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Bubbles of dishonesty can't last forever


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A Review the book, "The Great 401{K) Hoax" by William Wolman and Anne Colamosca (Jul 02)

The stock market "slide" which actually began in March 2000 may have bottomed out for the time being, or maybe not. Recent passage of the Accounting Industry Reform Act may have helped some. This act tightens some corporate accounting and financial disclosure rules, and it toughens sentencing for acts of fraud committed by corporate executives, but it still fails to close many of the largest loopholes that have been permitting corporate executives to make their companies appear to be far more profitable than they really are (e.g. like allowing corporations to compensate their employees with company "stock options" without counting them as an expense). It's also important to note that many of the fraudulent activities of corporate executives that have "come to light" in recent months were ALREADY illegal under our existing laws, but until recently our political leaders in both major parties have been "turning a blind eye" to the fact that such laws were routinely being violated. Some might say, "We have the best politicians money can buy." Enron, for example, was the biggest fundraiser for President George W. Bush's election campaign. As pointed out in my Mar 02 article, numerous authors (especially Martin D. Weiss) have been exposing such deceptive practices and industry-wide systemic deficiencies for years. Nevertheless, even our so-called "free press" has tended to ignore such practices as long as the stock market appeared to be "booming." The financial futures of tens millions of Americans have been seriously damaged because of this particular self-serving lack of concern for the truth.

Wolman and Colamosca (contributing editors for Business Week) refer to 401(K) plans as a "hoax", because many corporations have decided to use 401(K) plans as an excuse to abandon the employee pension plans that they had been offering before. The 401(K) plans are far cheaper for such companies in the long run, and if the going gets rough, they can always discontinue their matching contributions into those funds. Many large US corporations have already done that. Other corporations have figured out that they can "cook their books" by restricting their matching contributions to company stock options. Some corporations have even been so bold as to create rules that prohibit their employees from actually using their company stock options until they are 55 years old! To make matters worse, like their former pension plan funds, many of companies have given their employees no meaningful choice as to how their 401(K) dollars are being invested. If you have a job interview with a company that offers a 401(K) plan in lieu of a pension plan, you should seriously consider looking elsewhere for a company that offers both (there are still some out there).

Wolman and Colamosca's book is filled with interesting statistics regarding the present state of our economy such as that fact that the top 1 percent of the US population owns just under 50 percent of all the stock outstanding, and the top 10 percent of the population owns 85 percent. And in spite of the by-monthly contributions of employees and corporations throughout the years, the average 401(K) account shrank to $49,024 in 2000, down from $55,502 in 1999 (page 13). But the most disturbing revelations are their estimates of the future outlook for the stock market in general. The year 2000 was clearly the year when our present stock market "bubble" began to burst. Historically, it has taken at least 20 years for the market to surpass the highs of its bubble years (page 20). This time, it may take even longer, because of:

1. The huge amount of debt US corporations piled up during the 1990s in order to acquire other companies and make themselves appear to be more profitable than they really were, and the amount of debt the average American household acquired during those years by spending more than they were earning. The present Bush Administration's return to deficit spending practices will eventually exacerbate this problem by driving up interest rates in general.

2. The significant decline in the confidence of investors for investing in stocks, due to the deceptive accounting practices of so many American corporations and the frequently demonstrated dishonesty of "Wall Street" firms in general.

3. The accelerating increase in the "globalization" of the American economy as American corporations increasingly employ cheaper foreign labor sources to accomplish many of the tasks that used to be accomplished by American workers.

4. The impending "baby boomer bomb." As pointed out on page 44, Wall Street traditionally viewed small investors as suckers. They were expected to appear in the market only when bull runs were reaching their top. But the 401(K) plans have changed that. During the 1990s, America's population bubble of "baby boomers" (born between 1946 and 1954) reliably contributed hundreds of millions of new dollars each month INTO the stock market thereby helping to create an upward pressure on the price of stocks in general. They are just now beginning to reach their "peak earning years." However, beginning in 2008 and increasing for many years thereafter, rather than putting money into the stock market each month, these baby boomers will retire and begin taking large chunks of money OUT OF the stock market as they use their 401(K) money to pay off their debts. This will create an increasingly strong downward pressure on the price of stocks for many years. And, of course, managers of the "smart money" will no doubt begin to withdraw their own money from the stock market BEFORE this effect begins to seriously take hold.

Wolman and Colamosca also present an excellent overview of the history of our nation's pension plans, Social Security, Medicare, and Medicaid systems. Then they hilariously describe current right-wing efforts to replace those systems with "privately funded" systems (so that corporate executives can raid or plunder those tax dollars in much the same way as they have been raiding or plundering private pension plan dollars). They point out that since the cost of living increases were incorporated into Social Security benefits in 1972, Social Security benefits have actually been outperforming increases in the benefits provided by most private pension plans. As they say on page 154, "Between 1980 and 1988, the value of private pension funds, in real terms, grew by 413 percent. Over the same period the average pension benefit, adjusted for inflation, declined by one-third. To top it off, there was an actual 2 percent-point shrinkage in the share of retirement income provided by private pension plans." This illustrates just one of the MANY good reasons it would be a BIG mistake to "privatize" our Social Security, Medicare, and Medicaid systems.

As far as investment strategies are concerned, they point out that the Bush Administration did the American people a GREAT DISSERVICE by using the patriotic fervor inspired by the destruction of the World Trade Center towers to encourage Americans to invest in a stock market that was already spiraling in a serious downward slide toward more realistic stock prices since March of 2000. Most of those who patriotically responded to George W. Bush's appeal have lost a LOT of money that they will probably never retrieve.

Like Martin Weiss, Wolman and Colamosca recommend that rather than investing in stocks, people should generally invest in bonds or no-load bond-oriented mutual funds. Those who feel that they must invest in stocks should wait until the stock market has "bottomed out" and is clearly on the way back up again. Even then, they should invest primarily in DJ or S&P-based "index funds." Why? Because on page 174, they point out that even during the "boom years" in the last half of the 1990s, only 7 percent of all equity funds outperformed the S&P index. The diversity of investments represented by those index funds is not only safer, 93 times out of 100 it is also more effective!

Wolman and Colamosca's book is filled with really great insights, not just regarding the stock market, but regarding the direction our country is headed in general. I highly recommend it.

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(one grain of salt)


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Last modified on Thursday, August 01, 2002