Market Decline Will Hit Taxpayers

The Dow Jones Industrial index is dropping like a stone in Raystown Lake.  The market fell over 220 points Friday following a decline of 8% just since August.  The meltdown in the mortgage and credit markets is hitting the banking industry hard with billion dollar write downs happening everywhere.  The loss of assets and profits is affecting stock values.  Stocks are driven hugely by profits and as banks and other financial companies write off $5-11 billion in assets and fire their CEO's  the markets are sinking.

How will this affect tax payers?  Pension plans.  Governments are heavily invested, as they should be, in stocks.  Historically stocks gain in value long term and pension funds should be invested long term.  Pension plans must also be funded so they can meet their obligations.  Underfunded pension plans have been plaguing companies and governmental entities for years.  Companies defaulting on their pensions are bailed out by the federal government.  Guess who funds the federal government?

The other part of the tax payer double whammy here is when your school district and county government must pay into their pension plans to cover the shortfalls from market declines.  The overall value of a fund must meet its obligations.  If the value of those investments declines these institutions must infuse cash into the plan to keep it solvent.  In other words, if your county has pension obligations of $200 million and a value of only $185 million they have to add $15 million to the plan.  Last year their stocks may have been worth $200 million.  Now it isn't and guess whose taxes will be raised to fund that $15 million?

Taxpayers will be hit from all sides in this crisis.  Homeowners are getting hit with rising interest rates on the adjustable mortgages, their schools and local governments will hit them with a tax increase to fund their pensions, and as companies increasing bail on their pension obligations federal taxes must fund them.  The cumulative effect, along with rapidly rising energy costs, means less discretionary spending on consumer goods and major purchases, further slowing the economy.

I want to watch and see how George Bush blames this one on Bill Clinton.

Comments

[Ghost of Tom Joad]

It's going to get a lot uglier before it gets any better.