The Next Financial Crisis
People tend to act in their own self-interest.
In free-market capitalism, these competing interests of the masses find balance, wherein two parties can meet their own interests, or the best compromise thereof, in mutual exchange. Self-interest fuels thinking and innovation. Competing interests prevent corrupting power and unbalanced influences. You can find exceptions to both principles, surely. But, as a system, it works well.
From time to time, government likes to get in the middle of this arrangement. The citizenry is all too often glad to let them intervene, nevermind the fact that the same people understand, at least anecdotally, that government is a mess. Construction projects that take 5 times as long at 4 times the budget that they should…. Impossible to decipher tax forms…. Wasteful spending. But promise to get government involved in the marketplace, and people are happy—IF you convince them it is in their self-interest. Government can’t change that people will try to act in their own interests. The problem is that it is a corrupting influence that infringes upon the balance of not only the system, but the individual. Whereas competing interests compel one to take a long-term perspective, a promise of easy gratification can cause short-term destructive thinking. The mortgage meltdown is a prime example. Government enacting laws to give you an easy house today shunted thinking about how to pay for it later. You see how that worked out.
Yesterday, in his four-point economic plan, Barry Sotero, whom you may also know as Barack Obama, included a provision to allow people to access their 401(k) and IRA money without penalty. Many Americans will see a removal of a 10% penalty as being in their self-interest, and will surely be persuaded. However, this is another financial disaster in the making. Let’s look at the logical consequences.
Removing the early withdrawal penalty encourages people to raid their retirement accounts. Much of this money is tied up in the stock market or mutual funds invested in a broad range of things, including the stock market. People raiding retirement accounts = Massive selloff on Wall Street.
Also, while the penalty will be dropped, this money would still be taxed as it was pre-tax income. The problem is that you cannot ensure it would be taxed in the same way as it would have been when it was initially earned. That means it becomes advantageous to squirrel away money, but only until you can shelter it from higher tax rates. A case in point…. If you have a laid-off worker who can access their retirement fund, who gets laid-off in the second half of the year, why would they work to immediately find a new job if they can access that money, taking as little as they need so as to stay in the lowest income bracket possible. After all, more money will still be there if they need it. No need therefore to worry about extra for savings. It’s saved. Finding additional income in the short term would only serve to drive up their taxable income. It would be in their own self-interest, for the short-term, at least, to stay out of work as long as possible. People raiding retirement accounts = Higher unemployment.
Next, if a large number withdraw their funds, it devalues funds for those that don’t. Back to the massive selloff. So you have a choice. Be responsible, leave your money, and hope that it is even a fraction of what you would have had by time you retire. Or, take your money now, and take your chances on how you may be able to reinvest it. The government takes the massive revenue shot from taxing the funds, and you have to find a new, safe way to invest what are now after-tax dollars. And that’s just if you’re somewhat responsible. There is no balance from competing interests. If you choose not to participate in this folly, you’ll still get screwed. People raiding retirement accounts = Less safe places to invest long-term.
Of course, this is all money for retirement. If you take that money, then with what shall you retire? You’ll either have devalued your own account by taking money, or you’ll have your account devalued by the selloff. Then we’ll have a new financial crisis. And just who do you think will swoop in, just in the nick of time, to solve the problem? As always, the one that caused the problem in the first place. Government. People raiding retirement accounts = Massive power grab by the Feds.
People will continue to have a hard time convincing me that free-markets cannot work well on their own until they can actually show an example where they have been allowed to exist on their own.
Jared A. Chambers
