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Bernie Madoff, Fed Rate Cut: Thoughts about News Events

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The news has been crazy the last couple of days. I figured I'd just round up a couple of pieces of it for those out of the loop.

Bernie Madoff

Unless you've been under a financial rock the last couple of days you've heard of Bernie Madoff. I'll be honest, a lot of the specific details about what he did are over my head. For the most part, I don't really care to learn the specifics... I simply boiled the whole thing down to big Ponzi scheme, pain, people out of billions of dollars, pain, probably the worst timing imaginable in this economy, pain. Kimberly Palmer of Alpha Consumer reminds us that we can learn one big lesson here: diversify.

Fed Rate Cut

With the cutting the federal funds rate 3/4 of a percent, we can expect high-yield banks such as FNBO Direct to reduce the interest rates they'll give you. CDs will probably drop as well. It seems like the Fed is willing to unleash it's whole arsenal of ammuntion on this economy. However it seems like the economy is like Superman watching the bullets bounce off his chest. The Fed may be running out of bullets too.

Social Security

This hasn't been in the news of late (at least that I've heard), but remember a few years back when there was a big call to let the government invest Social Security funds in US stocks. The greater return of stocks was supposed to be the answer to keeping the program alive. Let's give a little a credit to the people who shot down that idea. They say that things could always be worse, and there's your proof.

Posted on December 17, 2008.

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9 Responses to “Bernie Madoff, Fed Rate Cut: Thoughts about News Events”

  1. Miranda says:

    At this point, the Fed rate cut isn’t going to do much IMO. After all, with our debt-based economy, the banks have to be willing to lend. And they just aren’t willing to take the risk right now — no matter how many borrowers want a loan.

  2. Kate says:

    I am not sure this is the right answer but I think they waited too long to solve this problem, people get paid a lot of money to make sure that our economy is good, they didn’t do this and now there isn’t a quick fix answer to solve this problem. I think people need to look after themselves and make money to make sure they can meet their bills.

  3. jim says:

    Anyone else find it funny that Madoff is pronounced “made-off”…. :)

  4. jim says:

    Oh, and the real reason why the target rate range of 0-0.25% won’t matter TOO much (not as much as the Fed saying we’ll do anything… incl. “quantitative easing” which is code for print more money) is because the actual funds rate has been under 0.2% for a while (http://www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm)

  5. kosmo says:

    Madoff conned some big investors, too. HSBC bank was reported to have lost $1 billon.

    I’m still in favor of allowing (note: NOT requiring) citizens to invest social security in the market, if they wish. I’m 33 and am perfectly confident that the market will rebound by the time I retire. If I was 60 and had SS money in stocks, would I be concerned? Certainly … but at that point, I should have shifted assets toward a more conservative portfolio.

    The return on investment for SS has to be horrible. 12.4% of my income goes to SS (6.2% from employer and employee) and they projected benefits pale in comparison to what my 401K projections are (assuming 8% return for the 401k) Surely someone has caculated this – I’m too lazy to do this today.

  6. Dan says:

    I’m totally behind the idea of allowing the YOUNGER generation to have a small percentage of their SS taxes be invested in the stock market. It’s very unfortunate that someone would use a financial crisis such as this to say I told you so.

    So if not this what? The answer can not be just to throw more money down the same rat hole.

    Same answer that we hear about all of the time is just give it more money, schools are ailing it couldn’t be that they aren’t spending the money wisely so just give them more money. Take a look at the California budget, I believe that over 50% of the CA state budget goes to education and yet the teachers are out buying there own school supplies. Give them more money that’ll solve the problem???? Right?

  7. kosmo says:

    According to the SSI site, my wife and I will get a whopping 2.08 return on our SSI money (table 3, steady, average earners, two earners, ~1973 birth)

    http://www.ssa.gov/OACT/NOTES/note2000s/note144.html

    I’m thinking that I could beat this fairly easily, even with conservative investments. I’m not talking about investing in Haitian penny stocks. I definitely want this opportunity. For those who don’t want to take that risk, that’s great – they should definitely have the opportunity to stay in the current program. Nobody should be forced to manage their own SS.

    I just hate to see my money doing so little work for me.

  8. kosmo says:

    Here’s my alternative retirement strategy.

    It is, of course, intended to be satire.

    http://somecasualobservations.blogspot.com/2008/10/investments.html

  9. Careful about the big lessons. Diversification merely reduces volatility for statistical reasons, that is to say, that it also assumes that individual stocks are not correlated overall and thus the market is not coherent … but behold, when everyone is freaking out, it is. However, there is more to risk than mere volatility. That equivalence was only adopted in modern portfolio theory because it was and is mathematically convenient. That does not make it true. It is a model assumption. The scary part here is that there are no universal models for volatility. Forsooth! In other words, it is just a parameter for your model; you can pick what you want, 20 day standard deviation, 40 day, 200 day … Fun fact: Lower risk stocks have historically had higher returns. According to the theory that so many take on faith, that it practically rules the market, this should not happen. How’s that for efficiency?

    The big lesson here is: Know what you are buying :-)

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