Answers to your financial questions from Hilliard Lyons - wave3.com-Louisville News, Weather & Sports

Answers to your financial questions from Hilliard Lyons

With Wall Street taking its biggest one-day hit ever after the House rejected a $700 billion buyout plan, we've asked John Roberts, Director of Research at Louisville's Hilliard Lyons, to answer your questions about the economy. Here's a compilation of the questions we've received so far, along with John's answers.

Question:
Why in the world did Congress (the house or the senate) let our economy get to this point?  Why do they always have to add their special wants to every bill that is passed? Take care of one thing at a time.

Answer:
Remember that Congress, per se, cannot control the economy. However, the bills and regulations they pass certainly can impact the economy.

Certainly, the current housing issues begun as a result of the CRA (Community Reinvestment Act), which forced banks to make loans into distressed geographic areas. The banks then had to find a way to make that business profitable, which led to the proliferation of sub-prime loans,which were fine until the real estate market peaked. While it took significantly more than a decade for that business to fall apart, it was certainly an unintended consequence of that Congressional Legislation, and a major problem with all of these new laws and regulations on businesses is their unintended consequences!

Question:
How or will this (credit crunch) affect my 401K?

Answer:
The current issues should have no impact on 401Ks, other than on the value of the individual accounts as the price of stocks and bonds go up and down, which will effect the value of the accounts. As you move closer to retirement, one should move of their asset away from more volatile stocks and into less volatile bonds and money market funds.

Question:
If a person had a bond backed by Lehman Brothers, what would be the effect of their filing bankruptcy? Would the bond be 0 now?

Answer:
There will likely be some recovery as assets are sold in the bankruptcy process, but you will likely not get face value.

Question:
Is the U.S. still printing money daily? What is  behind the money that's being printed, gold, economic predictions, or what? Are we borrowing the money from other nations (i.e., China) to pay  for the war overseas?

Please explain the correlation between printed new money and what supports  our monetary standard backing up those dollars.

Answer:
The Fed is always printing money, both to replace what is worn out and to increase liquidity in the economy. The full faith and credit of the US government backs out currency. We are borrowing from many countries through the sale of Treasury securities, and vice versa.

Question:
Can my house be foreclosed on if the company my house is financed through  goes bankrupt? Even though I make my payments early?

Answer:
Not as long as you make your payments.

Question:
I have an adjustable mortgage which will be up in November, to eliminate the pre-pay penalties, I have began to try to refinance now. Because of the stock market mess, will this affect me and what percent rate I will be getting?

Answer:
Should the bailout bill not pass, it certainly could hurt you because interest rates could move significantly higher.

Question:
I have an IRA  for under $100,000 with National City Investments. If they file bankruptcy am I insured or will i loose it all?

Answer:
You are fine as you are under the FDIC limit.

Question:
Please clarify for your audience exactly what FDIC and SIPC insurance is, specifically, the length of time allowed by these companies to pay claims.

Also, is it not true that if a large number of banks were to fail it would be near to impossible to repay all insured accounts? How would this be affected by borrowing an additional $800billion from the taxpayers?

Answer:
FDIC and SIPC insurance protects all assets up to insured limits. There is no particular timeframe in a default, but the liabilities are usually assumed by another firm.

Question:
If you have family members in about in bankruptcy would it be possible to pull out all of their small retirement accounts and close it to try to prevent bankruptcy.

Answer:
I am not a bankruptcy expert, but I believe that typically you cannot shield assets under a bankruptcy filing.

Question:
Thanks to unlimited deficit spending and credit the United States is bankrupt and has been for many years. By strict interpretation of the US Constitution-Article 1 section 10 clause 1 there is (or should be) a constitutional crisis in effect, due to the fiat currency system in use here. Why should the American taxpayer continue to support this "financial cancer" that has now infected the majority of the planet?

Depression appears to be inevitable. Wouldn't it be better now to endure the "enema" needed to clean out the financial system? All of the "experts" and media speak of "loosening up credit supplies". What ever happened to that dirty, four letter word, CASH ?!

Answer:
I am certainly no where near as sanguine on the economy as you. While we certainly have a lot of deficit spending and some pain is necessary among both the over extended government and consumer, the hope is by freeing up the current credit issues, there can be a softer landing than a depression-type scenario. Cash is always good, and hopefully credit will become less available, forcing consumers to be more circumspect in their spending.

Question:
The United States has a little over 300 million in population. This government buyout is for $700 billion. So, I heard an Australian actor on  Jay Leno last night state that if we want to boost the economy, let's give  every citizen of the United States $1 million dollars. That is massively  less than the $700 billion it will take to fix someone else's problem, and  the citizens will spend it on houses, cars, and other things they need, therefore helping the economy. I really agree with this. My question is, why can't we do that, instead of give more of hard  earned money away to big corporate spenders, and a government that is robbing the people of this country blind?

Answer:
First, if we were to give all 300 million people in the US $1 million, that would equate to more than 425 times the current stimulus package (which amounts to a little over $2000 per person if it is all spent and there is no recovery. I actually expect the government to make money off of this as they will be buying all of these mortgages at big discounts -- and there is no where near that amount in the entire economy. 

As far as who caused the problem, there are a wide variety of people to blame for that. It includes the politicians that passed the legislation that forced the banks to make these loans into "disadvantaged geographic areas", the homeowner who took out mortgages and loans that they could not afford, the lenders that gave them the loans, and the managements at companies that packaged these loans and sold them off without appropriate due diligence.

Unfortunately, most of those people have already been punished (CEOs fired, companies in bankruptcy, homeowners with houses foreclosed, etc.) and we have to pick up the bag for them. If we don't you won't be able to get a loan, your credit cards will likely see their interest rates increased and credit lines cut back, and many people, possibly you and/or your husband, will lose their jobs as credit becomes unavailable for businesses to invest. 

This bill will enable banks to sell assets clogging up the system to the government, which will be sold off in the future, probably at a big profit. Then the banks will be able to use the money they get for these loans to lend to business and individuals to get the economy going again.

Question:
Hello, in checking the US Census, there are about 300 million people in the US. About 225 million are 18 or older. If these numbers are accurate, Then congress is voting on bailout amounts equal to approx. $2.3 billion dollars per person or $3.1 billion dollars per person 18 or older. I think they should give individuals the money rather than bailing out the banks that made such poor business decisions.

Answer:
The actual amount is about $2300 per person if the total amount is used.

However, since the government will be buying mortgages with the money, it will be helping people who are having trouble paying their mortgages. The money is only going to the banks in exchange for these mortgages for people who are unable to pay them off. Fortunately, people who made the bad decisions (borrowers who borrowed too much and lost their houses, companies that went bankrupt as a result of buying these loans, etc) have already been punished. The bill just allows the banks to lend to people, such as you hopefully, and businesses that acted responsibly, by taking these problem mortgages on which their is currently no market off their balance sheets. The government at a later date will sell these mortgages, probably at a profit. Without the bill, banks will be unable to lend, and a lot of businesses will be forced to lay people off, and not be able to lend on more mortgages, credit cards, etc,

Question:
I am currently paying tuition for my son while he attends the University of Louisville. Fortunately, I am able to save just enough to pay each semester when the bill arrives. However, I am not able to accumulate any savings for myself/family in the event of financial crisis. With the United States economy being so unpredictable, should I have my son apply for student loans and increase my savings?

Answer:
It certainly would not hurt to have him apply for any financial aid you can get, and student loans are typically tax deductible and very inexpensive, so if it helps you increase your retirement savings that is a good thing!

Question:
I work for a medium to large company. How will this global financial crisis effect my payroll checks?

Answer:
It should only have an impact if the economy enters recession due to the slowdown and the company is forced to reduce employment,

Question:
My retirement is in the 100 aggressive. I am a 34 year old healthcare worker. Should I change to a less aggressive option???

Answer:
That depends on your tolerance for risk. Such an exposure is higher risk/higher reward. Typically, you should be more aggressive the younger you are, and less aggressive as you get older. A good rule of thumb is that 120 minus your age should be the percent in stocks--In your case approximately 85%, with the remainder in more conservative money market and bond investments. Remember to diversify across geographies and stock types.

Question:
The original bailout bill contained no revisions to the bankruptcy laws. I understand that attempts to do that were rejected. I also understand the original change to the bankruptcy law benefited big business, not the consumer. Please comment.

Answer:
The original bankruptcy bill benefited business by reducing the types of liabilities that individual consumers could escape during bankruptcy.

Remember though, that all of us consumers are hurt by consumers that declare bankruptcy, as those costs are passed on to all consumers by businesses in higher prices as a cost of doing business.  The new bill will likely have some benefits for consumers entering bankruptcy--which will hurt all of us responsible borrowers who don't enter bankruptcy!

Question:
With the current status of our financial system, will this affect college students who receive federal grants and federally funded student loans?

Answer:
It may if government is forced to cut subsidies due to lower tax receipts as a result of slowing economic activity.

Question:
If you have over $200,000 in CD's in one bank how can I be sure all the money is insured to the max? I, husband, and son are on the CD's, but some only two names, some three names. I was told you are insured $100,000 per person. How can I be sure with  the CD's we have?

Answer:
At the current time, you are only insured up to $100,000 and it does not matter how many people are on the account.  Unless the law is passed to increase the limit, I would suggest opening accounts at different banks to keep you under the limit.

Question:
Will interest rates that are being paid in savings, money market accounts and treasury bills rise significantly as credit availability is tightened if a bill is not passed? Are Louisville area banks a safe place for my money (especially if my deposits are in CD's and above the $100,000 FDIC cap?)

Answer:
Bank and money market rates are typically determined by the Fed funds rate.

Most Louisville based banks are generally strong, but never hold more than $100,000 in a single bank, I would break it up into different institutions to protect yourself,

Question:
I purchased an annuity in April from AIG and also have one five years old. Are these safe or have I lost them? I have been told  they are safe, because an insurance company must have this money set aside.

Answer:
You should be just fine with that annuity.  The insurance subsidiary of AIG is very highly capitalized.

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