Stick It To Congress And Wall Street By Waging Financial Warfare? ~ MAKE MONEY BLOG$

MAKE MONEY BLOG$~I’ve been thinking about what, if anything, everyday people can do about the ongoing Euro Zone crisis and looming Fiscal Cliff that Congress refuses to address.

Sadly, both are having a significant impact on many Americans’ last remaining asset: retirement savings. Any way that you look at it, the little guy seems about to get screwed, so as an alternative to being victims of another political and financial mess, what if we turned the situation around and, instead, stuck it to Congress and Wall Street by waging some financial warfare.

It used to be that a person’s home or business was their most prized and valuable asset. But now, both are likely underwater, leaving investors with their company retirement plans and IRAs as their last hope to keep pace with inflation and someday allow them to retire. The risk, however, is that if Congress fails to act before the election or New Year, we’ll be referring to retirement plans as a fond memory, a lost love and in exactly the same way we now talk about real estate, “Remember when our house used to be worth X?”

Nowadays it seems like politicians’ only motivation to create real long-term solutions is to alleviate a crisis that is affecting them rather than everyday investors. While calls to suspend Congress’ pay, or delaying their August recess until something gets done, is just the same old rhetoric that only results in the shrinking of individual investor’s account balances. Unbeknownst to many, waging financial warfare is a very viable strategy, with a history of successful application. In 1956 Great Britain and France were in a battle with Egypt over control of the Suez Canal. At that time the U.S. owned a great portion of Great Britain’s debt and decided to put financial pressure on them by threatening to dump their debt and sell sterling on the open market. This simple but effective threat had far reaching implications as it could quickly debase their currency and cause a shortage of reserves they would need to pay for imports. The result: Great Britain and France backed down.

Fast-forward to today and, while no individual investor controls a significant portion of the government’s debt, they do hold the keys to an estimated $17.9 trillion in tax-qualified retirement accounts, according to the Employee Benefit Research Institute. Most notably, they own an estimated $4.5 trillion in defined contribution plans like 401(k), 403(b), and 457s, and another $4.9 trillion in IRAs, which can be moved from an equity or bond fund, or ETF to cash with a click of a mouse.

So what would happen if every working American simply transferred their money from stock and bond mutual funds into a money market or guaranteed option within their retirement account? What impact would that have on the markets? Would it be enough to get Congress back from vacation to do their job and address the Fiscal Cliff we face…and cause European and other international leaders to get their act together and identify solutions instead of tolerating ongoing chaos and uncertainty? What would happen to the stock market if one day people united to make a coordinated move to the sidelines and left institutional buyers and wealthy corporate insiders over $9 trillion dollars poorer?

Jonathon Citrin, an adjunct professor at Wayne State University and founder of the Citrin Group suggests that a coordinated move of just the $4.5 trillion in Defined Contribution (DC) plans would have “a deep effect on not only markets but corporate balance sheets and our economy. It would be very, very ugly with a sell-off in the range of 20-25% with a compounding impact as other investors react emotionally to the movement of funds.”

He goes on to note, “Trillions of dollars of market capitalization would be lost in a very short time, negatively affect GDP growth, unemployment, consumer sentiment, and company earnings, among others.”

I suspect that his estimates may be conservative at best. Considering that 2012’s largest outflow from equity mutual funds and ETFs alone resulted in almost $7 billion being yanked from the system in early April. The move resulted in a weekly decline of 4.3% in the S$P 500. Extrapolate that out to include bond funds and ETFs and you would be adding three more zeros and a “T” for trillion, at which point markets could find themselves back near March 2009 lows.

Could A Coordinated Effort On Such A Level Be Possible?

Cliff Rossi, Tyser Teaching Fellow and Executive-in-Residence for the Robert H. Smith School of Business at the University of Maryland admits, “The logistics involved in getting people to actively adjust their accounts is difficult. There is a behavioral inertia at work that limits investor reactions to large one-time moves like this.” Citrin seems to agree that such a coordinated effort is difficult to imagine but theoretically “lawmakers would not only need to respond, but restore the public’s confidence in their ability to properly and effectively govern.”

Rossi adds, “Such a move would have negative implications for the financial markets but political reaction would largely result in more window dressing rather than substantive measures because the political system is so dysfunctional at this point.” How sad is that?

And yet, what if nothing is done? Citrin warns, “We still face significant downside risks in markets as this fiscal cliff is anticipated and approaches.” Looking beyond the academic analysis, I feel that a coordinated effort like this may not be necessary. Similar to a bank run, as more and more people assess the current state of the economy and political system, the avalanche of people heading for the exits may begin to build whether it’s done as a means of financial warfare or gut reaction to ongoing European woes and lack of leadership in Washington. The question the individual investor faces is: Will you be one of the first to get out of the market or last ones left behind?

Individual investors may have lost pensions and homes, their businesses may be worth a lot less, and their concerns about the viability of Social Security may keep them awake at night, but for the most part they’re still in the game thanks to retirement plans and IRAs. So instead of continuing to be victimized by the current political and economical environment, consider being part of a united effort to help Congress recognize who hires them and who controls the dollars they seem so good at spending. Stand up and stick it to Congress and Wall Street!

Follow Robert on Forbes.com or on Twitter@robertlaura

Check out Robert Laura’s recent articles:

How Star Athletes Deal With Retirement

What Broke Athletes & Entertainers Can Teach Retirees

5 Retirement Questions You’re Afraid To Ask

source: forbes.com

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