A tax gimmick is named financial innovation of the century
When I blogged about David A. Noyes & Co.’s attempt to choose the greatest financial innovation of the last century, I dismissed 401ks and IRAs as mere tax gimmicks. So guess which innovation won the poll? Noyes says in a news release issued today:
Much like our presidential election, it was a landslide — 56% of participants voted for retirement plan innovations, such as 401Ks and IRAs. The runner-up was electronic trading garnering 16% of the vote, and mutual funds taking only 6% of the tally.
OK, so I’m disappointed in the voters. I think mutual funds, which did a great deal to democratize stock ownership, were a far more important innovation. So are other things I mentioned in the earlier post, such as options markets and mortgage-backed securities. Today, however, the latter would probably win a poll to select the most evil financial product of the century.
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
The biggest gimmick– the whole idea you can invest in the stock market, sit back and make money.This premise that this so called investment will be this ultimate money machine is a farce. Money has to be earned by working, not by letting some expert investor or money manager sit and play on his or her keyboard and make trades. They have nothing to loose, they are gambling with someone elses money while they charge commision.The market has been a terrible learning experience for many of us.
Tax-advantaged accounts aren’t as great for people in general as they are imagined to be. Why? Because every tax dollar that someone avoids paying in a retirement account is a tax dollar that needs to be collected by higher taxes on something else. Society as a whole doesn’t get a free lunch.
While there is also an element in them of some people benefitting at the expense of the general taxpayers, I think that Treasury Inflation Protected Securities (TIPS) are the most significant financial innovation of the 20th Century in the U.S. For investors who are smart enough to appreciate the importance of protecting their assets against inflation, TIPS are the ONLY investment that is guaranteed by the government to provide a long-term return that is modestly in excess of inflation.
By the way, contrary to Mr. Newman’s comment about the stock market, investing in stocks probably will EVENTUALLY produce a higher rate of return than investing in TIPS or other bonds, CDs, etc. that are less volatile than stocks. That’s the basic principle of finance — that the “price” of a higher probable long term return is greater risk. It’s amazing how quickly investors forget that principle whenever the stock market goes up for more than a few weeks.
Fundamentally, the reason why investment in stocks is necessary to sustain an economy is that, by deferring people’s consumption, investment frees resources for production of real capital such as factories, stores, cultivated farm fields, and inventories. The monetary returns that people get from investing (whether in stocks, bonds, or whatever) are their incentive and reward for deferring consumption.