Death and Taxes

As Easter and April 15 approach, it's appropriate that we talk about death and taxes. We may not agree on either. But this much is sure, both are a reality! Much too real!

If you're like me, you're wondering what in the world is the government doing with all the monies they collect from me? Well, they didn't collect all that much from me this year. Two boys in college helps with deductions but that also puts stress on the old budget! You get the point. Show me the money already!

Well, now that you've asked, I will do just that. If your a policy and finance nerd you can go to the Office of Management and Budget and take a look at the Fiscal Year 2010 Budget for yourself! Not interested. I can't say I blame you.

Enter Jess Bachman and WallStats. Bachman transforms reams of boring data into posters for your wall. The newest poster outlines the 2009 budget. The entire poster is six square feet, but you can see a detailed, zoomable version here. Place your cursor on the map and controls appear that allow you to scroll in close. The size of each circle represents the size of each agency-and there are over 500 of them in total.

Take a close look and you will see that in 2009 we spent $2.054 billion for Humvees used in Iraq and $3.230 billion for New Orleans Storm Protection.

And where did all this money come from? I'm glad you asked! For every $1 billion of federal spending:

• Every tax payer has to pay $4 on average ($550 million total)
• Every employer has to pay $1 per employee on average ($150 million total)
• Every corporation has to pay $20 on average ($110 million total)
• $40 million is collected in estate, gift, excise and other taxes
• $140 million is borrowed

Are you wondering what the 2010 budget looks like? As you can imagine, Bachman is still working on that poster. Rumor has it that the 2010 version will be a wall-sized mural! You can get a preview of the size of the spending and deficit here. We are looking at a $1.2 trillion deficit or 8% of our gross domestic product. And this deficit spending adds to the size of our rapidly growing national debt, which is now at over $11 trillion and rapidly climbing!

By the way, I have the National Debt Clock module on the right hand column of my blog for your viewing pleasure. Watching that Debt Clock spin is a good reality check and a reminder to not spend more than what I make.

Death and taxes, both are a reality. You can get mad, you can protest and you can live in denial. But Father Time and Uncle Sam bow to no one. Try to ignore them and before you know it they will be knocking at your door. Both demand payment in full.

And so in March of this year I paid a visit to my tax account to settle my score with Uncle Sam. No one was going to do it for me. I'm accountable and held responsible to pay my taxes annually.

And tomorrow I will celebrate with millions of other followers of Christ around the world. I will remember our Saviors death, burial and resurrection. I'm thankful for a Savior who willingly paid my death sentence for me so that I can live.

Death and taxes. I can't do anything about my tax problem. Uncle Sam has to be paid year after year. But I can do something about my death problem. Father Time is a defeated foe. This is what Easter is all about.

In a year of bad new - the flood of 2009, the economic melt down, vanishing retirement accounts, high unemployment and global terrorist threats - I'm ready to celebrate some good news.

He is not here; he has risen. just as he said. Come and see the place where he lay. Matthew 28:6

For Christ died for sins once for all, the righteous for the unrighteous, to bring you to God. He was put to death in the body but made alive by the Spirit. 1 Peter 3:18

Infectious Greed

I wrote earlier about Alan Greenspan and his libertarian trust in unregulated financial markets to do the right thing. It seems as though Mr. Greenspan has changed his mind. He was called to testify before the House Oversight Committee on Thursday, October 23.

Listen to Mr. Greenspan's new "enlightened" views:

• He described the current financial crisis as a "once-in-a-century credit tsunami" and acknowledged that the crisis has exposed flaws in his thinking and in the workings of the free-market system.
• He told the House Oversight Committee that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had been proven wrong by the current crisis. He called this a "mistake" in his views and said he had been shocked by that.
• He said he had made a "mistake" in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions.
• He called this "a flaw in the model that I perceived is the critical functioning structure that defines how the world works."

Mr. Greenspan shouldn't have been shocked. In 2002 he appeared before Senate and had this to say:

"Why did corporate governance checks and balances that served us reasonably well in the past break down? At root was the rapid enlargement of stock market capitalizations in the latter part of the 1990s that arguably engendered an outsized increase in opportunities for avarice. An infectious greed seemed to grip much of our business community."

"The trouble, unfortunately, is that the shock of what has happened will keep malfeasance down for a while. But human nature being what it is -- and memories fade -- it will be back. And it is important that at that time appropriate legislation be in place to inhibit activities that we would perceive to be inappropriate."

"It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously.''

The human condition hasn't changed through the centuries. Greed, if left unchecked, consumes everything around it. It's never satisfied.

This is why Jesus told His followers in Luke 12:15:
"Watch out! Be on your guard against all kinds of greed; a man's life does not consist in the abundance of his possessions."

The only solution is a transformed heart. Greed and selfish interest can be changed to generosity, gratitude and humility by the power of Jesus Christ. He is able to deliver us from ourselves. The human heart is capable of all kinds of evil. External legislation and laws are needed to create moral boundaries for protection, accountability and stability.

We shouldn't be "shocked" that given the chance, individuals and corporations pursue profit-taking. We shouldn't be shocked when we seek corporate executives on lavish vacations even as they seek government bailouts. We shouldn't be shocked that banks and credit institutions sold sub-prime mortgages in order to turn short-term profits. We shouldn't be shocked to learn that in 2005, for the first time since the Great Depression, personal savings rates were in the red for an entire year! You see, we have met the enemy and he is us!

As Jesus instructed us, we need to "watch out" for all kind of greed. We need to "be on our guard" for infectious greed!

Most Were Wrong

OK, I admit it. I don't understand derivatives. But I'm trying. I want to understand because Warren Buffett called them "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." He wrote this to Berkshire shareholders in 2002.

I want to understand because the derivatives market has reached an astronomical $531 trillion and has been credited by many as the major cause of our current economic meltdown.

So what are derivatives? Wikipedia defines derivatives as financial instruments whose values depend on the value of other underlying financial instruments. The main types of derivatives are futures, forwards, options and swaps.

At this point I need to post a disclaimer. I know hardly anything about the topic on which I'm about to write. What I know comes primarily from talking to trusted friends and my own personal reading. I reserve the right to change my mind at any time!

OK, back to derivatives. To fully understand how large the $561 trillion derivative market is, we need to put it in context. The following comes from Market Watch.

• The US annual gross domestic product is about $15 trillion
• The US money supply is about $15 trillion
• The current proposed US federal budget is $3 trillion
• The US mutual fund companies manage about $12 trillion
• The worlds gross domestic product for all nations is approximately $50 trillion
• The total value of the world's real estate is estimated at about $75 trillion
• The total value of the world's stock and bond markets is more than $100 trillion
• The 2007 valuation of the world's derivatives is now a whopping $516 trillion, up from $100 trillion in 2002

Throughout the 1990s some argued that derivatives had become so vast and intertwined that they required federal oversight to protect the financial system. Deviates are unregulated and have been referred to as the "shadow banking system" and the worlds largest "black market." The ultimate fear, as Fortune magazine put it, is that swaps and derivatives can cause a "financial Ebola virus radiating out from a failed institution and infecting dozens or hundreds of other companies."

Deviates were originally designed to lower risk for buyers and sellers, a form of safety net or insurance. But they created a false sense of security, allowing financial service firms and corporations to take more complex risks. And the contracts could be traded, further limiting risk but also increasing the number of parties exposed if problems occurred. And then all of a sudden, the virus began to spread.

When you or I get sick, we seek outside intervention. A good doctor and prescription can help us avoid acute illness and keep others from becoming infected. So what went wrong with the unregulated derivatives market?

Many, including the New York Times, pin the blame squarely on Alan Greenspan. Mr. Greenspan, a professed libertarian, expressed resolute faith that those participating in financial markets would act responsibly. As early as 1992, Edward Markey, a Democrat who led the House subcommittee on telecommunications and finance, asked the GAO to study derivatives risks.

The report issued two years later stated, "The sudden failure or abrupt withdrawal from trading of any of these large US dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole."

Even Mr. Greenspan himself warned that deviates could amplify crises because they tied together the fortunes of many seemingly independent institutions. "The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence," he said. But he called that possibility "extremely remote," adding that "risk is part of life."

Later in 1994, Mr. Markey introduced a bill requiring greater derivative regulation. It never passed.

In 1997, the Commodity Futures Trading Commission began exploring derivatives regulation. The commission, led by Brooksley Born, was concerned that unfettered, opaque trading could "threaten our regulated markets or, indeed, our economy without any federal agency knowing about it." In spite of Ms. Born's concern and even the near collapse of the hedge fund Long Term Capital Management, nothing was done.

In November 1999 Mr. Greenspan and others recommended that Congress permanently strip the Commodity Futures Trading Commission of regulatory authority over derivatives. In 2000 during Congressional hearings, Mr. Greenspan argued that Wall Street could be trusted and that Wall Street had tamed risk!

History has proved Mr. Greenspan wrong. Wall Street couldn't be trusted and Wall Street didn't tame risk. We live in a world full of risk, and with people bent on personal gain.

In retrospect, shared risk has evolved from a source of comfort into a virus. Mr. Greenspan doesn't give interviews and rarely speaks in public. He wrote the following in the epilogue of the paperback version of his new book:

"Risk management can never achieve perfection." The villains were the bankers whose self-interest he had once bet upon. "They gambled that they could keep adding to their risky positions and still sell them out before the deluge," he wrote. "Most were wrong."

Feed The Pig

Over the course of the past few months I have heard several creative radio spots for Feed the Pig. Feed the Pig is a collaborative initiative sponsored by the American Institute of Certified Public Accountants, state CPA societies and the Ad Council. The campaign's icon, Benjamin Bankes, targets 25-34 year olds and encourages them to establish the savings habit by taking small, easy steps to take control of their finances.

Check out the Feed the Pig web site. And check out the Lunch Savings Calculator.

Here's the discouraging financial reality for the average 25-34 year old.

• Their average credit card debt is $4,088.
• Their average student loan debt is $20,000.
• They spend 24 percent of their income just on debt payments.
• They now have the second highest rate of personal bankruptcy in the nation.

The companion web site, 360 Degrees of Financial Freedom has some great resources.

I applaud these organizations for trying to encourage young adults to establish a savings habit. However, the pull of culture is hard to overcome. I'm afraid the pig will be ignored. Since 2005 Americans have spent more than we have earned. And this trend doesn't appear to be changing anytime soon. It's time to use some restraint. It's time to feed the pig!

Good Sense Indeed

Seth Godin has a great post over on his blog about personal finance. I really enjoy Seth's creativity and practical advice. Here's some of what he has to say about debt and savings.

"When I talk to people who want to become marketers, I almost always tell them to go start something and go market something. The same advice for 15 year olds and seniors. Turning off the TV and building a CafePress store is not only free, but it starts to build a professional-skills asset for the long haul. Pay as much as you need to for things that matter, and as little as you can for things that don't. And never borrow money to pay for something that goes down in value."

Now that's some pretty sound advice. Sounds like what we are learning in the Good $ense course. As we follow God's financial guidelines we become a diligent earner, a generous giver, a wise saver, a cautious debtor and a prudent consumer. Good sense indeed!

The Wise Thing To Do

The Cedar Rapids Gazette had an interesting editorial today titled, Save For The Rainy Days. For those of use in Good Sense groups this is an even more timely warning. It's a bit sobering to think that Americans spend more than they save. Until 2005, personal savings rates had not been in the red for an entire year since the Great Depression!

It doesn't take a Good Sense small group to help us understand that this is extremely dangerous. How about using some "common sense!" Like not spending more than I earn. I love how the Good Sense material puts it - A wise financial steward learns to become a diligent earner, generous giver, wise saver, cautious debtor and prudent consumer. God's priorities just make sense!

I applaud the Gazette for writing the editorial. But I'm not optimistic that it will change the tide of consumer debt. The pull of the culture requires a change of heart and a change of values. And heart change my friend, takes more than information. A change of heart required radical transformation. Sharon and I are going to be working on some of our Good Sense homework this afternoon, looking at how we can increase our savings. It's the wise thing to do.

I'm not sure that non-Gazette subscribers can access the editorial, so I'm going to post it here in it's entirety.

Even as Americans are earning more and then spending it, with an increasing percentage being spent on discretionary purchases, they are saving less and less. This financially dangerous trend needs to be reversed. In 2006, Americans continued to spend more money than they earned. At the same time, the personal savings rate, for the second year in a row, was in the red, at negative 1 percent. That’s even lower than in 2005, when the personal savings rate was a negative 0.4 percent. Until 2005, personal savings rates had not been negative for an entire year since 1932 and 1933, in the midst of the Great Depression.

Back then, people had a good reason for not saving money: the had no money to save. During the Depression, a quarter of the labor force was out of work, and people dipped into savings to buy food, clothing and other necessities. Now, people spend everything they earn and borrow more to buy stuff. This does not bode well for the coming decades when 78 million of baby boomers will retire, nor for young people who will have no cushion in the case of personal emergencies or should the economy seriously falter. During the Great Depression, Americans learned the hard way about the importance of having rainy-day funds tucked away. Back then, many people lost everything through no fault of their own when banks and other financial institutions failed.

Now, people get into financial trouble when they max out their credit with no ability to pay those debts. Economic downturns can happen at any time, whether on a personal level or at the national level. Americans leave themselves open to calamity when they don’t have quickly accessible savings and long-term investments to get them through the years when they should be able to spend their retirement doing more of the things they enjoy.

Americans clearly didn’t get the message sent by Congress last year when it passed a package of reforms covering pensions, individual retirement accounts and annuity and life insurance contracts. The message was that they should save more. Instead, they saved even less. Some economic experts predict people will save more in 2007 because the economy, including the housing market, will continue to slow. Those same experts say that financial institutions are hungry for deposits and will offer better rates and incentives, such as elimination of some fees, to encourage saving. But consumers should shop around for the best savings vehicle for their own situation.

Now is the time for people to educate themselves about savings options the government has made available and the incentives that financial institutions are offering, and to find out about the risks that each option carries. With more and more options for both short-term and long-term savings, especially those like Roth IRAs and health savings accounts that are tax exempt, there is simply is no excuse for people, especially young adults, to leave their future financial security in jeopardy.