Financial Planning Blog

I have to admit a warm feeling of vindication at the end of last month when Edmunds.com reported the findings of their team of "PhDs and statisticians" who reviewed the recent Cash for Clunkers program. I was critical of CARS (the Car Allowance Rebate System was the official name of the federal giveaway program) when it was first announced, but felt a little overwhelmed by the positive media hoopla during the summer. The Edmunds analysis showed that of the almost 690,000 new autos sold during the program only an estimated 125,000 were truly incremental sales. In other words, the other approximately 565,000 autos would have been sold anyway, either during the summer or in the months to follow. When you apply the $3 billion cost of the rebate program over these 125,000 incremental sales, they arrived at an average cost of $24,000 per new auto.

This analysis certainly didn't cast a favorable light upon this poster child of the federal stimulus program. The White House was quick to respond, and other economists have criticized the Edmunds report. This Planet Money podcast gives you both sides of the story. It just goes to prove the old adage, that for every two economists you'll have three different opinions.

Besides the general problem of adding to the huge budget deficit with arguably inefficient program designed to help a small subset of the population, I thought the program was particularly wasteful in requiring the demolition of the vehicles traded in. (There was an environmental argument for this--just not a good enough one to convince me.) Now we see the impact of shredding hundreds of thousands of functional used vehicles in higher used car prices. Basically, we use taxpayer money to prop up prices in the auto industry, making it more difficult (i.e. expensive) for consumers to find good used cars.

The criticism of the government's attempt to stimulate the economy certainly doesn't stop with Cash for Clunkers. Read this economist's critique of the tax credit for home purchases (now extended beyond first time homebuyers) that appeared in the Washington Post. They claim the tax credit is an inefficient stimulus, and cite costs of $43,000 to maybe $80,000 per incremental home sale. The tax credit, along with other favorable tax treatment of property ownership, effectively keeps housing prices artificially high. If you are a homeowner artificially high prices may sound good, but it does have negative consequences to others and the economy in general.

Which gets me to my main point--if we are going to borrow money to fuel the auto and housing industry, along with bailing out big banks and insurance companies who took imprudent risks, can't we find a more beneficial way to stimulate the economy? You may laugh at the idea of subsidizing financial planners, but none other than Robert J. Shiller (the famous Yale economics professor and author of Irrational Exuberance and other books) proposed this back in January in a New York Times editorial. Of course, I'm thinking this is a pretty good idea--especially for my personal economy. However, even though the idea is wacky and isn't going anywhere, Shiller made some worthwhile points that speak to the value of objective, financial advice and education. He cites recent studies about consumer financial literacy and how many are exploited by lenders or other financial service providers.

But in some areas, notably personal finance, it is important to recognize that a good share of Americans have difficulty figuring things out. Most people get financial advice only from sales representatives of one sort or another: real estate agents, mortgage brokers, sellers of financial products. Some of these providers could use their sophistication to exploit people's tendency to behave irrationally, and to manipulate the judgment errors that consumers typically make. And competitive pressures tend to make providers promote products that exploit those errors to the hilt, unless, of course, we offer consumers real financial advice.

He goes on to explain how a subsidy for quality financial advice, provided by practitioners who are loyal to the client (i.e. fiduciaries) and whose objectivity is not tainted by commissions or kickbacks, could have helped many and reduced the severity of the housing bubble. He ended with this observation:

Professional financial advice is now generally accessible only by the relatively wealthy. Changing this would be an important corrective step. Giving the general public access to trained advisers would be a boon for the nation in this time of doubt and distrust.

This sounds like a commercial for the Garrett Planning Network and Table Rock Financial Planning--dedicated to making competent, objective financial advice accessible to everyone.

I finally watched IOUSA the other night, courtesy of Netflix instant play. This is the 2008 (pre-global financial crisis, pre-massive government response) documentary covering the Fiscal Wake Up Tour. I had read plenty about the tour, and have been impressed with the straight forward manner of David Walker, former head of the Government Accountability Office and Comptroller General of the United States, who was the chief spokesman. Walker is now CEO of the Peter G. Petersen Foundation which seeks to educate the nation and our leaders on the necessity of getting our fiscal house in order.

The tour and the documentary focus on the dangers of four deficits facing the United States:

• A budget deficit--which is even worse than it looks on the surface due to unfunded obligations.
• A savings deficit--which has gotten much worse over the last several years (although the trajectory may have improved some over the last year or so).
• A value-of-the-dollar deficit--which includes the foreign trade deficit.
• A leadership deficit--which Walker is focuses on as most critical, since leadership is necessary to turn things around.

The film is pretty engaging and while it is sounding the alarm, it is not without hope. It does kind of take you back to the days of Ross Perot, but with better graphics and much higher numbers (most of them negative). Although it may not sound like a fun evening, consider watching it, if only to start getting used to the fact that our collective behavior as a nation has to change. If not, there will likely be severe consequences for us and our children. Like the individual or family who finally wakes up to the fact their personal financial situation is unsustainable (a Dave Ramsey moment), the nation needs to wake up to the crisis--because we apparently won't act until we are convinced it is a crisis. Again, this is not without hope, but it will take national focus and resolve.

If you don't want to invest the time to watch IOUSA, there is a 30 minute version here. Also, the Wall Street Journal recently featured this interview with Walker. And, for film fans who can't get enough of the gloomy fiscal genre, check out Maxed Out.

In case the passage of time and a nice summer vacation has dulled your rage over the abuses in the financial markets, take a look at The Great American Bubble Machine from Rolling Stone Magazine. No, Rolling Stone is not my normal source for financial commentary, which is why I almost missed this controversial article and the on-line debate that has followed.

The article by Matt Taibbi is great fodder for conspiracy theorists, and I have to admit it made me more than a bit angry. Although I was thoroughly amused by Taibbi's lambasting of Goldman, I tried to maintain a bit of perspective-after all, this is Rolling Stone and it just may not be the whole story. The article alleges that "from tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again." Taibbi reviews the amazing number of ex-Goldman Sachs officials in high government positions in the US and other countries, and then looks at five past bubbles, and one he claims is about to be inflated. He has a number of good lines that make for good reading, such as this description of Robert Rubin the ex-Goldman co-chairman and Treasury Secretary under Bill Clinton:

Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach.

Although Taibbi entertains and gets you pumped up, I'm not sure he makes a convincing case that Goldman is behind all of our problems. Don't get me wrong, I am very suspect of any company where the average compensation per employee was $386, 000 for the first half of 2009. (Yes, that was just for six months and we're talking about almost 30,000 employees.) However, I think there is plenty of blame to go around--why stop with Goldman?

If you take the time to read Taibbi's article, also take a look at some of his on-line critics. Not everyone is impressed with his journalism. For example, look at ex-Wall Street Journal reporter Heidi Moore's "Matt Taibbi Is Just Plain Wrong" for a little balance.

It annoys me to see the public that wasn't fully educated about the financial crisis before it happened get snookered again by misleading reporting afterward...Context and good facts were in short supply in favor of a lively, if incoherent, narrative. As a fellow financial journalist put it: "If you read the article without knowing anything about finance, by the end you would still not know anything about finance-but you would hate Goldman Sachs."

Also, check out Charlie Gasparino's "Stop Blaming Goldman Sachs" for another perspective. He's not a fan of Goldman Sachs, but he obvious felt The Great American Bubble Machine was a bit short of the truth.

I have to admit I love to beat up on Goldman; I do it for The Daily Beast and on CNBC every chance I get. I also have to admit cheering Matt Taibbi on when I first read his Rolling Stone article...But Taibbi has elevated a combination of half-truths, superstitions, and a lack of understanding about the financial crisis to what is fast becoming established as "fact": that Goldman Sachs was the main culprit for the financial crisis and is now unfairly profiting from the various bailouts the crisis caused.

You make your own call as to the level of Goldman Sachs' evil. Or, better yet, skip it altogether and take a long walk and try and forget the last couple of years.

Although I've done my best to ignore the numerous ways the U.S. government has been devising to stimulate the economy by giving away money it doesn't really have, one program has caught my eye. The Car Allowance Rebate System (CARS) was passed into law on June 24 and is set to be up and running from July 23 through November 1, 2009. You may know it as "Cash for Clunkers", which is an apt moniker for a clunker of an idea. However, just because it is another flakey attempt at bailing out the auto industry doesn't mean we shouldn't take a closer look at whether it may benefit us individually. After all, we (and our children) will be paying for this in some manner--eventually.

The CARS program is designed to provide significant incentives for consumers to trade-in older vehicles for newer, more fuel-efficient ones.  Consumers trading in eligible older cars will receive a $3,500 to $4,500 credit on a new car purchase. Now before you get too excited, understand some of the details.

• Your trade-in vehicle must be less than 25 years old (i.e. a mid to late model 1984), and be in drivable condition. It will be interesting to see what the definition of "drivable condition" ends up being.
• The trade-in vehicle must have been registered to you (and insured) for at least the previous 12 months. If you think you were going to offer your neighbor $1,000 for that old truck parked on the street, and then take it into the dealer for your $4,500 credit, think again.
• Just to make sure there is no confusion here--this credit isn't really in addition to your car's trade-in value, it's more like a guaranteed trade-in value. A requirement of the program is that the old vehicle be taken out-of-service and destroyed, so the most you will receive from the dealer is its scrap value. (If destroying a 10 year old automobile worth maybe $3,000 seems a bit wasteful to you, join the club.) Obviously, if your current vehicle is worth more than $3,500-$4,500, it is not a candidate for this program.
• If you are the proud owner or more than one clunker (and I know a few of you are out there), you can only trade-in one of them for the credit. Only one credit per person and no combining CARS credits on the purchase of a vehicle. The credit can be combined with other dealer incentives, however.
• You must purchase a new car. Make sure you negotiate a good deal, or you may lose most, or all, of the benefit of the program.
• The car you wish to trade-in must have sufficiently poor gas mileage to be eligible. Under the EPA's new measurement standards your trade-in vehicle must have a combined city/highway fuel economy of 18 miles per gallon, or less. To figure out what your old car's fuel economy rating is under the new standards, go to www.fueleconomy.gov and look under "find a car".
• The fuel economy of the new car you wish to purchase must be a significant improvement over your trade-in for you to qualify for the credit. If you are buying a new passenger car, it must get at least 10 MPG more than the old vehicle in order to qualify for the $4,500 credit. If it gets between 4 and 10 MPG more than the trade-in, you will receive the $3,500 credit. If the improvement is less than 4 MPG, there is no credit. Remember, it is the combined city/highway fuel economy that is used to determine the improvement.
• If you are purchasing a new truck, van, or SUV, the requirements for improved fuel economy are lower. Check out the details at www.cars.gov. Work trucks also have some different rules.

In the interests of full disclosure, the U.S. government has declared that I am the official owner of an eligible "clunker". (What this distinction says about a financial planner is the subject for another discussion.) We have planned a new vehicle purchase, but keep putting it off.  In this economy, waiting a while longer to purchase a new car (even though we have the cash) just seems prudent--although maybe not patriot.  The old SUV is reliable, and worth more than $3,500 to us, even if the Blue Book says different. And besides, I can't stand the thought of the old gal being shredded when she still has many more good years in her, bumping along Idaho's backcountry roads.