Moderators: Elvis, DrVolin, Jeff
by stoneonstone » Thu Jul 01, 2010 8:35 pm
Some of it sound familiar? If history is repeating, then not because of mystic cycles, but because the same damn strategies are being followed again.
by JackRiddler » Fri Jul 02, 2010 2:50 am
Unbelievable! Statement to the Commission on Deficit Reduction
James K. Galbraith, Lloyd M. Bentsen, jr., Chair in Government/Business
Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin
June 30, 2010
Mr. Chairmen, members of the commission, thank you for inviting this statement.
I am a professional economist, but I have served in a political role, as Executive Director of the Joint Economic Committee of the United States Congress. I am offering this statement on behalf of Americans for Democratic Action, an organization co-founded in 1949 by (among others) Eleanor Roosevelt, John Kenneth Galbraith, Arthur M. Schlesinger, jr., and Ronald Reagan. Accordingly I would like to begin with a political comment.
1. Clouds Over the Work of the Commission.
Your proceedings are clouded by illegitimacy. In this respect, there are four major issues.
First, most of your meetings are secret, apart from two open sessions before this one, which were plainly for show. There is no justification for secret meetings on deficit reduction. No secrets of any kind are involved. Nothing you say will affect financial markets. Congress long ago -- in 1975 -- reformed its procedures to hold far more sensitive and complicated meetings, notably legislative markups, in the broad light of day.
Secrecy breeds suspicion: first, that your discussions are at a level of discourse so low that you feel it would be embarrassing to disclose them. Second, that some members of the commission are proceeding from fixed, predetermined agendas. Third, that the purpose of the secrecy is to defer public discussion of cuts in Social Security and Medicare until after the 2010 elections. You could easily dispel these suspicions by publishing video transcripts of all of your meetings on the Internet, and by holding all future meetings in public. Please do so.
Second, there is a question of leadership. A bipartisan commission should approach its task in a judicious, open-minded and dispassionate way. For this, the attitude and temperament of the leadership are critical.
I first met Senator Simpson when we were both on Capitol Hill; at Harvard he became friends with my late parents. He is admirably frank in his views. But Senator Simpson has plainly shown that he lacks the temperament to do a fair and impartial job on this commission. This is very clear from the abusive response he made recently to Alex Lawson of Social Security Works, who was asking important questions about the substance of the commission's work, as well as calling attention to the illegitimate secrecy under which you are operating.
A general cannot speak of the President with contempt. Likewise the leader of a commission intended to sway the public cannot display contempt for the public. With due respect, Senator Simpson's conduct fails that test.
Third, most members of the Commission are political leaders, not economists. With all respect for Alice Rivlin, with just one economist on board you are denied access to the professional arguments surrounding this highly controversial issue. In general, it is impossible to have a fair discussion of any important question when the professional participants in that discussion have been picked, in advance, to represent a single point of view.
Conflicts of interest constitute the fourth major problem. The fact that the Commission has accepted support from Peter G. Peterson, a man who has for decades conducted a relentless campaign to cut Social Security and Medicare, raises the most serious questions. Quite apart from the merits of Mr. Peterson's arguments, this act must be condemned. A Commission serving public purpose cannot accept funds or other help from a private party with a strong interest in the outcome of that Commission's work. Your having done so is a disgrace.
In my view you also should not have accepted help from the Economic Policy Institute, even though EPI's positions on the merits are substantially closer to mine.
Let me now turn to the economic questions. A first economic question is, what caused the deficits and rising public debt? The answer comes in two parts: present deficits and projected future deficits.
2. Current Deficits and Rising Debt were Caused by the Financial Crisis.
Overwhelmingly, the present deficits are caused by the financial crisis. The financial crisis, the fall in asset (especially housing) values, and withdrawal of bank lending to business and households has meant a sharp decline in economic activity, and therefore a sharp decrease in tax revenues and an increase in automatic payments for unemployment insurance and the like. According to a new IMF staff analysis, fully half of the large increase in budget deficits in major economies around the world is due to collapsing tax revenues, and a further large share to low (often negative) growth in relation to interest payments on existing debt. Less than ten percent is due to increased discretionary public expenditure, as in stimulus packages.
This point is important because it shows that the claim that deficits have resulted from "overspending" is false, both in the United States and abroad.
3. Future Deficit Projections are Generally Based on Forecasts which Begin by Assuming Full Recovery, but this Assumption is Highly Unrealistic.
Unlike the present deficits, expected future deficits are not usually considered to be due to continued recession and high unemployment. To understand how the discussion of future deficits is being framed, it is necessary to grasp the work of the principal forecasting authority, the Congressional Budget Office. CBO's projections proceed in two steps. First, they wipe out the current deficits, over a very short time horizon, by assuming a full economic recovery. Second, they create an entirely new source of future deficits, essentially out of whole cloth. The critical near-term assumption in the CBO baseline concerns employment. CBO claims to expect a relatively rapid return, over five years, to high levels of employment, and the baseline incorporates a correspondingly high rate of real growth in the early recovery from the great crisis. If this were to happen, then tax revenues would recover, and ordinarily the projected deficits would disappear. This is what did happen under full employment in the late 1990s.
But under present financial conditions this scenario of a rapid return to high employment is highly unrealistic. It can only happen if the credit system finances economic growth, which implies a rising level of private (household and company) debt relative to GDP. And that clearly is not going to happen. On the contrary, de-leveraging in the private sector is sure to remain the rule for a long time, as mortgages and other debts default or are paid down, and as many households remain effectively insolvent due to their mortgage debt.
With high unemployment, high public deficits are inevitable. The only choice is between an active deficit, incurred by putting people to work or otherwise serving national needs -- such as providing a decent retirement and health care to the aged -- and a passive deficit, incurred because at high unemployment tax revenues necessarily fail to cover public spending. Cutting public spending or raising taxes, now or in the future, by any amount, cannot reduce a deficit due to high unemployment. The only fiscal effect is to convert an active deficit into a passive one -- with disastrous economic and social effects.
4. Having Cured the Deficits with an Unrealistic Forecast, CBO Recreates them with Another, Very Different, but Equally Unrealistic Forecast.
In the CBO models, high future deficits and rising debt relative to GDP are expected. But the source is not a weak economy. It is a set of assumptions describing an economy after full recovery from the present crisis. In the CBO forecasts, big future deficits arise from a combination of (a) rapidly rising health care costs and (b) rising short-term interest rates, in the context of (c) a rapid return to high employment and (d) continued low overall inflation. This combination produces, mechanically, a very large net interest payout and a rapidly rising public debt in relation to a slowly rising nominal GDP.
Even if CBO were right about recovery, which it is not, this projection is internally inconsistent and wholly implausible. It isn't going to happen. Low overall inflation (at two percent) is inconsistent with the projected rise of short-term interest rates to nearly five percent. Why would the central bank carry out such a policy when no threat of inflation justifies it? But the assumed rise in interest rates drives the projected debt-to-GDP dynamic.
Similarly, the rise in projected interest payments is inconsistent with low nominal inflation. Interest payments rising to over 20 percent of GDP by mid-century would constitute new federal spending similar in scale to the mobilization for World War II. Obviously this cannot happen with two percent inflation. And although a higher inflation rate is undesirable, arithmetically it means a lower debt-to-GDP ratio.
Finally, rapidly rising health care costs and low overall inflation are mutually consistent only if all prices except health care are rising at less than that low overall inflation rate -- including energy and food prices in a time of increasing scarcity. This too is extremely unlikely. Either overall health care costs will decelerate (relieving the so-called Medicare funding problem) or the overall inflation rate will accelerate -- reducing the debt-to-GDP ratio.
In sum: the economic forecasts on which you are being asked to develop a credible plan for reducing deficits over the medium term are a mess. The unemployment and growth forecasts are implausibly optimistic, while the inflation and interest rates projections are implausibly pessimistic and mutually inconsistent.
Good policy cannot be based on bad forecasts. As a first step in your work -- long overdue -- the Commission should require the development of internally consistent, and factually plausible, economic forecasts on which to base future deficit and debt projections.
5. The Only Way to Reduce Public Deficits is to Restore Private Credit.
The conclusion to draw from the above argument is that large deficits going forward are likely to have the same source as they do right now: stubbornly high unemployment.
The only way to reduce a deficit caused by unemployment is to reduce unemployment. And this must be done with a substantial component of private financing, which is to say by bank credit, if the public deficit is going to be reduced. This is a fact of accounting. It is not a matter of theory or ideology; it is merely a fact. The only way to grow out of our deficit is to cure the financial crisis.
To cure the financial crisis would require two comprehensive measures. The first is debt restructuring for the entire household sector, to restore private borrowing power. The second is a reconstruction of the banking system, effectively purging the toxic assets from bank balance sheets and also reforming the bank personnel and compensation and other practices that produced the financial crisis in the first place. To repeat: this is the only way to generate deficit-reducing, privately-funded growth and employment.
As a former top adviser in the Clinton White House, co-chairman Bowles no doubt knows that privately-funded economic growth produced the boom years of the late 1990s and the associated surplus in the federal budget. He must also know that the practices of banks and investment banks with which they were closely associated worked to destroy the financial system a decade later. But I would wager that the Commission has spent no time, so far, on a discussion of the relationship between deficit reduction and financial reform.
To be clear: unemployment can be cured without private-sector financing, if public deficits are large enough -- as was done during World War II. But if the objective is to reduce public deficits, for whatever reason, then a large contribution from private credit is essential.
One more time: without private credit, deficit reduction plans through fiscal austerity, now or in the future, will fail. They cannot succeed. If at the time the cuts take effect the economy is still relying on public expenditure to fund economic activity, then reducing expenditure (or increasing taxes) will simply reduce GDP and the deficits will not go away.
Further, if the finances of the private sector could be fixed, then an austerity program would be entirely unnecessary to reduce public debt. The entire national experience from 1946 to 1980, when public debt fell from 121 to about 33 percent of GDP and again from 1994 to 2000, proves this. In those years the debt-to-GDP ratio fell mainly because of creditdriven economic growth -- certainly not because of public-sector austerity programs. And this is why the deficits returned, in 1980-2 and in 2000, once the credit markets froze up and the private economy entered recession.
Thus until the private financial sector is fully reformed -- or supplemented by parallel financing institutions as was done in the New Deal -- high deficits and a high public-debt-to-GDP ratio are inevitable. In the limit, if there is no private financial recovery, debt-to-GDP will converge to some steady-state value, probably near 100 percent - a normal number in some countries - and at that point the public deficit will be the sole engine of new economic growth going forward. Only when the private sector steps up, will the debt-to-GDP ratio begin to decline.
For this reason, a Commission report focused on "entitlement reform" rather than "financial reform" would be entirely beside the point. Entitlement cuts, no matter how severe, cannot and will not achieve deficit reduction. They cannot "meaningfully improve the long-term fiscal outlook," as required by your charter. All they will accomplish is to impoverish vulnerable Americans, impairing the functioning of the private economy and the taxing capacity of the government.
6. Social Security and Medicare "Solvency" is not part of the Commission's Mandate.
I note from Chairman Simpson's conversation with Alex Lawson that the Commission has taken up the questions of the alleged "insolvency" of the Social Security system and of Medicare. If true, this is far outside any mandate of the Commission. Your mandate is strictly limited to matters relating to the deficit, debt-to-GDP ratio and fiscal stability of the U.S. Government as a whole. Social Security and Medicare are part of the government as a whole, so it is within your mandate to discuss those programs -- but only in that context.
To make recommendations about the matching of benefits to payroll taxes -- now or in the future -- would be totally inappropriate. Within your mandate, the levels of payroll taxes and of Social Security benefits are relevant only insofar as they influence the current and future fiscal position of the government as a whole. Their relationship to each other is not relevant. You are not a "Social Security Commission" and there is no provision in your Charter for a separate discussion of the alleged financial condition of either program taken on its own. Such discussions, if they are occurring, should be subjected to a point of order.
The usual "solvency" arguments directed at the Social Security system and at Medicare as separate entities are in any event complete nonsense. These programs are just programs, like any others, in the Federal Budget, and the Social Security and Medicare "systems" are thus fully solvent so long as the Federal Government is. Further, as explained below, under our monetary arrangements there is no "solvency" issue for the federal government as a whole. The federal government is "solvent" so long as U.S. banks are required to accept US. Government checks -- which is to say so long as there is a Federal authority in the Republic. This point has been demonstrated repeatedly in times of stress, notably during the Civil War and World War II.
7. As a Transfer Program, Social Security is Also Irrelevant to Deficit Economics.
Political discussions of "long-term fiscal sustainability" -- including in the Charter for this Commission -- make an economic error when they loosely use the word "entitlements" and suggest that supposed economic dangers of federal deficits (for instance, rising real interest rates) can be reduced by "entitlement reform." As a matter of economics, this is not true.
"Government Spending" -- as any textbook will verify -- is a component of GDP only insofar as the spending is directly on purchases of goods and services. That alone is what economists mean by the phrase "government spending." GDP is the final consumption of produced goods and services, and government is one of the major consuming sectors; the others being private business (investment) and households (consumption).
Social Security is a transfer program. It is not a spending program. A dollar "spent" on Social Security does not directly increase GDP. It merely reallocates a dollar from one potential final consumer (a taxpayer) to another (a retiree, a disabled person or a survivor). It also reallocates resources within both communities (taxpayers and beneficiaries). Specifically, benefits flow to the elderly and to survivors who do not have families that might otherwise support them, and costs are imposed on working people and other taxpayers who do not have dependents in their own families. Both types of transfer are fair and effective, greatly increasing security and reducing poverty -- which is why Social Security and Medicare are such successful programs.
Transfers of this kind are also indefinitely sustainable -- in fact there can intrinsically be no problem of sustainability with transfer programs. Apart from their effect on individual security, a true transfer program uses (by definition) no net economic resources. The only potential macroeconomic danger from "excessive" transfers is that the transfer function may be badly managed, leading to excessive total demand and to inflation. But there is no risk of this so long as the financial crisis remains uncured. Under present conditions Social Security and Medicare are bulwarks for stabilizing a total demand that would otherwise be highly deficient.
Similarly, cutting Social Security benefits, in particular, merely transfers real resources away from the elderly and toward taxpayers, and away from the poor toward those less poor. One can favor or oppose such a move on its own merits as social policy - but one cannot argue that it would save real resources that are otherwise being "consumed" by the government sector.
The conclusion to be drawn is that Social Security should in any event be off the agenda of your Commission, as it is a transfer program and not a program of public spending in the economic sense. In particular it does not use capital resources and will not drive up interest rates. This is true whether the "Social Security System" is in internal balance or not.
8. Markets are not calling for Deficit Reduction; Now or Later.
Let me turn next to a larger economic question. Do deficit projections matter? Are they important? Was the President well-advised to frame the mandate of the Commission as he did?
What, in short, are the economic consequences of a high public deficit and a rising debt-to-GDP ratio, and what (if any) benefits are to be expected from creating an expectation that deficits will come down and that the debt-to-GDP ratio will fall?
The idea that US economic policy should aim for a path of reduced deficits in the future, is shared by liberals and conservatives, and it is, from a political standpoint, a very powerful idea. The Commission's charter takes for granted that this goal is desirable. It specifies that your objective is to achieve a balanced "primary budget" -- net of interest payments, by 2015.
Yet your charter does say why this is an appropriate goal. It cites no study to which one might refer. It does not explain why 2015 is the right target date, as opposed to (say) 2025 or even 2050. It does not spell out the economic consequences -- if any -- of failing to meet the stated objective.
Does the requirement make economic sense? I shall tackle that question in two parts. The first accepts the view most people hold of the fiscal and financial world. The second reflects, from an operational standpoint, how that world actually works in practice.
Most informed laymen believe that the Federal government must borrow in order to spend. They believe that the interest rate on Treasury securities is set in a market for government bonds. The markets impose discipline on the government. Thus their idea is that "fiscal responsibility" will produce low long-term interest rates and tolerable borrowing conditions for the federal government, while "irresponsibility" will be punished by higher, and eventually intolerable, debt service costs.
Accepting this view for the moment, what does the present level of long-term interest rates tell us? As I write, thirty year Treasury bonds are yielding just over four percent -- or just a little more than half their yield a decade back. On the argument just given, this must be an extraordinary success of virtuous policy. It seems that Wall Street has made a strong vote of confidence in the fiscal probity of our current policies. This vote is unqualified, backed by money, contingent on nothing. It therefore represents a categorical rejection, by Wall Street itself, of the CBO's doomsday scenarios and all other deficit-scare stories.
On this theory, it follows that the mandate to reduce the primary deficit to zero by 2015 is unnecessary. Such an action can hardly reduce interest rates -- neither short nor long-term -- which are already historically low.
But wait a minute, some may say. Yes interest rates are low at the moment. But bond markets are fickle, they can turn on a dime. And what then?
Yes, it is possible that interest rates could rise. But the problem with this argument is that it takes us away from the premise of rationality. If bond markets are fickle and arbitrary, who is to say what they will do in response to any particular policy? In the face of irrational markets, the sensible policy is to borrow heavily for so long as they are offering a good deal. One may say that all good things end, and perhaps they will. But if markets are irrational, then by construction you cannot prevent this by "good behavior."
The conclusion from this section is that one cannot logically argue that markets insist on deficit reduction. Either the markets are rationally unworried about deficits, or they are acting irrationally right now, in which case they can hardly "insist" on anything.
9. In Reality, the US Government Spends First & Borrows Later; Public Spending Creates a Demand for Treasuries in the Private Sector.
As noted, the above argument is based on the common belief that the government must borrow in order to spend, and thus that the government faces "funding risks" in private markets. Such risks exist, of course, for private individuals, for companies, for state and local governments, and for national governments such as Greece that have ceded monetary sovereignty to a central bank. But the situation of the United States government is quite different.
The U.S. government spends (and the Federal Reserve lends) in a very simple way. It does so by writing checks -- in fact simply by marking up numbers in a computer. Those numbers then appear in the bank accounts of the payees, who may be government employees, private contractors, or the recipients of federal transfer programs.
The effect of government check-writing is to create a deposit in the banking system. This is a "free reserve." Banks of course prefer to earn interest on their reserves. Thus they demand a US Treasury bond, which pays more interest without incurring any form of credit or default risk. (This is like moving a deposit from a checking to a savings account.) The Treasury can meet that demand, or not, at its option -- it can permit, or not permit, the stock of US Treasury bonds in circulation to increase.
So long as U.S. banks are required to accept U.S. government checks -- which is to say so long as the Republic exists -- then the government can and does spend without borrowing, if it chooses to do so. And if it chooses to issue Treasuries to meet the demand, it can do that as well. There is never a shortfall of demand for Treasury bonds; Treasury auctions do not fail.
In the real world, the government creates demand for bonds by spending above the level drained by taxation from the system. The extent to which those bonds are held locally, or abroad (another common source of worry) depends on the US current account deficit. This also has nothing to do with approval or disapproval by foreign bankers, central bankers, or their governments of American deficit policy. A foreign country cannot acquire a US Treasury bond unless someone outside the United States has acquired dollars to pay for them, which is generally done by running a trade surplus with the United States. And when foreigners do acquire those dollars, then like domestic banks they prefer to earn interest, which is why they buy Treasury bonds.
Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system. The actual risks in this system are (to a minor degree) inflation, and to a larger degree, depreciation of the dollar. However at the moment there is wide agreement that a lower dollar would be a good thing -- against the Chinese RMB and now also the euro. So it is difficult to believe that the goal of deficit reduction per se serves any coherent, or presently desirable,
economic objective.
We can conclude that there is actually no economic justification for the target of reducing the primary deficit to zero by 2015 or any other date. The right economic objectives are to meet real problems, not those conjured from thin air by economists. Bringing about a rapid end to unemployment, caring properly for an aging population, cleaning up the Gulf of Mexico, coping with our energy insecurity and with climate change are all far more important objectives than reducing a projection of future budget deficits.
10. The Best Place in History (for this Commission) Would be No Place At All.
Most people assume that "bipartisan commissions" are designed to fail: they are given thorny (or even impossible) issues and told to make recommendations which Congress is free to ignore or reject. In many cases -- yours is no exception -- the goal is to defer recognition of the difficulties for as long as possible.
You are plainly not equipped by disposition or resources to take on the true cause of deficits now and in the future: the financial crisis. Recommendations based on CBO's unrealistic budget and economic outlooks are destined to collapse in failure. Specifically, if cuts are proposed and enacted in Social Security and Medicare, they will hurt millions, weaken the economy, and the deficits will not decline. It's a lose-lose proposition, with no gainers except a few predatory funds, insurance companies and such who would profit, for some time, from a chaotic private marketplace.
Thus the interesting twist in your situation is that the Republic would be better served by advancing no proposals at all.
by JackRiddler » Sat Jul 03, 2010 7:09 pm
Jeff wrote:Departments told to draw up plans for 40% spending cuts
Saturday, 3 July 2010 22:44 UK
Most government departments are being asked to produce "illustrative plans" for spending cuts of up to 40%.
The Treasury wants departmental heads to set out how they would cut spending by both 25% and 40% by the end of July.
But education and defence have been given some protection from the worst of the cuts, and will have to draw up plans for cuts of 10% and 20%.
Health will continue to have small rises in its budget, and international aid is also protected.
BBC political correspondent Gary O'Donoghue said ministers were told by the Treasury at a cabinet meeting in Bradford last Tuesday to draw up what are being called illustrative plans, and have them ready by the end of July.
Sources have stressed that Labour's pre-election plans had already implied cuts of 20% around Whitehall, he said.
Privately, they say that no department will actually face 40% cuts.
However, all departments have also been told to look at cutting their administration costs by a third, or even a half.
These are not final settlements - but they will allow ministers to see the concrete results of cutting budgets, our correspondent added.
Prior to the election, the Conservatives pledged to cut an additional £6bn above Labour's planned spending reductions.
...
The Office for Budget Responsibility has forecast 610,000 public sector jobs will be lost by 2016, assuming departmental spending cuts of 25%. Mr Philpott said 40% cuts would put more like one million jobs at risk.
Last month, ministers cancelled 12 projects worth £2bn which had been spending commitments of the previous administration. A further 12 with a value of £8.5bn are under review.
...
http://news.bbc.co.uk/2/hi/uk_news/10500081.stm
by barracuda » Sun Jul 04, 2010 12:00 am
JackRiddler wrote:"The Best Place in History (for this Commission) Would be No Place At All."
by RocketMan » Thu Jul 08, 2010 9:23 am
Brad Reed wrote:So I was watching a CNN panel today and the subject up for debate was something along the lines of, "Is Obama shedding constituents? Critics say he's abandoned Wall Street."
My first reaction was, "Wait, critics are saying this? Are you sure that wasn't what his allies said?" But no -- I actually had to listen to a debate over whether Obama was making a huge political mistake by "abandoning" his bestest pals in the world at the megabanks.* You know, the guys whose greed and irresponsibility caused the worst financial collapse since the Great Depression.
(*Obama hasn't actually "abandoned" the banks in the least, but that's a story for another post.)
And then I thought, "Why the hell are we the only culture in the whole goldurned world where it's seen as a political risk to abandon the people who are responsible for causing widespread economic hardship?" And all this got me thinking about the super-weird "We-Must-Be-Nice-to-Rich-People" doctrine that has run through our national discourse since the 1980s.
You see, there was a time when American politicians could say things such as "It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes" (Andrew Jackson) and "Too much cannot be said against the men of wealth who sacrifice everything to getting wealth" (Teddy Roosevelt) and "We had to struggle with the old enemies of peace — business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering... They are unanimous in their hate for me — and I welcome their hatred" (FDR) and no one thought anything of it. Indeed, as Simon Johnson and James Kwak show in their excellent book 13 Bankers, hating on financial oligarchs is as American as hating on soccer, dating all the way back to Thomas Jefferson.
But starting in the 1980s, Ronald Reagan began popularizing Randroid mythology about how rich people were necessarily our betters because they were the only ones capable of "creating wealth" in the economy.
(For some reason, Big Ron forgot to mention they were also capable of creating multi-trillion-dollar housing bubbles, overpriced Pets.com stock certificates and made-to-fail synthetic interest rate swaps that bankrupt entire counties.)
And ever since then, every Democratic president and politician has had to reassure members of our elite media that he's just as capable of kissing rich-guy keisters as the Republicans. If you want a prime example of this dynamic at work, check out this Washington Post piece (via Harper's) that places giant red warning lights over Paul Krugman's views but that quotes some sleazeball Wall Streeter as though he were a perfectly objective analyst. First, his take on Krugman:
When you read Krugman on economics, you need to read him through a filter. He believes that the $787 billion government stimulus approved last year was not enough to really kick-start the economy and that much more is needed. You can correctly read many of his columns -- including this one -- as arguments for more taxpayer-funded stimulus. So just know that.
And now, the equity strategist:
I started with Peter Boockvar, equity strategist at Miller Tabak.
My e-mail was short: "Double-dip or slowdown?"
His response was equally abrupt: "Depends on who wins Nov. elections and what taxes get hiked in 2011."
The tax cuts enacted by President George W. Bush expire at the end of this year. President Obama has proposed extending those cuts -- except for families that make more than $250,000 a year. If Republicans win Congress in November, it's a good bet that the wealthiest Americans will keep their tax cuts. If the Democrats hold the Hill, it's unlikely.
"Our fragile economy CANNOT handle any tax hikes whatsoever, particularly on capital and the income of those who invest, save and spend the most," Boockvar wrote, meaning those American families that make more than $250,000 a year. The all-caps are his, but the feeling is shared by many.
Now, I'm of the general mindset that it's daft to raise taxes or cut spending in the middle of a severe economic downturn. But at the same time, note Boockvar's emphasis on whose taxes we should really be opposed to raising: "Those who invest, save and spend the most." In other words, people like Peter Boockvar.
I personally find it highly unlikely that if Mr. Boockvar's taxes were to rise back to the level of the 1990s that he'd suddenly lose all will to work and would instead spend his remaining days sipping Purple Drank outside his local 7-11. People like this are generally addicted to making money and they'd sell penny stocks and junk bonds to special needs children if they thought they could get away with it. What Mr. Boockvar would have written if he were being honest was, "I've already put off buying cocaine and pricey call girls enough during this recession and I CANNOT handle any tax hikes whatsoever."
And that's where we are. Despite the fact that our banking oligarchs destroyed the entire financial system and were only saved from homelessness by the United States government, they still must be treated as "special" people who are "the only ones" capable of creating new jobs for the lesser people. It'd be nice if this particularly insidious piece of mythology were to be sent to the ashcan of history, but methinks it's going to take some time...
by JackRiddler » Sat Jul 10, 2010 1:29 am
by stefano » Mon Jul 12, 2010 9:33 am
by JackRiddler » Tue Jul 13, 2010 12:29 pm
July 13, 2010, 11:27 a.m. EDT
Dollar falls, shrugs off Portugal downgrade
British pound extends gain after U.K. inflation report
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) -- The U.S. dollar weakened against the euro Tuesday as positive U.S. earnings reports supported equity markets, again robbing the greenback of its safe-haven appeal.
U.S. equities rose more than 1.3%, boosted by strong reports as second-quarter earnings season gets under way. The dollar has tended to move in the opposite direction of equities, rallying when stocks fall and losing ground when stocks are on the rise.
The euro (U.S.:CUR_EURUSD) advanced to buy $1.2693, briefly touching $1.27 again and up from $1.2596 in late North American trading on Monday. The euro turned higher versus the Japanese yen (U.S.:CUR_EURYEN) to trade at ¥111.81, up about 0.2%.
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The dollar index (BOARD:DXY) , which tracks the U.S. unit against a basket of six major currencies, fell to 83.571, down from 84.213 from Monday.
The dollar had been higher against the euro before a U.S. report showed an unexpected widening of the U.S. trade deficit in May, which economists expect to detract from second-quarter growth numbers. Read about the trade deficit.
"With U.S. reporting a larger-than-expected trade deficit and better-than-expected earnings and outlook from early U.S. reporting, the greenback is losing ground with a risk-on trade narrative developing," said Andrew Busch, global currency strategist at BMO Capital Markets.
Still, the risk of a double dip back into a recession is unlikely, said strategists at Brown Brothers Harriman. Second-quarter gross domestic product will come in near the first-quarter's 2.7% pace.
Part of what has been supporting the dollar against the euro and other major currencies was expectations that its economy would recovery from the recession before others, which tends to mean higher interest rates and supports the currency.
Pressure on the euro was mitigated earlier in the session by the results of Greece's €1.6 billion ($2 billion) auction of six-month Treasury bills, said strategists at Brown Brothers Harriman.
The auction, which marked Greece's first test of the debt markets since it tapped a European Union-International Monetary Fund bailout package in May, produced a yield of 4.65%, up from 4.55% in an April sale. The bid-to-cover ratio was 3.64-to-1, down from 7.67 in April.
But coming in the wake of the bailout and sovereign-debt turmoil, the results were dubbed somewhat encouraging, strategists said, reinforcing ideas that Europe's debt crisis has subsided at least on a temporary basis.
Portugal's downgrade "had originally weighed on the euro; however, the successful Greek bill auction and a U.S. dollar-weakening equity rally into the North American day has helped the euro recover from its lows," wrote Camilla Sutton, currency strategist at Scotia Capital.
The euro came under pressure in earlier activity after Moody's Investors Service downgraded Portugal's sovereign credit rating by two notches -- to A1 from Aa2 -- citing fears of further deterioration in the nation's public finances and weak growth prospects. Read about Portugal's downgrade.
Analysts said a steeper-than-expected decline in the German ZEW index on economic expectations had little impact on the euro. Read about the ZEW index.
U.K. inflation
SNIP
Copyright © 2010 MarketWatch, Inc. All rights reserved.
The Financial Con of the Decade Explained
So Simply Even A Congresman Will Get it
Sometimes, when chasing the bouncing ball of fraud and corruption on a daily basis, it is easy to lose sight of the forest for the millions of trees (all of which have a 150% LTV fourth-lien on them, underwritten by Goldman Sachs, which is short the shrubbery tranche). Luckily, Charles Hugh Smith, of oftwominds.com has taken the time to put it all into such simple and compelling terms, even corrupt North Carolina congressmen will not have the chance to plead stupidity after reading this.
Of course, to those familiar with the work of Austrian economists, none of this will come as a surprise.
1. Enable trillions of dollars in mortgages guaranteed to default by packaging unlimited quantities of them into mortgage-backed securities (MBS), creating umlimited demand for fraudulently originated loans.
2. Sell these MBS as "safe" to credulous investors, institutions, town councils in Norway, etc., i.e. "the bezzle" on a global scale.
3. Make huge "side bets" against these doomed mortgages so when they default then the short-side bets generate billions in profits.
4. Leverage each $1 of actual capital into $100 of high-risk bets.
5. Hide the utterly fraudulent bets offshore and/or off-balance sheet (not that the regulators you had muzzled would have noticed anyway).
6. When the longside bets go bad, transfer hundreds of billions of dollars in Federal guarantees, bailouts and backstops into the private hands which made the risky bets, either via direct payments or via proxies like AIG. Enable these private Power Elites to borrow hundreds of billions more from the Treasury/Fed at zero interest.
7. Deposit these funds at the Federal Reserve, where they earn 3-4%. Reap billions in guaranteed income by borrowing Federal money for free and getting paid interest by the Fed.
8. As profits pile up, start buying boatloads of short-term U.S. Treasuries. Now the taxpayers who absorbed the trillions in private losses and who transferred trillions in subsidies, backstops, guarantees, bailouts and loans to private banks and corporations, are now paying interest on the Treasuries their own money purchased for the banks/corporations.
9. Slowly acquire trillions of dollars in Treasuries--not difficult to do as the Federal government is borrowing $1.5 trillion a year.
10. Stop buying Treasuries and dump a boatload onto the market, forcing interest rates to rise as supply of new T-Bills exceeds demand (at least temporarily). Repeat as necessary to double and then triple interest rates paid on Treasuries.
11. Buy hundreds of billions in long-term Treasuries at high rates of interest. As interest rates rise, interest payments dwarf all other Federal spending, forcing extreme cuts in all other government spending.
12. Enjoy the hundreds of billions of dollars in interest payments being paid by taxpayers on Treasuries that were purchased with their money but which are safely in private hands.
Charles' conclusion does not need further commentary as it is absolutely spot on:
Since the Federal government could potentially inflate away these trillions in Treasuries, buy enough elected officials to force austerity so inflation remains tame. In essence, these private banks and corporations now own the revenue stream of the Federal government and its taxpayers. Neat con, and the marks will never understand how "saving our financial system" led to their servitude to the very interests they bailed out.
The circle is now complete: in "saving our financial system," the public borrowed trillions and transferred the money to private Power Elites, who then buy the public debt with the money swindled out of the taxpayer. Then the taxpayers transfer more wealth every year to the Power Elites/Plutocracy in the form of interest on the Treasury debt. The Power Elites will own the debt that was taken on to bail them out of bad private bets: this is the culmination of privatized gains, socialized risk.
In effect, it's a Third World/colonial scam on a gigantic scale: plunder the public treasury, then buy the debt which was borrowed and transferred to your pockets. You are buying the country with money you borrowed from its taxpayers. No despot could do better.
As for part two of this epic con we are all living through, Charles explains as follows:
The Con of the Decade (Part II) meshes neatly with the first Con of the Decade. Yesterday I described how the financial Plutocracy can transfer ownership of the Federal government's income stream via using the taxpayer's money to buy the debt that the taxpayers borrowed to bail out the Plutocracy.
In order for the con to work, however, the Power Elites and their politico toadies in Congress, the Treasury and the Fed must convince the peasantry that low tax rates on unearned income are not just "free market capitalism at its best" but that they are also "what the country needs to get moving again."
The first step of the con was successfully fobbed off on the peasantry in 2001: lower the taxes paid by the most productive peasants marginally while massively lowering the effective taxes paid by the financial Plutocracy.
One Year Later, No Sign of Improvement in America's Income Inequality Problem:
Income inequality has grown massively since 2000. According to Harvard Magazine, 66% of 2001-2007's income growth went to the top 1% of Americans, while the other 99% of the population got a measly 6% increase. How is this possible? One thing to consider is that in 2001, George W. Bush cut $1.3 trillion in taxes, and 32.6% of the cut went to the top 1%. Another factor is Bush's decision to increase the national debt from $5 trillion to $11 trillion. The combination of increased government spending and lower taxes helped the top 1% considerably.
The second part of the con is to mask much of the Power Elites' income streams behind tax shelters and other gaming-of-the-system so the advertised rate appears high to the peasantry but the effective rate paid on total income is much much lower.
The tax shelters are so numerous and so effective that it takes thousands of pages of tax codes and armies of toadies to pursue them all: family trusts, oil depletion allowances, tax-free bonds and of course special one-off tax breaks arranged by "captured" elected officials.
Step three is to convince the peasantry that $600 in unearned income (capital gains) should be taxed in the same way as $600 million. The entire key to the U.S. tax code is to tax earned income heavily but tax unearned income (the majority of the Plutocracy's income is of course unearned) not at all or very lightly.
In a system which rewarded productive work and provided disincentives to rampant speculation and fraud, the opposite would hold: unearned income would be taxed at much higher rates than earned income, which would be taxed lightly, especially at household incomes below $100,000.
If the goal were to encourage "investing" while reining in the sort of speculations which "earn" hedge fund managers $600 million each (no typo, that was the average of the top 10 hedgies' personal take of their funds gains), then all unearned income (interest, dividends, capital gains, rents from property, oil wells, etc.) up to $6,000 a year would be free--no tax. Unearned income between $6,000 and $60,000 would be taxed at 20%, roughly half the top rate for earned income. This would leave 95% of U.S. households properly encouraged to invest via low tax rates.
Above $60,000, then unearned income would be taxed the same as earned income, and above $1 million (the top 1/10 of 1% of households) then it would be taxed at 50%. Above $10 million, it would be taxed at 60%. Such a system would offer disincentives to the speculative hauls made by the top 1/10 of 1% while encouraging investing in the lower 99%.
Could such a system actually be passed into law and enforced by a captured, toady bureaucracy and Congress? Of course not. But it is still a worthy exercise to take apart the rationalizations being offered to justify rampant speculative looting, collusion, corruption and fraud.
The last step of the con is to raise taxes on the productive peasantry to provide the revenues needed to pay the Plutocracy its interest on Treasuries. If the "Bush tax cuts" are repealed, the actual effective rates paid on unearned income will remain half (20%) of the rates on earned income (wages, salaries, profits earned from small business, etc.) which are roughly 40% at higher income levels.
The financial Plutocracy will champion the need to rein in Federal debt, now that they have raised the debt via plundering the public coffers and extended ownership over that debt.
Now the con boils down to insuring the peasantry pay enough taxes to pay the interest on the Federal debt--interest which is sure to rise considerably. The 1% T-Bill rates were just part of the con to convince the peasantry that trillions of dollars could be borrowed "with no consequences." Those rates will steadily rise once the financial Power Elites own enough of the Treasury debt. Then the game plan will be to lock in handsome returns on long-term Treasuries, and command the toady politicos to support "austerity."
The austerity will not extend to the financial Elites, of course. That's the whole purpose of the con. "Some are more equal than others," indeed.
Op-Ed Contributor
America Builds an Aristocracy
By RAY D. MADOFF
Published: July 9, 2010
Paul Sahre and Jason Arias
AMERICANS have always assumed that wealth comes and goes. A poor person can work hard, become rich and pass his money on to his children and grandchildren. But then, if those descendants do not manage it wisely, they may lose it. “Shirtsleeves to shirtsleeves in three generations,” the saying goes, and it conforms to our preference for meritocracy over aristocracy.
This assumption is now being undermined, however, through the increasing use of so-called dynasty trusts. These estate-planning instruments enable affluent people to provide their heirs with money and property largely free from taxes and immune to the claims of creditors. And rather than benefit only children and grandchildren, dynasty trusts provide for generations in perpetuity — truly creating an American aristocracy.
Congress is feeling pressure to deal with taxes on inherited wealth, which have fallen to zero this year thanks to lawmakers’ inaction. In the process, it should address the more pernicious problem of dynasty trusts.
This type of trust is new because until very recently most states had a “rule against perpetuities,” which limited the term of any family trust to about 90 years, after which time the family members would own the property outright. This rule derived from the idea that property is best controlled by the living.
In the mid-1990s, however, many states repealed the perpetuities rule, and now any wealthy American can set property aside for his heirs forever, simply by hiring a trustee from one of these states.
What caused state legislatures to abandon a rule that had existed since the late 1600s? Banking industry lobbyists persuaded them that it would be a lucrative move because it would bring business to their states. But it was Congress that set the stage nearly 25 years ago.
In 1986, Congress instituted the generation-skipping transfer tax. This closed a loophole in the estate tax by ensuring that property would be subject to tax as it passed through each generation, even if it would otherwise have avoided estate taxes because it was held in trust. (It prevented “generation skipping.”) However, in enacting this tax, Congress gave each taxpayer a $1 million exemption, which was raised over the years to $3.5 million.
Naturally, estate planners began to create trusts that could take advantage of the exemption, and avoid taxes for the term of the trust. The term, however, was limited by the rule against perpetuities.
Bankers then realized that if they could persuade their state legislatures to repeal that rule (as well as state income taxes on trusts), they could attract business. And in more than a dozen states the banking lobbyists were successful. The rule against perpetuities was repealed, and dynasty trusts — tax-exempt trusts that could benefit generation after generation of heirs — were born.
This did generate business. One study found that nearly $100 billion in trust funds moved to states that repealed their rule against perpetuities.
Dynasty trusts can grow much larger than the $3.5 million exemption amount would suggest. A couple can, for example, put $7 million (their two $3.5 million exemptions) into a life insurance policy owned by the trust. They apply their exemption at the start, and the trust is forever free from taxes — even when, after the death of the second spouse, the life insurance policy pays off at $100 million. Alternatively, a trust can use the $7 million as seed money for a profitable business that the trust then owns.
An ordinary trust dissipates as money is distributed to the beneficiaries. But a dynasty trust can avoid this by discouraging outright distributions and instead encouraging trustees to buy, for the use of the beneficiaries, things like houses, artwork, airplanes and even businesses.
Because the trust retains ownership, the assets can pass tax-free and creditor-proof to the next generation.
Beneficiaries don’t pay taxes on the use of this property. In contrast, a worker whose employer provides housing or other benefits is taxed on those benefits.
But tax breaks are not the only special advantages that dynasty trusts provide. Even more troubling, they commonly include a “spendthrift clause,” which provides that trust assets cannot be reached by a beneficiary’s creditors. If a beneficiary causes a car accident, for example, the victim cannot be compensated with assets from the trust, even if they are the driver’s only resources. So beneficiaries are free to behave as recklessly as they like, knowing that their money is forever protected for themselves and their heirs.
Surprisingly, dynasty trusts can also be bad for the beneficiaries themselves. Many wealthy people agree with Andrew Carnegie and Warren Buffett that it is not in their children’s best interest for them to be given so much wealth that they don’t need to work. Dynasty trusts rob future parents of the ability to decide this for their children, because the ancestor creating the trust is the one who determines how much wealth each generation of his descendants will receive.
What can be done to eliminate these trusts? A state-level solution is unlikely, since all 50 states would need to act in unison. But Congress could fix the problem by limiting the generation-skipping-transfer exemption to trusts that last no longer than two generations. After that, beneficiaries of a trust should be subject to tax, like everyone else. Then America would not have to face the uncontrollable growth of a new aristocracy.
Ray D. Madoff, a professor at Boston College Law School, is the author of “Immortality and the Law: The Rising Power of the American Dead.”
by JackRiddler » Tue Jul 13, 2010 12:44 pm
eridani (1000+ posts) Sun Jul-11-10 08:27 PM
Resources for fighting the Catfood Commission and their useless bankster fuckbuddies
http://www.socialsecuritymatters.org/Resources.html
Welcome and Getting Started
Sample Agenda and Guide
10-minute Video Clip “Social Security: The American Promise.”
Social Security Matters Coalition Partners
10 Things You Should Know
Sample Presentation (PowerPoint)
Social Security Matters Coalition Messaging
Social Security Matters Supplementary Messages
Resource Sheet (EMAIL Handout)
Resource Sheet (PRINT Handout)
Sample Letter to Congress
Sample Press Release
Sample Letter to the Editor
Responses to Opposition
Sample Tweets
Organizations
Social Security Works
http://socialsecurity-works.org /
Social Security Matters
http://www.socialsecuritymatters.org/Home.html
National Committee to Preserve Social Security and Medicare
http://www.ncpssm.org /
Fight the "deficit hawks" noise machine with facts
The Century Foundation reports on Social Security
http://www.tcf.org/list.asp?type=TP&topic=2
Behind the Myths of Social Security
http://www.fair.org/index.php?page=1381
Center for Economic and Policy Research reports on Social Security
http://www.cepr.net /
by JackRiddler » Tue Jul 13, 2010 12:47 pm
Neither Devaluation Nor Austerity, But Tax Restructuring
Latvia's Third Option
Weekend Edition
July 9 - 11, 2010
By MICHAEL HUDSON
As Europe’s banking crisis deepens, Greece’s and Spain’s fiscal crisis spreads throughout Europe and the US economy stalls, most discussions of how to stabilize national finances assume that only two options are available: “internal devaluation” – shrinking the economy by cutting public spending; or outright devaluation of the currency (for countries that have not yet joined the euro, such as Eastern Europe).
The Baltics and other countries have rejected currency depreciation on the ground that it would delay EU membership. But as most debts are denominated in euros – and owed mainly to foreign banks or their local branches – devaluation would cause a sharp jump in debt service, causing even more defaults and negative equity in real estate. Devaluation also would raise the price of energy and other essential imports, aggravating the economic squeeze.
Sovereign governments of course can re-denominate all debts in domestic currency by abolishing the “foreign currency” clause, much as President Roosevelt abolished the “gold clause” in U.S. bank contracts in 1933. This would pass the bad-loan problem on to the Swedish, Austrian and other foreign banks that have made the loans now going bad. But most government leaders find currency devaluation so unthinkable that, at first glance, there seems to be only one alternative: an austerity program of fiscal cutbacks.
The EU, IMF and major banks are telling governments to run budget surpluses by cutting back pension and social security programs, health care, education and other social spending. Central banks are to reinforce austerity by reducing credit. Wages and prices are assumed to fall proportionally, enabling shrinking economies to “earn their way out of debt” by squeezing out a trade surplus to earn the euros to carry the enormous mortgage debts that fueled the post-2002 property bubble, and the new central bank debt taken on to support the exchange rate.
The Baltic States have adopted the most extreme monetary and fiscal austerity program. Government spending cutbacks and deflationary monetary policies have shrunk the GDP by more than 20 per cent over the past two years in Lithuania and Latvia. Wage levels in Latvia’s public sector have fallen by 30 per cent, and the central bank has expressed hope that the wage squeeze will continue and lower private-sector wages as well.
The problem is that austerity prompts strikes and slowdowns, which shrinks the domestic market and investment. Unemployment spreads and wages fall. This leads tax receipts to plunge, because Latvia’s tax system falls almost entirely on employment. Half of the employers’ wage bill goes to pay the exorbitant set of flat taxes amounting to over 51 per cent, while a VAT tax absorbs another 7 per cent of disposable personal income. Yet the central bank trumpets the wage decline as a success – and would like even further shrinkage!
Property prices have plunged too, by as much as 70 per cent. Mortgage arrears have soared to over 25 per cent, and defaults are rising. Downtown Riga and the Baltic beach suburb of Jurmala are filled with vacancies and “for sale” signs. Falling prices lock mortgage-burdened owners into their properties. Meanwhile, the virtual absence of a property tax (a merely nominal rate in practice of about 0.1 per cent) has enabled speculators to leave prime properties unrented.
About 90 per cent of Latvian mortgage debts are in euros, and most are owed to Swedish banks or their local branches. A few years ago, bank regulators urged banks to shift away from collateral-based lending (where the property backed the loan) to “income-based” lending. Banks were encouraged to insist that as many family members as possible co-sign the loans – children and parents, even uncles and aunts. This enables banks to attach the salaries of all co-signing parties.
The next step is to foreclose on the property. Bank regulators are concerned only with maintaining bank solvency (mainly for a foreign-owned banking system) not with the overall economy. Their model is Estonia which combined stable finances with 15 per cent economic shrinkage in 2009, and was rewarded by last month's promise of entry into Euroland.
The result is that instead of running the banking system for the economy, Latvia and other post-Soviet economies are managing their economies to maintain bank solvency – as if the indebted population is really expected to spend the rest of their lives paying off the deep negative equity left in the wake of bad loans.
This is causing such havoc that some business owners are emigrating to escape their debts. The newspaper Diena recently published an article about a woman of modest means in the mid-sized Latvian town of Jelgava. After taking out a 40,000 lat ($65,000) mortgage she lost her job. The bank refused to renegotiate and auctioned off her property for just 7,500 lats, leaving her still owing 30,000 for the shortfall, to be paid out of future income.
Mortgage lending to fuel the property bubble has been financing the trade deficit – but now has stopped
Until the property bubble burst two years ago, euro-mortgage lending provided the foreign exchange to cover Latvia’s trade deficit. The central bank is now borrowing from the EU and IMF, on the condition that the loan will be used only to back the currency as a cushion. This seems self-defeating, because monetary deflation will cause financial distress, aggravating the bad-debt crisis and spurring financial outflows.
Can governments that promote such policies be re-elected to office? In Latvia and other East European economies, political parties are developing a Third Option as an alternative to devaluation, economic shrinkage and declining living standards.
This Third Option is to reform the tax system. It starts with the fact that Latvia’s bloated 50 per cent + tax package on employment means that take-home wages are less than half of what employers pay. Latvia has the worst remunerated northern European labor, yet it is proportionally the highest-cost to employers. And to make matters worse, real estate taxes are only a fraction of 1 per cent. This has been a major factor fueling the real estate bubble. Untaxed land value is paid to banks, which in turn lend their mortgage receipts out to bid up property prices all the more – while obliging the government to tax labor and sales, raising the cost of labor and the price of goods and services. A similar high flat tax on labor and little property tax has plagued the entire post-Soviet block ever since 1991.
The good news is that this malformed tax system leaves substantial room to shift employment taxes onto the “free lunch” revenue comprised of the land’s rental value, monopoly rents and financial wealth. At present, this revenue is left “free” of taxation – only to be pledged to banks.
Latvia’s economy can be made more competitive simply by freeing it from the twin burden of heavily taxed wages and housing prices inflated by easy euro-credit. It has a wide margin to reduce the cost of labor to employers by 50 per cent, without reducing take-home wages. A tax shift off labor onto the land’s rental value would lower the cost of employment without squeezing living standards – and without endangering government finances.
Lowering taxes on wages would reduce the cost of employment without squeezing take-home pay and living standards. Raising taxes on property, meanwhile, would leave less value to be capitalized into bank loans, thus guarding against future indebtedness.
This was the policy that underlay Hong Kong’s economic rise – the example that Latvian leaders hope to emulate as a banking service entrepot and international technology center (as Latvia was in pre-1991 Soviet times). Hong Kong promoted its economic takeoff by relying mainly on collecting the land’s rental value, enabling it to minimize employment taxes (presently only 15 per cent).
Shifting the burden of tax from labor onto land would therefore hold down the price of housing and commercial space, because rental value that is taxed will no longer will be recycled into new mortgages.
The tax shift also can bring down property prices, because rental value that is taxed no longer will be available for banks to capitalize into mortgage loans. Housing in debt-leveraged economies such as the United States and Britain typically absorbs 40 per cent of family budgets. Reducing this proportion to 20 per cent – the typical rate in Germany’s much less indebted economy, where lending has been more responsible – could enable wage receipts to be spent on goods and services rather than as mortgage debt service. It thus would provide further scope for wage moderation without lowering living standards. This means that Latvians and other Eastern European countries do not need to sacrifice the economy on a cross of euro-debts and suffer from currency devaluation or austerity programs.
Shifting the tax off employees onto the land would cut the cost of living for Latvians, by holding down the price of housing and commercial space. The economic rent – income without any corresponding cost of production – would be paid to the government as the tax base rather than being “free” to be pledged to banks to be capitalized into mortgage loans. Property prices are determined by how much banks will lend, so taxing the land’s rental value (but not legitimate returns on building and capital improvements) would reduce the capitalization rate, holding down property prices.
In sum, the problem with monetary deflation (“internal devaluation”) is that it leaves the existing dysfunctional tax structures in place. The main issue in Eastern Europe and beyond over the coming years will be whether economies can free themselves from the twin burden of heavily taxed wages and inflated housing prices, while avoiding an overdose of needless austerity. The tax structure needs to be changed – along the lines that most countries in the West expected to see a century ago.
The aim should be to make the economy more competitive by minimizing the cost of living and doing business. The Third Option serves to bring property and monopoly prices in line with necessary costs of production. Taxing away “empty” pricing in excess of cost-value – economic rent – was part of the “original” liberalism of Adam Smith and John Stuart Mill, and indeed of classical economists from the French Physiocrats down through Progressive Era reformers.
The national parliamentary elections scheduled for this October will be fought largely over the Latvia Renewed economic development program, sponsored by Harmony Center -- the coalition of left-wing parties. At the latter’s annual meeting on May 29-30, party leaders moved to start preparations to translate the above alternative into law and drawing up a land-value map of Latvia.
Michael Hudson is Chief Economist of the Reform Task Force Latvia, commissioned by the Harmony Center coalition. He is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com
by JackRiddler » Tue Jul 13, 2010 12:50 pm
The Stress Test Fraud
EU Banking System on the Brink
Weekend Edition
July 9 - 11, 2010
By MIKE WHITNEY
The EU banking system is in big trouble. Many of the Union's largest banks are sitting on hundreds of billions of dodgy sovereign bonds and non performing real estate loans. But writing down their losses will deplete their capital and force them to restructure their debt. So the banks are concealing their losses through accounting sleight-of-hand and by borrowing money from the European Central Bank. This has helped to hide the rot at the heart of the system.
Presently, 170 banks are having difficulty accessing the wholesale markets where they get their funding,. Financial institutions are wary of lending to each other because they're not sure who is solvent or not. It's a question of trust.
ECB chief Jean-Claude Trichet has tried to keep the problems under wraps, but markets aren't easily fooled. Stress gauges, like euribor, have been rising for the last two months. Investors smell a rat. They know the banks are playing hide-n-seek with downgraded assets and they know that Trichet is helping them out.
A week ago, stocks rallied on news that EU banks would repay most of the €442bn one-year emergency loan from the ECB. The news was mainly a publicity stunt designed to hide what was really going on. Yes, the banks borrowed significantly less that analysts had predicted (another €132bn), but just two days later, 78 banks borrowed another €111bn. The additional loans makes it look like Trichet cooked up the whole thing to trick investors.
EU banks were engaged in the same high-risk activities as their counterparts in the US. They were playing fast and loose on speculative trades that were ramped up with maximum leverage. Bankers raked in hundreds of billions in salaries and bonuses before the bubble burst. Now the securities and bonds they purchased have plunged in value, so they've turned to the ECB for a bailout. Sound familiar?
Trichet is a banking industry rep, much like Geithner and Bernanke. His job is to maintain the political and economic power of the banks and to dump the losses onto the public. Presently, the ECB provides "limitless" loans to underwater banks so they can maintain the appearance of solvency. Trichet has lowered rates to 1 percent, provided a safe haven for overnight deposits, and begun an aggressive bond purchasing program (Quantitative Easing) which keeps prices of sovereign bonds artificially high. Valuations on bank assets are supported by a central authority and do not reflect true market pricing.
The wholesale-funding market (repo) has not shut down. Banks can still exchange their sovereign bonds and real estate securities for short-term loans. It merely requires that they take a haircut on the value of their collateral, which would then have to be recorded as a loss leaving them capital impaired. This is how markets work, but the banks are not required to play by the rules.
From Bloomberg News: "European lenders had $2.29 trillion at risk in Greece, Italy, Portugal and Spain at the end of 2009, including loans to governments, according to the Bank for International Settlements...German banks’ writedowns on loans and securities will probably reach $314 billion by the end of 2010, with state-owned lenders and savings banks facing the bulk of the losses, the International Monetary Fund said in a report in April."
See? The ECB is not buying Greek bonds because of a "sovereign debt crisis". They are buying them so the banks won't lose money. The "sovereign debt crisis" meme is all public relations hype. If it becomes too expensive to fund government operations, Greece can leave the EU and return to the drachma which would give it greater flexibility to settle its debts. That would increase demand for Greek exports and improve tourism. This is the best solution for Greece. So, where's the crisis?
If Greece, Portugal and Spain, leave the EU and restructure their debt, banks in Germany and France will default and bondholders will lose their shirts. In other words, the investors, who took a risk, will lose money---which is how the system is supposed to work.
Bloomberg again: "The region’s banks have written down a proportionately lower percentage of their assets than their U.S. counterparts. U.S. banks will have written down 7 percent of their assets by the end of 2010 and euro-area banks 3 percent, according to the IMF. European banks still haven’t shown analysts they have completed their writedowns." (Bloomberg)
So, the banks are underwater, but nothing has been done to fix the problem. Where are the regulators?
On Tuesday, euribor hit a 10-month high. The pressure is building despite Trichet's emergency programs. ECB bank lending is nearly €800bn while overnight deposits are roughly €240bn. Trichet is willing to drag the EU through 10 or 15 years of subpar growth and high unemployment (like Japan) to keep a handful of bankers and bondholders from accepting their losses. If things get bad enough, Trichet might invoke the "nuclear option", that is, allow a major bank to implode "Lehman-style" so he can extort hundreds of billions of euros from the EU member states. It's been done before; just ask Bernanke or Paulson.
THE "STRESS TEST" FRAUD
The bank stress tests in the US were organized by the Treasury as a "confidence-building" measure. They allowed the banks to use their own internal-models to determine the value of complex securities. The same rule will apply to EU banks. The Daily Telegraph reports that some of the banks will actually test themselves. As least that removes any doubt about the results.
From Bloomberg News -- "European stress tests on 91 of the region’s biggest banks drew criticism from analysts who said regulators are underestimating probable losses on Greek and Spanish government bonds. The tests are designed to assess how banks will be able to absorb losses on loans and government bonds, the Committee of European Banking Supervisors said yesterday. Regulators have told lenders the tests may assume a loss of about 17 percent on Greek government debt, 3 percent on Spanish bonds and none on German debt, said two people briefed on the talks who declined to be identified because the details are private.
Credit markets are pricing in losses of about 60 percent on Greek bonds should the government default, more than three times the level said to be assumed by CEBS. Derivatives known as recovery swaps are trading at rates that imply investors would get back about 40 percent in a Greek default or restructuring." (Bloomberg)
The tests are a joke. The banks will continue to use accounting-rule changes and other gimmickry to obfuscate their losses. Trichet will use the tests to step up his bond purchasing program (QE) which will transfer the banks losses onto the member states. Many of the banks are insolvent and need restructuring. But they are in no real danger, because they still have a stranglehold on the process.
Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com
by JackRiddler » Tue Jul 13, 2010 12:55 pm
The Attack of the Real Black Helicopter Gang: The IMF Is Coming for Your Social Security
Monday 12 July 2010
by: Dean Baker, t r u t h o u t | Op-Ed
A few years back, there was a fear in some parts about black UN helicopters that were supposedly taking part in the planning of an invasion of the United States. While there was no foundation for this fear, there is basis for concern about the attack of another international organization, the International Monetary Fund (IMF).
Last week, the IMF told the United States that it needs to start getting its budget deficit down. It put cutting Social Security at the top of the steps that the country should take to achieve deficit reduction. This one is more than a bit outrageous for two reasons.
First, the IMF deserves a substantial share of the blame for the economic crisis that gave us big deficits in the first place. The IMF is supposed to oversee the operations of the international financial system. According to standard economic theory, capital is supposed to flow from rich countries like the United States to poor countries to finance their development. In other words, the United States should be having a trade surplus, which would correspond to the money that we are investing in poor countries to finance their development.
However, the IMF messed up its management of financial crises so badly in the last 15 years that poor countries decided that they had to accumulate huge amounts of currency reserves in order to avoid ever being forced to deal with the IMF. This meant that capital was flowing in huge amounts in the wrong direction. One result of this reverse flow was that the United States ran a huge trade deficit instead of a trade surplus.
The trade deficit in the United States was a big part of the story of the housing bubble. The trade deficit cost millions of workers their jobs. This was one of the main reasons that economy was so weak coming out of the 2001 recession. This weakness led the Fed to keep interest rates at 50-year lows, until the growth of the housing bubble eventually began to generate jobs in the fall of 2003.
The IMF both bears much of the blame for the imbalances in the world economy and then for failing to clearly sound the alarms about the dangers of the bubble. While the IMF has no problem warning about retired workers getting too much in Social Security benefits, it apparently could not find its voice when the issue was the junk securities from Goldman Sachs or Citigroup that helped to fuel the housing bubble.
The collapse of this bubble has not only sank the world economy, it also destroyed most of the savings of the near retirees for whom the IMF wants to cut Social Security. The vast majority of middle-income retirees have most of their wealth in their home equity. This home equity largely disappeared when the bubble burst. Maybe the IMF doesn't have access to house price series and data on wealth, because if they did, it's hard to believe that they would advocate further harm to some of the main victims of their policy failure.
The other reason that the IMF's call for cutting Social Security benefits is infuriating is the incredible hypocrisy involved. The average Social Security benefit is just under $1,200 a month. No one can collect benefits until they reach the age of 62. By contrast, many IMF economists first qualify for benefits in their early 50s. They can begin drawing pensions at age 51 or 52 of more than $100,000 a year.
This means that we have IMF economists, who failed disastrously at their jobs, who can draw six-figure pensions at age 52, telling ordinary workers that they have to take a cut in their $14,000 a year Social Security benefits that they can't start getting until age 62. Now that is real black helicopter material.
by JackRiddler » Tue Jul 13, 2010 3:23 pm
by anothershamus » Tue Jul 13, 2010 11:36 pm
by American Dream » Sat Jul 17, 2010 6:04 pm
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