by Jonathan Wallace firstname.lastname@example.org
The other night on my ambulance, I picked up Cora, a sixty year old homeless woman with two canes who was sitting on a subway platform by herself, unable to stand up. Her only address was a woman's shelter, which like many homeless she preferred to avoid, because too crowded and violent. She boasted about her sons but said she couldn't live with them because they were too strict. She had an open, friendly, humorous manner and a Southern accent. When I asked her if she felt any pain anywhere, she replied, "Everything's fine except my mind, Jackson."
A key to determining anyone's character and moral beliefs is their answer to the question: What do we do about Cora? My ambivalent answer begins with the fact that Cora, unlike many of the homeless I retrieve from the street and the subway, is "alert and oriented times three": she knows who she is, where she is and approximately what date it is. And she has made choices: she chose to live on the subway instead of in the shelter or with her sons. To some extent, I sympathize with the conservative view that we should not spend a substantial amount of tax dollars helping people who have made bad choices (and who, in many cases, don't want the help because they don't want to live any differently). On the other hand, New York in February is not San Jose; Cora is not living in a park in seventy-degree weather; I may pick her up next week severely blue and hypothermic from a bench on Pelham Parkway, or call in an "83 not removed" and leave her body for the police. No matter how reprehensible Cora's choices are, I don't want her freezing to death on my watch. So my ideal society--the one in which I wish to live--will do something to keep that from happening.
Contrast a remarkable speech I have quoted before in the Spectacle. A friend of mine, a respectable, successful, very courtly attorney in Austin, Texas, commenting on an article in the paper about a lawsuit against Grand Central to assure the rights of the homeless to live there, said, "Let me tell you how I would solve your homeless problem in New York. I would export them all to an island in the Pacific. Every week I would fly over in a C130 and drop them canisters--full of drugs, guns and knives." He meant it too--and saw nothing contradictory to his vision of himself as a good man by the original Socratic definition: defender of his friends, fearful to his enemies.
A discussion of Cora grounds us, brings in a dose of reality, before we ask whom these private investment accounts, which the president has proposed as an alternative to social security, will benefit. Cora is still five years too young for Social Security. Unlike some mentally ill homeless who are not capable of understanding what a check is, Cora will probably consistently cash hers. She will possibly also make bad choices with the money, spending some of it on alcohol instead of food or shelter. One thing Cora will not do is manage the investment of her retirement funds. She will not emerge from the subway from time to time to call an investment adviser and tell him to up the portion in bonds from ten to twenty percent.
In fact, most people are not particularly capable of doing this well. I for one, am not, and I am a person who has always been warm, well fed, mostly sober, and the holder of an advanced degree from a respected institution. Walk down the street and tap any fifty people and ask them about the concept of income averaging, or how the equity markets have done over time, and how many will be able to respond knowledgeably? In fact, try this experiment on Wall Street, and just make sure you are asking everybody--not just the banker but the bicycle messenger and the guy delivering sandwiches, and see what kind of answer you get.
Who are these personal accounts intended to appeal to, if they are meaningless to both Cora and me? Well, I can guarantee they would appeal to my Texas friend, and to twenty-two year old libertarians, who love the idea of control over more of their money through-out their lives They will appeal to a much larger number of people who have never done well in the market, but have preserved their illusions and never stopped trying.
The equity markets, looked at through an idealistic eye, are a beautiful thing: an invisible hand managing supply and demand, setting prices, acting as the solvent for many social issues and among the different classes and groups in American society; a rising tide, lifting all boats; delicious pure water trickling down to the thirstiest classes in society. Personally, I have lived and died (and lived again) in the free market; it has been a friend and enemy to me. The difference between me and my Texas friend is that he thinks free markets are the solution to every problem, while I believe that living in proximity to one is like having a highly useful tiger living next door: it has to be carefully watched.
The discussion of personal accounts in the press so far, has concentrated on the philosophic issues of whether the free markets have a role at all in providing basic social safty nets (I will return to this), and on practical issues such as whether particular groups (such as fifty-year olds, like me), will have enough time to accumulate any significant amount of savings in these accounts. I have seen almost no discussion of fraud. Get on Google, plug in the words "broker churning elderly" and see what you pop up. Since the beginnings of free markets, brokers have preyed on the money of the elderly and other passive, trusting populations:
An example of an unsuitable investment is where the bulk [of] an elderly, income dependent clients irreplaceable assets are sold, and the proceeds used to purchase high-risk investments. What Types of Investment Loss are Recoverable, http://www.investmentloss.com/types.htm
This kind of behavior has been routine, since there have been brokers. You will find a number of decisions on the SEC web site which tell very disturbing stories. Witness the case of Daniel Zessinger, a broker for Prudential Securities who specialized in elderly, unsophisticated customers:
His victims included elderly customers with limited assets who had entrusted their retirement funds to him; some were unsophisticated investors who were unable to understand the monthly statements Prudential sent them..... Among other things, Zessinger effected unauthorized transactions in customers' accounts; ignored customers' instructions to sell securities; purchased securities for customers which were unsuitable or excessively risky in view of their financial circumstances and investment objectives; misrepresented to customers that unauthorized trades in their accounts had been canceled; and misrepresented to customers that they were making money on their investments when, in fact, they were losing money.... The losses caused by Zessinger's fraudulent conduct were between $350,000 and $500,000. In the Matter of Daniel Zessinger, http://www.sec.gov/litigation/aljdec/id94cff.htm
One of Zessinger's victims was Mildred Weir, a ninety year old widow with Alzheimer's. Weir's son Martin, who worked installing air conditioners, had a high school degree and no investment experience or knowledge of the markets. When he retained Zissinger, he informed him that the income on his mother's assets would be needed to pay her nursing home expenses. Weir originally encountered Zessinger when he came into his brokerage to buy a certificate of deposit--one of the most conservative and safest investments there is.
A total of $117,913.82 was deposited into the account at Prudential, primarily in the CD, which matured January 30, 1991.... Soon after the CD was redeemed, Zessinger began trading on margin..... Between December 1990 and May 1992, Zessinger effected 109 trades in the account, purchasing securities valued at $1,039,737...... Martin never knowingly signed a margin agreement or verbally authorized Zessinger to engage in margin trading in the account..... Martin did not even know what a margin agreement was and did not understand margin trading..... The Mildred Weir account lost over $65,000 during the time it was handled by Zessinger.... Yet when they questioned him, Zessinger always assured the Weirs that the trading in the account was profitable.....
This is just one of numerous painful stories you will find with an easy Google search. Now, in Zessinger's case, the SEC took an interest. If a broker is not prosecuted by federal authorities, or the SEC does not seek to fine him or revoke his license, the unhappy customer is usually forced into the niceties of compulsory arbitration under the rules of the National Association of Securities Dealers--which is complicated, expensive, and tends to be sympathetic to brokers. Under existing rules, the elderly have not had effective enough protection against sharks like Zessinger--so why would we take more of their retirement money and put it in the hands of private brokers?
Getting down to this level of detail easily answers the meta-question, of the role of the free market in providing basic social safety nets. None, zero, zip, zilch, none. The difference between me and my Texas friend will always be the belief that there are certain functions best provided by government. (He and most libertarians believe that the only inherently governmental function is national defense.) Social security was enacted as an entitlement, meaning that people as different as Cora and I know that when we reach the end of our lives, or, earlier than that, of our ability to manage our own affairs, the government will be doing its best to provide us with an amount of money that will help us avoid living on the subway or in a shelter. Relying to any significant extent on funds that I must knowledgeably manage, with the help of an adviser who may (despite my best intentions) be Daniel Zessinger, is not an alternative to a social safety net.
Much is being made of the fact that Social Security is broken. I was, I admit, shocked to figure out years ago that Social Security is funded like a Ponzi scheme: the contributions that the latest members make are used to pay the earlier ones. Which does get you thinking, "How long can they keep that up?" The reason Social Security is not actually (from a moral standpoint) a Ponzi scheme is that no fraud is involved. No-one is pretending that the system works any differently, and government is allowed to decide to fund things this way if it wishes. However, from a practical standpoint, the system starts to fail when there are too few younger workers trying to support too many elderly. The aging American demographic dictates that benefits cannot be maintained beyond a certain point at today's levels-- around 2040, according to the White House.
The White House is trying to avoid discussion of less radical solutions than privatizing social security. One would be to raise the social security tax, but tax raises are anathema in today's politics and no-one wants to bet their career on supporting one. Another approach would be to eliminate the cap--we only pay social security tax on the first ninety thousand dollars of salary. Some commentators say that we would solve all problems right there, simply by eliminating the cap. And of course, we could also change the entitlement, making it available in larger amounts to those who need it more. Under that theory, Cora would receive a higher payment than I would, because she has no other assets or source of retirement funds, while I do have other resources. Personally, I think any of these solutions make far more sense than private accounts.
Most people do very poorly managing their own money in stock markets, and the system, while not quite a Ponzi scheme, relies on the masses losing money, so the "players" can make it. Think about any initial public offering: the investment bank sells the stock on the first day to a few other financial institutions, who flip it that same day for two to ten or more times what they paid. Each succeeding wave of investors is less sophisticated, and makes less money, until we reach the final ripple, of people like me or Mildred Weir's son, who buy at thirty what the insiders bought for ten, and who eventually sell at twenty-five (or $1.35). These people lose the money everyone else makes; they are essential to the system. The old theory of Wall Street--that most stocks go up over time, and a rising tide lifts all boats--if it was ever valid, has been replaced by a mode of operation which involves overvaluing something, getting one's money out, and leaving the last purchaser holding the bag. The only ones who can consistently make money at IPO's are the bankers and insiders, and anybody who buys in that last ripple is, frankly, an idiot. The system could not work, and the investment bankers could not make their money, if the marks did not exist. Just like in a carny sideshow, its the marks who are the true commodity of the system.
President Bush's private accounts initiative simply creates a much bigger class of marks, by encouraging or forcing people into the market who don't belong there. I don't believe that any of the president's intelligent advisers honestly believes that most people will be able to do as well in private accounts as they would with the old entitlement. I think that there are two very cynical motives behind the private account initiatives. One, it is a gift to the shark class, driving a huge school of tasty fish into their jaws; secondly, it is a way of carrying out the conservatives' old dream, of dismantling the New Deal entitlements, while pretending to substitute something better--but which is in reality no substitute at all.