Wednesday, November 28, 2012

Political Risks of the Fiscal Cliff

Who faces the greatest political risks from the fiscal cliff?  It ain't the Democrats.  They could do nothing, and watch the pre-Bush tax rates go back into effect in 2013.  While this would have a near term negative impact on consumer spending, it would lower the federal deficit.  That would promote long term economic growth.  The President would take some heat for the economic slowdown, but the Democrats would have four years to recover before facing the 2016 Presidential election.  By then, the economy might well be improving.

If there is a deal on the fiscal cliff, it would probably include some cuts to Medicare and Medicaid, and perhaps to Social Security (although the latter is less likely, since Social Security is actually much less of a fiscal problem and more visible to the voting public).  The Democrats would blame these cuts on Republican insistence (of which there is plenty).  Meanwhile, the Democrats would take credit for whatever tax increases or enhancements or whatever else would be part of the deal, which probably would fall more heavily on the rich than the 99%.

The Republican insistence on no tax rate increases allows President Obama to replay his winning electoral strategy of advocating tax increases for the rich.  Republicans believe too much in their own P.R., that all taxes increases are invariably bad and that spending cuts would somehow be made to prevent taxes from increasing.  A majority of the electorate thinks otherwise, and the Republicans conceded these voters (let's call them the 51%) to President Obama. 

 The baseline problem with the Bush tax cuts is that they reduce federal revenues to the point where Social Security and Medicare--the two most sacred bovines of American politics--are imperiled.  It's one thing to attack federal funding of bridges leading to nowhere.  It's another to take away bread and butter from the elderly.  Republicans have managed to put themselves in a corner where they seek to protect low taxes for the wealthy while trying to squeeze pensioners having modest incomes.  They ultimately can't protect the wealthy from a tax increase--the Democrats can do nothing and those increases will take effect at midnight, Jan. 1, 2013.  But the Republicans can manage to look like Scrooge during the Christmas season as they advocate cuts for moderate income retirees.  Politically, it won't be the Democrats who tumble over the fiscal cliff.

Sunday, November 18, 2012

Why Insurance Products Can Make Lousy Investments

If you're considering an insurance product that includes an investment feature, consider the following two examples of why you might want to say no.

Mass Mutual.  On Nov. 15, 2012, the SEC sued Massachusetts Mutual Life Insurance Company in an administrative proceeding (an agency process somewhat like a court case, although conducted within the SEC instead of in a court).  Mass Mutual settled without admitting or denying the SEC's charges.  The essential accusation the agency leveled against Mass Mutual was that it didn't adequately explain to customers how withdrawals from variable annuities under certain circumstances could drain their accounts of value.  (See the SEC's press release at

Variable annuities involve the customer making periodic payments for a number of years and directing how the money is invested in a tax sheltered annuity. Eventually, the invested amounts can be used to purchase an income stream from the insurance company. The investments may do well or poorly.  To ameliorate the potential for poor investment returns, Mass Mutual offered an optional rider that, for an additional premium, gave customers a GMIB, or Guaranteed Minimum Income Benefit.  The GMIB guaranteed a minimum value that customers could use eventually to purchase an income stream, regardless of how poorly their investments did.

The GMIB could increase by 5% or 6%, depending on the rider.  Mass Mutual capped the level of the GMIB (through a somewhat complex formula).  Once the cap was reached, the GMIB wouldn't increase.  Mass Mutual also allowed customers to make withdrawals from their annuities before they converted the investment value into an income stream.  If they made a withdrawal before the GMIB reached its cap, the withdrawal would reduce the GMIB value (and the value of the invested assets as well), but wouldn't prevent the GMIB from continuing to increase.  However, after the GMIB reached its cap, withdrawals would decrease the GMIB and it wouldn't increase the next year.  Thus, making withdrawals after the GMIB reached its cap could permanently shrink the GMIB--under some potential circumstances, to zero.  According to the SEC, Mass Mutual didn't clearly explain how the GMIB, which might be thought by customers to be a guaranteed minimum value, wasn't guaranteed if the customer made withdrawals after it reached its cap.

Got it?  Pretty simple, right?  To be sure, after it was nabbed by the SEC, Mass Mutual did the right thing and eliminated the cap on the GMIB.  But if you furrowed your brow over the details of this annuity (and we've just summarized them--read the SEC's press release and order cited above for a gorier rendition), you should think twice--and then three times--and then four times--and then five, six, seven and many more times before investing in a variable annuity.

Universal Life.  The other example is in today's Wall Street Journal (Nov. 17-18, 2012, P. B9), which reports that low interest rates may require universal life insurance policy holders to pay higher premiums or face the cancellation of their policies.  Universal life is a form of permanent life insurance that allows customers to have life insurance coverage for long periods of time (i.e., longer than the perhaps 20 years allowed in term life coverage), often with flexibility in the amounts of the premiums paid.  Universal life also has an investment feature, and customers can use money from the investment account to help cover the cost of their life insurance.  As customers age, the cost of life insurance coverage naturally increases.  But today's low interest rate environment has been detrimental to investment returns, including those of universal life policies.  Many universal life customers are facing the need to pay increased premiums, or see a reduction of their life insurance coverage or even the cancellation of their policies.  Large numbers of universal life policies were sold years ago, before the Federal Reserve declared war on positive interest rates.  So the current low rate environment and its consequences for universal life policies probably come as a surprise to many customers. 

Insurance products like variable annuities and permanent life insurance can sometimes put customers into the middle of the complexities of the financial markets.  You're subject to many of the same risks as professional investors and traders.  But you probably don't have the same level of knowledge, experience, and information as they do.  Sophisticated insurance products can be labyrinthine mazes of risk shifting, and it's possible to run into the Minotaur.  Traditional insurance, which consists of the pooling of risks, can offer sensible protections.  But stick to policies that are easy to understand, because then you'll know what you're getting into.  Term life and fixed annuities can be useful for many people. Super dooper, turbo-charged complex insurance products that also invest your savings, pick up your dry cleaning and get the oil changed in your car are to be viewed cautiously, and then skeptically.

Sunday, November 11, 2012

The Republican Redistricting Nightmare

The Republican Party is all tangled up in a pickle of its own making: redistricting. And this pickle doesn't taste very good.

Redistricting is the re-drawing of the borders of Congressional districts.  It often happens after a decennial census, when the results show significant population change.  In most states, redistricting is done by state legislatures, sometimes subject to the approval of the governor.  The potential for political shenanigans is obvious, and the federal courts have presided over many cases alleging gerrymandering.  But stacking the deck in your favor isn't always unconstitutional, depending on how you do it, and there are many districts resembling Rorschach tests for ghouls that are legally tilted in favor of one party or the other. 

The Republicans have been very successful at redistricting.  In recent decades, they have used political successes at the state level to string together districts that look like they were inspired by Jackson Pollock but vote reliably Republican.  They got what they wished for.

Then came the Tea Party.  A problem with democracy is the little people can't always be kept in line.  They can sometimes be unruly and demanding.  When riled up enough, they may even assert control.  The doyens of the Republican Party found this out the hard way in 2009 and 2010, when malcontents of many kinds coalesced into the Tea Party movement.  Although Tea Partiers counted some Independents and even a few lapsed Democrats within their ranks, the movement as a whole gravitated toward the Republican Party and pushed it ideologically rightward.  To make things worse, the erstwhile 2008 Republican Vice Presidential nominee, Sarah Palin, went rogue on the party's leadership and helped many radical right Tea Partiers win primary elections in 2010 over mainstream Republicans.  Thus, in 2010, a number of Tea Party and other seriously right wing candidates won elections in reliably Republican districts.

Now, the Republican leadership is stuck with these Tea Party legislators.  Perched in districts well-drawn to protect incumbency, these birds ain't going nowhere.  They'll keep the Republican agenda firmly anchored to starboard, even though the route to an electoral majority veers to port.  The Republican chieftains can't sponsor centrist candidates or advance a more moderate iteration of the vision thing without alienating their base, now ensconced in Republican cocoons.  

Political segregation prevents the Republican Party from evolving.  For those that are creationists, this is probably okay.  But others in the GOP may realize that they've been too clever by half, and that they helped to make the Democratic strategy of political integration a winner.

Wednesday, November 7, 2012

All That Noise, All Those Robocalls, and Nothing Changed

We had the elections, and nothing changed.  Barack Obama was re-elected President.  The Democrats kept control of the Senate.  The Republicans kept control of the House.  After all the accusations, attack ads, junk mail, robocalls, soaring campaign rhetoric, and lies, we can look forward to . . . more gridlock.

This election was the comeuppance of all the money bag men who nonymously or anonymously tried to buy their way into political power.  Hiding behind secretive nonprofits, monied interests barraged users of every type of media with relentless harangues and unending fear mongering.  While Democratic war chests were very large, Republican funding was Brobdingnagian.  But all that spending, and counter-spending, produced very little change.

That's a great result.  It shows that the American voter isn't a dumbo who can be cynically manipulated by unnamed puppet masters with zillions to spend behind the scenes to instill subliminal fears.  Politicians and political parties must, however difficult it may be, offer something that is in the public interest.  They need to demonstrate that they have something positive to say and do.  The political process remains a means for societal concerns to be debated and resolved.  The rich may not get richer.  The poor may not get poorer. 

Many problems lay ahead.  The fiscal cliff approaches anon.  The economy remains in first gear, and unemployment levels feel like the real bad hangover that comes from drinking the worm as well as the tequila.  The federal deficit must be dealt with.  As difficult as these problems may seem, the defeat of the monied interests is a sign of hope--hope that politicians may try doing something constructive for a change, rather than cater to those that offer to hand over the biggest checks.