401(k)s were supposed to replace pensions. Less headaches for companies, plus workers will get the benefit from the power of the market! As Bloomberg’s Josh Barros shows, that’s not how it worked out. A 2012 paper by Boston College Professor Alicia Munnell analyzed

a “typical” pre-retirement household. These are the mean holdings of a household in the middle net worth decile among households headed by people age 55 to 64.

Social Security is dominant: Forty-nine percent of this household’s wealth is in the form of the expectation of drawing government benefits in the future.

The next largest slice, 23 percent, is accrued benefits in traditional pension plans. But that figure is skewed by a handful of workers who are lucky enough to participate in such plans; as of 2010, only 14 percent of U.S. workers were earning benefits in such a plan.

Private saving for retirement is woeful. This typical near-retirement household has just $42,000 in [401(k)/IRA] retirement accounts and $18,300 in other financial assets. For most Americans, Social Security isn’t augmenting private saving; private saving is (just barely) augmenting Social Security.

The end result: after the devastating financial crisis,

Munnell and her colleagues estimate that as of 2010, 53 percent of American households were on track to be more than 10 percent below the amount of assets they would need at age 65 to maintain their standard of living in retirement, up from 44 percent in 2007.

Barros says either expanding Social Security and cutting Medicare or a program for compulsory savings is the way to go. I think we ought to take a look at bringing back pensions, possibly in the form of a national/regional pension system paid for by a mix of payroll tax & corporate profits tax, a modest part of which could be invested in long-term infrastructure projects or other relatively safe bets that create more good jobs and growth over the long term. But whatever we do, the answer isn’t going to be the 401(k)s we have now.

When Wall Street melted down, some liberals and lefties said it was because Wall Street was rotten to the core with corruption. I’m usually skeptical of arguments like this — the worst stuff usually isn’t because of corruption, of acts that were illegal, it’s what’s legal that does the real damage. But in the case of Wall Street, I was wrong. As Frontline’s new documentary shows, the crisis was literally built on a foundation of fraud.

At its heart, the Wall Street meltdown was about a housing bubble. Mortgage lenders created lots of home mortgages that were either likely to blow up or were just plain crap, and then these mortgage loans were packaged together and then sold, mostly as pieces of these packages, to investors, who leveraged them to the point where if anything went wrong the investors would go broke.

The key to making it work was getting enough mortgages to package together. No more mortgages, no more new “financial instruments” — and that meant no more big, fat Wall Street fees for packaging, selling, and repackaging them. But mortgage brokers aren’t supposed to be able to give home loans to just anyone. They’ve got to have a reasonable expectation that they’ll get paid back.

And as the housing bubble inflated and housing prices got higher, it got harder and harder to find folks who wanted to buy a house and could afford it. If Mortgage brokers and the financial types who bought their mortgages played by the rules, the highly lucrative game would have to stop early. So, as the Frontline Documentary shows, they cheated.

The mortgage lenders made tons of loans that fraudulently broke their own lending standards. The people at the mortgage lenders who were supposed to check for fraud and abuse were told to ignore it — or the standards were lowered until, say, marking down a waitress as having a salary of $12,000 a month was no longer considered fraud. Over and over in the documentary, we meet whistleblowers who said that more than half of the loans they were auditing were clearly fraudulent.

Without this fraud, the housing bubble would’ve popped years before 2008.

And so it went up the chain of mortgage financial games. Financial firms that bought bundles of loans and packaged them fraudulently asserted that the loans were ok. In turn they got ratings agencies to take packages of loans that were bound to fail and gave them a AAA rating, without which pension funds and certain other investors couldn’t legally purchase them. And everybody got a cut that made committing this fraud very lucrative.

So yeah, when it comes to the Wall Street meltdown, fraud really was at the core. And — unlike the S&L crisis — not a single high level Wall St exec has been jailed for it, Obama has all but guaranteed it’ll happen again.

UPDATE: just to be clear, it’s not that the evidence about what folks did wasn’t out there before the Frontline documentary. The elements of the basic story have been out there for a very long time. Bt what I didn’t get was how much of the behavior wasn’t simply greedily suicidal, it was also pretty clear cut fraud.

For example, it was perfectly legal to make “interest-only” mortgage loans where borrowers only paid the interest and not the principle for the first few years, then had their mortgage jacked up to almost certainly unaffordable levels once they had to start paying off the principle (i.e., the money they had borrowed). For most folks who got one of these loans, they were essentially being given a big stack of money to gamble that the housing bubble would keep going, sending the value of their house skyrocketing fast enough that they could get out of the loan into something more sensible before the principle was due. No sane housing or financial market should legalize this form of gambling, but it was legal.

What the Frontline documentary added to the story — or maybe more accurately, my understanding of the story — was the degree to which fraud was involved. the question the documentary asked was, how come no major Wall St execs have gone to jail? To explain why, they interviewed whistleblower after whistleblower who explained just how much of the behavior they saw was clearly fraudulent.

During the election I became a big fan of Nate Silver’s FiveThirtyEight blog. If you wanted to know what was going on in the polls without freaking out over the latest blip, it was the place to go. A lot of Beltway & right-wing political hacks/columnists trashed him, but at the end of the game it was Hacks 0, Silver 1.

Silver also came out with a book this year, The Signal and the Noise, that got mostly great reviews. But mathbabe, a really sharp modeler who worked on Wall Street and then Occupied it, is less impressed. When Silver is covering his own worlds – politics and baseball – she thought he was spot on. But when it came to Wall Street, she says, he drops the ball.

The problem, she says, is that he assumes that the financial crisis was caused or driven by the results of inaccurate models.

Silver confuses cause and effect. We didn’t have a financial crisis because of a bad model or a few bad models. We had bad models because of a corrupt and criminally fraudulent financial system.

Take the example of the ratings agencies.

The ratings agencies, which famously put AAA ratings on terrible loans, and spoke among themselves as being willing to rate things that were structured by cows, did not accidentally have bad underlying models. The bankers packaging and selling these deals, which amongst themselves they called sacks of shit, did not blithely believe in their safety because of those ratings.

Rather, the entire industry crucially depended on the false models. Indeed they changed the data to conform with the models, which is to say it was an intentional combination of using flawed models and using irrelevant historical data (see points 64-69 here for more).

In baseball, a team can’t create bad or misleading data to game the models of other teams in order to get an edge. But in the financial markets, parties to a model can and do.

Ditto for the other pieces of the financial crisis. The problem wasn’t that the models failed – as mathbabe points out, they were very successful for a lot of the people calling the shots, who made out like bandits.

The underlying problem, she says, is with Silver’s model of the world:

Silver has an unswerving assumption, which he repeats several times, that the only goal of a modeler is to produce an accurate model. (Actually, he made an exception for stock analysts.)

This assumption generally holds in his experience: poker, baseball, and polling are all arenas in which one’s incentive is to be as accurate as possible. But he falls prey to some of the very mistakes he warns about in his book, namely over-confidence and over-generalization. He assumes that, since he’s an expert in those arenas, he can generalize to the field of finance, where he is not an expert.

The logical result of this assumption is his definition of failure as something where the underlying mathematical model is inaccurate. But that’s not how most people would define failure, and it is dangerously naive.

I haven’t read Silver’s book yet; I’m waiting for it to arrive courtesy of Santa’s elves. Once I’ve read it, I’ll post my thoughts on her take on his book.

Now that Obama has been reelected for a few weeks – and most of the Turkey/vegan loaf you snarfed down on Thanksgiving has finally been digested – it’s time to start thinking about where we go next. In case you needed any encouragement, here’s Exhibit 23 of why we need to gear up to kick some ass:

New research from NYU economics professor Edward Wolff, flagged by Think Progress, found that the median wealth of American households plummeted over the years 2007 to 2010, and by 2010 was at its lowest level since 1969. Meanwhile, the late 2000′s saw a high rise inequality: while the median wealth fell, the top 1 percent increased their wealth by 71 percent between 2007 and 2010…

Wolff argues that while “the debt of the middle class exploded from 1983 to 2007, already creating a very fragile middle class in the United States… their position deteriorated even more over the ‘Great Recession.’” His research also detailed how the household wealth of racial minorities and young people dropped to an even greater extent in the wake of the housing bubble’s burst, when house prices collapsed.

Neil Barofsky, former inspector General of TARP and author of the mindblowing book Bailout, is not happy about a report in the Wall Street Journal article on bank stress tests conducted by the Fed. These stress tests are critical to our finding out banks are in trouble before they once again drag the economy over a cliff. And if they are going to mean anythng, the numbers have to be right.

But at the end of the [WSJ] article the reporters reveal that the Fed recently “backed off” a requirement that the CFOs of the banks actually confirm that the numbers they are providing are accurate. The reason? The banks argued, and the Fed apparently agreed, that providing data about what’s going on in the banks is simply too “confusing for any CFO to be able to be sure his bank had gotten it right.”

So the next time someone says government regulators will just slow down banks because can’t possibly understand what those sophisticated folks at the banks are doing, let em know they’re right — but the people who’re supposedly running the banks are equally clueless.