It seems to me that FDR may have saved the traditional banking system. What do you think?


Wall Street; AP photo

Question: First, it seems to me that FDR saved the traditional banking system. I’ve checked the account of the plan they came up with during the “bank holiday” in the second Schlesinger book and I think it bears out my impression. The Bush free marketeers, in contrast, seem to have moved, as you noted, toward nationalization, or socialism, or whatever. The ironies abound.

Second, McCain’s idea about not forcing IRA owners to take out specified amounts at age 70-plus. On the surface, it sounds sensible—the retiree isn’t forced to sell stock at rock bottom prices. But it then struck me that it would primarily benefit the people at the top of the economic spectrum, who could afford to wait for stock prices to rise again. But what about retirees who count on their distribution to make ends meet? They don’t have the luxury of waiting. What percentage of IRA owners fall into each category?

Paul Solman: First, FDR. His banking plan – using an agency created by his discredited predecessor, Herbert Hoover – was similar to what the government is now doing: injecting capital into the nation’s banks directly so they can lend money, in return for a temporary stake in those banks.

A major problem with the plan back then (it’s now thought) was that the government was paid back too soon; this blunted the intended effect which was to get more money out there, quickly. Presumably, we won’t make that mistake this time around. Another “mistake,” which the S&L government takeover was also accused of: selling off bad assets too cheaply. I.e., at fire-sale prices.

As to the irony, it is keen indeed. Go to this website for what may be the ultimate illustration of it. It is the home page of the Communist Party of the United States. Click on “Download our ’08 Electoral Program” for its 2008 campaign platform. You will note that nowhere is it so bold, in terms of government nationalization of private industry, as the Bush Administration has already been.

Perhaps, when I’ve been speaking of the “Scandinavianization” of American finance, I’ve understated. See an op-ed in the Washington Post by excellent economists Lawrence Kotlikoff and Perry Mehrling that anticipated the market bounce. The very conservative judge Richard Posner’s also did in his endorsement of a TEMPORARY government stake in the banking system, here, arguing with his friend and, usually, fellow traveler Nobel economist Gary Becker.

Now, on McCain’s idea about not forcing IRA owners to withdraw their funds. This strikes me as okay. It’s a choice, after all, not a mandate. Those who aren’t as well off aren’t FORCED to withdraw needed funds. Of course, it should be obvious that this only matters to the richest Americans. Who ELSE, as you point out, would have enough wealth that, at age 70+, they wouldn’t need to withdraw any of it?

Here’s the view of Dallas Salisbury, head of the Employee Benefit Research Institute, who was quoted briefly on this issue in the Wall St. Journal the other day:

“This was proposed by Cong. Miller (D-CA) and a number of democrats on the day before McCain. Details on the Miller web site.

“This proposal has been made many times in the past and has never been adopted by Congress. D’s and R’s have proposed and both have them failed to enact it.

“The JTC and CBO have always attached a revenue cost to changing it.

“Their analysis has also noted that the purpose of the tax preference is retirement income, and if the money never comes out and the IRA is left to an estate, the money was not used for the purpose that led to the tax incentive and revenue is delayed for an additional lifetime.

“Analysis has also noted that ‘retirees with multiple sources of retirement income and high net worth are the most likely to have money in a retirement plan at age 70 and 1/2 that they do not need to be spending to support themselves in retirement, and thus, a change in the rule would not help most Americans, just those with the most.’‘

“Since Congress has never enacted the proposal, these arguments seem to have been decisive in the past.

“Enactment of the bi-partisan proposal would do no direct harm to anyone, but it would not help many people either, and if done in a pay-as-you-go bill it would lead to higher taxes in order to pay for the further deferral of taxes for those that delayed taking income under the change.

“Few retirees who need the money are likely to have 100% of the money in an account in equities at age 70 and 1/2. Assuming they have 10% or more of the money in cash, they could begin withdrawals without any impact on their equities for more than the one-year extension that McCain proposed. Few financial advisors would suggest holding more than 30% in equities at that age, based on historical allocation “rules”.

“Thus, even setting aside net worth, few would likely need to sell equities during that first year to begin withdrawals.”

McCain has also suggested the possibility of suspending the capital gains tax, in the name of helping the middle class. This is hard to understand, given that most of the middle class’s investments are in pension accounts (otherwise they wouldn’t BE “middle class,” would they?) Those investments are subject to INCOME taxes when withdrawn; capital gains taxes have no impact whatsoever.