Thursday, October 23, 2008

Argentina's Property Grab - Should We Be Worried?

So quite the timing; Argentina just announced that due to deteriorating fiscal conditions, the government will be seizing all private retirement accounts (their equivalent of 401ks and IRAs) and nationalizing them. In a country that has a long history of intervention in financial markets as well as cycles of over spending that along with other factors, ultimately end up causing economic woes and civil unrest, this is not an unexpected move. This is interesting to think about in relation to me recent post on the banking bailout and what it means for property rights, and my post yesterday dealing with the quote on the fall of democracy due to "loose fiscal policy."

Our own entitlement programs are reaching insolvency. Will our government some time in the future, now armed with the precedent of semi-nationalizing the financial industry, look to take over the private retirement accounts of the "rich" in order to "protect" our public pensions?

Though obviously we have a much stronger tradition of property rights then a Latin American republic, it is an interesting thought to ponder. Up until this last month, the government buying a stake in the banking industry would have been considered more then improbable to say the least. Will the next financial crisis create the political capital to move ahead with this kind of move as well?



Argentina is, and I quote:
a country that has a long history of intervention in financial markets as well as cycles of over spending that along with other factors, ultimately end up causing economic woes and civil unrest.

Fears of the US government taking it's cue from Argentina are unwarranted. Government did not seize the assets of the wealthy elite during the Great Depression. Instead it relied on loans from those men. I would be much more inclined to predict that that will be the outcome again.



I wouldn't be so sure. In Argentina's case, this wasn't an outright grab. It basically transferred the private accounts into a public pension much like social security. The argument being that it was a move to "protect" these accounts from turmoil in the stock and bond markets, as the President said, "While the U.S. and other countries are stepping in to rescue their banks, Argentina must protect our retirees." For more details on the process, you can read this. But the reality is, this was done so that just like how the US and virtually every other country raids their social security funds to fund the general government and then just gives IOUs to the fund, this will allow Argentina to take this money, and just owe it back.

Likewise if the crisis becomes big enough, I can see the potential of the US taking 401k money placing it into a national pension which will "protect" those close to retirement from the "woes of the stock market." But the government will just tap these new funds, providing a cheap source of funding for government bonds. Or, it can indirectly do this if it does not have the political capital to do so, by starting to tax these accounts, which by design are supposed to be tax sheltered. After all, those who have IRA's and 401ks tend to be middle to upper middle class individuals. These "rich" people can surely join in with the regular social security fund that the "working class" people depend upon to help those who are in need of social security checks. It is after all the "fair" thing to do, is it not?

I highly doubt we would ever have an outright talking of these accounts, but either through taxing them, or transferring them into public funds, the money will be raided one way or another. Once again, we wouldn't have tolerated a bank buyout just a year ago. What type of political pressure do you think would exist if tens of millions of retirees, who tend to vote in high numbers, were faced with the situation of the fund drying up?

And I'm not really sure what you are referring to by "relied on loans from those [rich] men" in the Great Depression. The government didn't actually take large deficits then; between Hoover and FDR, it drastically raised taxes and confiscated all gold coins making their ownership illegal. I think that move is very similar to the process I've outlined that could potentially happen.