Whether you are well-versed in international economics or not, you’re probably aware that Europe is having substantial problems. You’re also likely familiar with the resulting worldwide ripple effects: uncertainty amongst investors, fears of a global double-dip recession, and widespread political upheaval, just to name a few. Of course, there are a number of prominent theories for how to solve Europe’s debt crisis, but given the depth and complexity of the problem, none is perfect and each requires tough choices to be made. People – not just in Europe, but around the world – need hope, however. We need a plan, a sense that these economic issues are finite and not permanently debilitating. So, with that being said, what say we take a quick look at four different courses of action that Eurozone governments can take, the pros and cons of each, and which will provide the most long-term benefit without causing short-term chaos.

Option 1: Economically sound European countries pay down southern debt
This plan would involve countries like Germany, the Netherlands, and Finland using savings, tax revenue, and export surpluses to help pay down the debts of southern neighbors like Greece, Portugal and Italy until they are at manageable levels. Such an approach is logical in the sense that the economies of European Union (EU) nations are interconnected, and the default of one or more countries would have negative repercussions for others.

Despite their similar names, money market accounts and money market funds are most certainly not the same thing. So let’s take a look at both to clear up whatever confusion might exist and provide insight into which will best suit your particular needs.

Money Market Accounts
A money market account, also known as a “money market deposit account,” is essentially a savings account. Money market accounts tend to pay more in interest than standard savings accounts and have higher minimum balance requirements but are interest-bearing bank accounts at their core, typically allow for limited check writing and debit card use, and most importantly, are explicitly insured by the FDIC—usually for up to $250,000.

Imagine for a second a U.S. president loses an election, decides he’s just not ready to give up his power yet, and concludes that he’ll remain president for another four years, whether the American people want him or not. How do you think that would go over with the voters? Not so well, I would guess. In fact, he might have to board up the White House’s doors and windows to deal with the resulting revolt.

Well, if you think about it, that’s essentially what’s going on right now with the board of directors system in this country. According to Business Week, more than 200 board members at public U.S. companies over the past three years have received less than 50% of the shareholder vote at elections, yet all but a few retained their seats. Two-thirds of the S&P 1,500 doesn’t even require that board members garner the approval of a majority of shareholders in order to keep their positions. But how could that possibly be?

All investors should have a system they use to approach investing. The ultimate goal of this system is to help the investor effectively make consistent investing decisions without being tossed to and fro by market conditions.

People who suffer the greatest investing losses are those who are constantly getting in and out of ‘hot’ stocks and those who buy and sell according to the dips and spikes of the market. Not only is this approach less-than-profitable, it is also stressful and time consuming.

Sometimes when individuals start using ‘financial talk’, some of the rest of us get lost in the dust. Phrases like “401(k), 503(b), Traditional IRA, and Roth IRA” sound like another language. As a result, many people are overwhelmed by the many options, and so they choose a terrible alternative – to do nothing.

This is not a strategy I recommend. Instead, slowly wade through all the options and make an informed choice. When it comes to saving for retirement, any choice is better than doing nothing.

We probably all know someone who was just learning how to start investing, and in the process he bought a hot stock.  That stock skyrocketed through the roof, and now everyone you know is trying to get a share in that stock.

However, for every stock investing success story, you’re likely to find a hundred who lost BIG TIME.  For most new investors, mutual fund investing is a much better route than single stock investing.

What is an ETF?

ETF stands for Exchange Traded Fund.  The closest relative of the ETF is a mutual fund or the index fund.  Each mutual fund, index fund, and ETF includes a sum of funds contributed by different investors.

There are different categories and types of ETF’s.  There are actively managed ETF’s (like mutual funds) where people buy and sell stocks in order to get the best returns according to the goals of the specific ETF.  There are also passive ETF’s (like index funds) where many shares are purchased in line with a market index so you will get the average return of the index.  Actively managed ETF’s seek to beat the market (with the possibility of lagging the market returns).  Passive funds are satisfied simply to mirror the market returns.  In addition, there are sector ETF’s that track a certain sector of the market.  Let’s assume you think that gold will perform well.  You could buy an ETF that focuses on the gold market or even other precious metals.

Nobel Prize-winning economist and Columbia Business School professor, Joseph Stiglitz argues in this interview that we are headed for another collapse.  His arguments are sound and should be listened to.

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In an article printed in The New York Times last November, Andrew Ross Sorkin addressed the issue of corporate governance by exploring the proposed takeover of the British confectioner’s company Cadbury by the American company Kraft.  The article explains that because British Boards of Directors act, essentially, in an advisory capacity, the decision to sell the company is based on the shareholder’s desires.

Since the article was written the takeover of Cadbury by Kraft has been complicated by various developments, but the issues discussed by Sorkin still hold.  Sorkin used the proposed takeover as an opportunity to discuss the differences between the power of corporate governance in England and in America.  In the British system, shareholders have much more control over the future of their investments, while in the American system, much of the control of the company is ceded to a Board of Directors and so takeovers, like that of Cadbury by Kraft, generally require the Board’s blessing to move ahead.

Recently, I came across an article on Yahoo Finance detailing the similarities between our current economic market and the market of the 1929.  The author of the article, Simon Maierhofer, did a great job of summing up the ways our current economic crisis is paralleling the historical Great Depression and how our economic forecasters ought to rely more on history to help manage their expectations of buying opportunities and economic recovery.  I felt that Maierhofer’s observations were worth some commentary here at Wallet Blog and I wanted also an opportunity to point our readers over to his article for their own edification.

One of the key points that Maierhofer made that I found particularly interesting was his point that during both time periods, the economic devastation was preceded by extreme optimism, that no one (or very few experts anyway) seemed to see the imminent collapse on the horizon.  It was also interesting to me that both economic disasters seemed to be preempted by the collapse of a real estate bubble.  I, for one, had never numbered a housing boom as one of the causes of the Great Depression.  Maierhofer also points out that one of the most striking similarities between the market then and now is that trouble seems to be across the entire economy and not simply located in a few kinds of sectors.

If Treasury Secretary Timothy Geithner doesn’t know how to get appropriately compensated for the loans / bailouts that he keeps approving on behalf of the United States Government then he shouldn’t be giving out these loans at all.  His mismanagement of these negotiations is wasting our money.

For instance last year, when Geithner, then operating through the New York Fed, decided to bailout AIG, the ailing insurance giant was already in negotiations with banks that would have retired their Credit Default Swaps with AIG paying 40 cents on the dollar.  Once Geithner took over the negotiations, he instructed AIG to pay 100 cents on the dollar.  The flubbed negotiations cost American taxpayers at least $19 billion (i.e. 60% of the $32.5 billion that AIG paid to retire the swaps).

A while back we wrote a piece describing the basic problems with Bullish opinions currently circulating about the end of the recession.  In that article, we showed the various continued symptoms of our nation’s economic problems and the signs that we are still in a very real recession, even if abstract economic terminology currently suggests otherwise.  Recently, I came across the following graph in an article by Henry Blodget, and I think that it shows further evidence that the stock market is already overvalued and the bulls are wrong about their predictions.

All along it has been our contention at Wallet Blog, that the board of director’s system for American public companies is in need of significant repair.  Specifically, its problem is that shareholders lack the ability to control who serves on the board of directors of their own companies at any point in time.

Lately, we have seen more and more stories in the financial news telling us that the various boards of directors of American public companies have acted in ways that are either suspicious, irresponsible, or just plain illegal.  With each such story, we see the SEC attempting to curb the corporate excesses one problem at a time.  In a recent story, the SEC has begun investigating the role of consulting firms in setting salaries for CEOs.  Specifically, the question is whether recommendations about CEO pay packages are compromised when the same consulting firm hired by the board also provides other services to the company? In other words, are these consulting companies providing generous recommendations to the board about the CEOs pay packages in order to keep the CEO happy and minimize the chances that the CEO replaces them with another consulting firm for all the other services that they provide?

Recently, a judge denied Bank of America’s attempt to settle with the SEC for $33 million dollars under accusations that the Bank presented false information to its shareholders about Merrill Lynch employee compensation packages.  The judge reasoned that the $33 million would end up being paid by shareholders, effectively forcing them to pay a bill twice which they should have never had to pay at all.  While we agree with the decision we clearly can not continue operating in a manner where shareholders are helpless in running their own companies.

Does it not seem odd that the owners of the company are not responsible for hiring corrupt or incompetent management or for allowing that corruption to continue?  Unfortunately, the reality with the current Board of Directors system is that shareholders cannot be responsible because they have very little power to decide who will sit on that board or to quickly remove board members when their attitudes or behaviors work against the shareholder interests.  If shareholders could have ousted Ken Lewis at any point in time, then they should have been responsible for any wrongdoings under his leadership. 

The bulls are pointing to the end of a recession and a robust recovery ahead for the American economy.  Their optimism is based on a definition of the recession, in economic terms.  For economists, a recession ends when the economy ends its negative growth.   These terms, however, are theoretical.  In practice, a robust recovery must parallel a robust recovery at the American household level, which is unlikely to happen for a number of reasons: 

• The Unemployment rate:  We hear a good deal of optimism coming from economists concerning the fact that the unemployment rate is slowing, but we ought to remember that it isn’t actually going down, but continues to rise.  According to the Associated Press, we are at the worst unemployment crisis since 1983 and economists are predicting the unemployment rate to peak above 10% by the middle of next year. 
• State Deficits:  We are suffering huge deficits at the state level which the Federal Stimulus package can not correct.  This means additional job losses for state employees.
• Unemployment Insurance:  Not only is America facing a dangerously high unemployment rate, but the unemployment level in this country has been high for so long that benefits are now running out.  We are in a situation far worse than simply having people who are out of work; they are out of work, have few prospects for new jobs, and are receiving no income.
• Continuing Bank Failures:  Despite the federal government’s intervention, we continue to see banks fail.  The number of banks on the FDIC’s “Problem List” (banks in danger of failing) has gone from 305 to 416 at the end of June ’09.  Some analysts are afraid that the FDIC will go into the red by the end of this year.
• Continuing Credit Crunch:  In these uncertain times, credit markets continue to be very tight.  Because of the continuing failure of the nation’s banks, regulators and bank executive remain cautious, which means less credit availability.  Companies who need to deal with debts that are coming to maturity are likely to find less opportunity to refinance.  As a result, we can expect more corporate bankruptcies and more job losses.   
   

Many economists are calling for more stimulus money by the federal government, but it is clear that what the country really needs is smarter spending.  We desperately need to make investments with government funds that will deliver strong returns on the nation’s money, and thus, we believe that the federal government ought to invest in new technologies that will turn America’s trade deficits into strong surpluses. It is precisely for that reason that this is the right time for a ‘Manhattan Project’ on energy independence.

Given the recent economic upheavals, as well as the unprecedented manner by which the government is handling these dilemmas, a lot of people are worried about what inflation will do to our savings and investments.  One option that investors have to safeguard against inflation is to put money into Treasure Inflation-Protected Securities or TIPS.

Basically, the principal investment for TIPS is adjusted by the Consumer Price Index (measures inflation) + A Fixed Yield that is unique for each TIPS (recently it has been around 2%).  This means that your investment primarily rises or falls along with inflation.   To use a simplified example, if you put in $100 in a TIPS that has a 2% ‘Fixed Yield’ and the nation goes through 5% of inflation in a year, then the value of the TIPS will raise from $100 to $105 over that year (as a result of the 5% inflation)+ 2% of $105 to a total value of  $107.1. 

Our country’s economy has been operating from bubble to bubble.  From 1996 until 2000, we were in a tech bubble.  Our faith in the financial potential of the dot com industry was boundless, though it ultimately proved ill placed.  From 2000 until 2006, we were in a housing bubble which, when it burst, laid the foundations for the current recession.  During these periods, the country placed its economic hopes on new, seemingly plentiful, frontiers that promised new means by which to make money.  Older values were made to seem, by comparison, out of touch and out of date.  As a result, we, as a nation, allowed ourselves to slip further and further away from the fundamentals necessary for a healthy economy.

Now, we stand on a precipice.  We could create another of these economic bubbles to put our financial hopes into – an option as illusory as ever – or we could find some way to return to the fundamentals that have, historically, made our nation’s economy strong.  Over the last decade, we allowed our exports to slip and made our economy deeply reliant on imports from the rest of the world.  We have let the trade deficit grow too wide without finding new products or new technologies to export, and as a result have found ourselves without a significant industry to insure future success in the global economy.

My point, in the past, has been that if America had allowed AIG to go into prepackaged bankruptcy, as we are doing with Chrysler and GM, we would have been in a better position to deal with the money AIG owes through Credit Default Swaps (CDS) because we could have negotiated payback for those positioned to collect on AIG’s obligations.  AIG owed money, we bailed them out to save the economy, and the result is that AIG paid off a lot of its obligations, and we, as taxpayers, now own billions of dollars of nearly worthless AIG stock. 

For the ones that are still not convinced, let us look at Goldman Sachs and its position concerning AIG.  AIG  paid out $13 billion bailout money to cover its CDS obligations to Goldman Sachs.  Actually, taxpayers paid Goldman Sachs, AIG just acted as a conduit.  The $13 billion was incredibly good for Goldman Sachs whose stock has since risen, but not nearly as good for AIG whose stock is perpetually on the verge of tanking.  However, the major problem here is that taxpayers paid AIG to pay off Goldman Sachs.  The result is that taxpayers own AIG stock (on the verge of collapse), and own no stock in Goldman Sachs (which is on the road to recovery).  Moreover, because CDSs are still unregulated, Goldman Sachs stands to make about $30 billion if AIG does, eventually, go bankrupt because of the CDSs they’ve taken out on that eventuality.  It is possible that other companies have similar CDSs bought against AIG, but since, remarkably, there still is no system of market regulation set up for CDSs, we can’t know for sure.

This recession has been characterized by the presence of companies that are so vast and influential that their failure actually endangers the American economy.  The names of these companies, GM, Chrysler, AIG, Citibank, Bank of America, and so on, are all too familiar to us from their prominent place in news stories about economic disaster.  In order to prevent systemic economic collapse, America has resorted to bailouts and political bankruptcy,  essentially changing the “rules of the game” in order not to have these failing companies take our economy down with them.  What is clear is that the benefits reaped by the economy in allowing the existence of these financial giants is nothing as compared to the damage caused by their collapse.  Companies that are too big to fail should simply not be allowed to exist.

We should remember that capitalism is based on free market principles in which companies compete with each other.  If one fails, other and presumably better companies take its place.  Thus, the market evolves so as to better meet consumer demands.  Companies fail in a free market economy because they are unable to compete with stronger business models.  Moreover, they should be allowed to fail in these circumstances so that better business models can take their market share.

We, at Wallet Blog, are as anxious for good news about the economy as is everyone else.  We’d love to concentrate on giving money management advice for the vast fortunes the nation reaps in boom years, rather than discussing the pros and cons of economic rescue plans and the need to overhaul the financial industry.  However, there’s a fine line between finding a ray of hope in this recession and simply misreading statistics.

A recent Associated Press headline read: Jobless benefit rolls drop sharply to nearly 6.7M.  Good news right?  Less people are receiving unemployment benefits.  That can only mean one thing:  all the people who’ve lost their jobs have found new employment.   How could a drop in unemployment payouts be anything but evidence that the nation is finally on the upswing?  After all, the AP article recounts the various highlights of this statistical evidence and calls them encouraging signs… 

According to CNNMoney, all of the news surrounding the stock market in the past few months, “has been good news, or at least neutral news,” but nothing bad.  The rationale for all of these happy feelings is that the market has the ability to prognosticate for the worst of times, and did so in March when we saw the Dow dip to around 6,500.  Additionally, it’s believed that 6,500 represented a worst-case scenario that never actually happened, and that therefore we’ve seen the lowest of the low. 

While this perspective fueled the three-month surge, it lacks fundamentals that can be found on page one of Investing for Dummies.  Before we fall for the hype, let’s face the facts.  We are in uncharted economic conditions, and face headwinds that we’ve never seen before and that cannot yet be fully understood. 

The thing about corporate democracy, as it has been allowed to flourish, is that it isn’t very much like a “real democracy”.  Basically, in a “real democracy” that you and I would recognize, people either vote for or against something.  If there are more votes for yes then yes wins the day, otherwise, no.  What we don’t think about as much is the number of people who don’t really vote yes or no, but who don’t vote at all.  In a “real democracy”, these people don’t really count.

On the other hand, in a corporate democracy when it comes to counting the votes from shareholders in publicly traded companies, those votes that aren’t cast, still count.   Officially, the votes not voted are given over to the brokers.  The brokers in charge of these votes are likely to defer their position to the suggestions made by the board of directors.  Thus, whatever the directors put up to a vote, they can be assured of having it go their way because they are supported by a silent majority.

The most infamous offshoot of the derivative market, the Credit Default Swap (CDS), is continuing to operate in an unregulated manner.  This despite the various collapses that this $60 Trillion unregulated market has caused, and the resulting government bailouts that have forced all of us to become financially responsible for lumbering economic giants such as AIG – a company which was deemed too big for the government to allow its collapse. 

Surely, given the damage caused by this unregulated market, the first order of business for lawmakers should be, and should have been, to put laws into place which would end derivative trading in its current form.  In short, we would expect that the current recession would inspire lawmakers to make laws that would prevent another recession of this kind in the future…but they haven’t.  They’re now trying, and that’s admirable, but those laws haven’t been passed as of yet. As recently as May 13th, Treasury Secretary Timothy Geithner sent a two-page letter to congressional leaders urging them into action.

The barbarians, so the saying goes, are no longer at the gates.  They’ve stormed through.  In many cases, they were practically let in by negligence of the regulators whose job it was to protect us from greedy swindlers, inventive accountants, and fraudulent lenders.  The gatekeepers themselves, the various federal regulators, have not been punished for failing in their duty to protect America.  They remain, even now, at their posts as the country reels from the damage it has taken from the various scandals and crimes committed against its economy and its taxpayers.  Those whose job it was to police against these crimes have failed us and we wonder why they have not been made accountable.

Why, for instance, didn’t Christopher Cox, the head of the SEC, not resign after the Madoff scandal?  Surely the crime was glaring enough to call his competency into question.  Shouldn’t he have taken some responsibility as the scheme was carried out on his watch?  Cox offered no public apology and was never taken to task for the calamity that resulted from his oversight.  He just stayed in, despite the very real complaints of his critics, until he was replaced by the next administration.

AP Business Writer Madelein Reid, in a recent article summarized the conflict between Citigroup Inc. and its shareholders at the company’s annual meeting.  The shareholders were rightfully outraged.  The Board seems unwilling to change most of its procedures or to give up any of its power to decide the future of the company.  It alone decides executive compensation packages—not the shareholders just as it alone decides that the company will fund a new stadium.  The shareholders, simply put, have no say.

Reid points out that the chairman of the board of directors amiably listened to the shareholders’ many complaints while keeping in good spirits and remaining polite and unflappable.  And of course, offering no indication that the shareholders’ opinions would have any affect on the business of the board or in the method by which the board would be run.  If the shareholders don’t want to support a new stadium, too bad for them.  As unhappy as the shareholders of Citigroup Inc. are with the company’s performance, all returning directors and the four new recommendations were voted in without much difficulty.  The board had not recommended anybody to run against the contenders for these positions…