Posts Tagged With: Finance

Everything you need to know about personal finance

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That’s the subject of my last column for the CMC Forum; enough people asked me about it and I see enough people throwing away money that I felt it could have a big impact.

Here’s my recommendation for banking:

The current best interest rate for a savings account is 1.14%, which means that if you have $1000 in a savings account for a year, you’re only going to make $11.40 in interest. So it’s not really that important right now to pick a bank because of its high interest rate.

A smarter move is to pick a bank that minimizes fees. There are two main sources of fees – ATM withdrawal fees and overdraft fees (when you try to withdraw more money than you actually have in the account). Fortunately, there are some banks that are not evil. I recommend Ally Bank, a new online bank. You can withdraw your money from any ATM and Ally will refund the fee. Also, you can sign up for overdraft protection, which will transfer in money from your savings account (with no fee) if you overdraft in your checking.

And on investing:

The best evidence we have says that, Warren Buffett aside, it’s extremely rare for anyone to beat the return of the stock market over a long period of time. Of course, people can beat it in the short run, just like if you had 1,024 people flip a coin ten times in a row, you would expect two of them to have all heads or all tails. However, there’s an easy way to perform at least as well as the overall stock market – invest in index funds, which allow you to own shares in thousands of companies for the price of one share (this is how all of my money is invested).

I also talk about credit cards and Roth IRA’s. A section on student loans would have been nice – my advice would be “don’t take them” – but I never took student loans so I could realize other people might be in a different position. 401K’s, rent/buy and how to finance a car are important topics but not so much for college students.

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Richard Posner on the Bailout

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Richard Posner has sage words about the bailout. He says that banks are suffering both from lack of capital and illiquidity. If they suffered only from lack of capital and the government bought the assets at market value, nothing would change, the supply of loans would not increase. If they suffered only from illiquidity the government could buy the assets at market value and hold them, the banks could make loans (you can't loan someone a collateralized debt obligation, but you can loan them cash) and the government would make its money back later. He says that the government should demand shares in banks it loans money to, because the alternative is a cash transfer from taxpayers to the bank's shareholders. While government ownership of private equity generally leads to political mismanagement and waste (a great example is Alitalia, as Becker points out), if it holds the shares briefly and sells them at the next opportunity there shouldn't be too much of a problem. He then goes on to outline what he thinks were the causes of the bailout, which are more private than any lack of government regulation. "There is a difference between creating and merely exacerbating a crisis," he writes. "Moreover, it is a paradox to exonerate the market on the ground that the government did not do enough to regulate it!" It's a complicated problem. But if our government is spending $2,333 per man, woman, and child on the problem, it deserves your attention. Uninformed analysis makes me think we can use $700 billion for much more noble purposes than grease the wheels of our banks. I'm also wondering why there's a market failure that requires government intervention. Usually if there is a shortage of lending, real interest rates will rise until people want to save money/lend it to others.

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Warren Buffett Interview on Freddie Mac and OFHEO

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"After it all came out, OFHEO wrote a 350--340 page report examining what went wrong, and they blamed the management, they blamed the directors, they blamed the audit committee. They didn't have a word in there about themselves, and they're the ones that 200 people were going to work every day with just two companies to think about."

Read the excerpt.

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Nassim Nicholas Taleb Called It

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Nassim Nicholas Taleb saw the market downturn coming 4 years ago, and was prepared to profit from it. He is a font of pessimism about banks and the market, and one of the most fascinating men alive.

Taleb's argument is that statistics and probability can only do so much to quantify and manage risk. Statistics and probability are great for games like craps, where the events are well-defined and you can calculate the probability and the expectation of every bet. Hedge-fund types can apply these statistics to make small gains in everyday market trading. The problem is that the small gains are overwhelmed by sweeping disasters, bubbles or failures in the market (or in craps, the likelihood that robbers shoot up the casino and steal everyone's money). The statistical tools being used today are just not good enough to evaluate the probability of those sweeping negative events, like the subprime crisis. Consequently everyone will over-estimate the chance of the market going up and up. Taleb bets against all of Wall Street by buying cheap options with extremely small odds. when markets operate normally, he loses small amounts on these options; when the markets lose a lot of money, he calls in the options and makes a fortune.

If you want to learn more about the theory read The Black Swan interesting the whole way through. Read more in this June profile of Taleb in the UK Times, or check out his website.

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Fed releases

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Cheat sheet: reacting to data and market releases weak data = Fed ease, stocks rally consensus data = lower volatility, stocks rally strong data = economy strengthening, stocks rally bank loses $4bln = bad news out of the way, stocks rally oil spikes = great for energy companies, stocks rally oil drops = great for the consumer, stocks rally dollar plunges = great for multinationals, stocks rally dollar spikes = lowers inflation, stocks rally inflation spikes = will inflate all assets, stocks rally inflation drops = improves earnings quality, stocks rally

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Fact of the Day

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The United States Federal Government has almost as much debt ($9.1 trillion) as the entire New York Stock Exchange has equity ($9.6 trillion). Of course these are off by half a trillion, or $500 billion, but that's only the federal government - municipal governments have 1.8 trillion dollars worth of debt.

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