In case you have blinders on, the financial outlook surrounding us is quite scary. Even without a horse’s blinders you may have been unaware that it was our nations fifth largest bank, which folded. Those stocks selling last Friday for 70 dollars at open, today went to J.P. Morgan for just 2 dollars a share. Let that sink in. The nation’s 5th largest bank just disappeared over the weekend. Ka-boom.
Today, Lehman Brothers will give their report: expect a similar outcome; everyone’s tied into the mortgage credit crunch. Also the Federal Reserve is expected to drop interest rates by a point.
A full percent could cause money to pour back into the hemorrhaging markets…..So which is more powerful. Another large company going belly up, or the big drop in interest rates that will land tomorrow? It is anyone’s guess.
But is a bailout a good thing? During the last several years, these companies collectively paid out 400 Billion in bonuses. No one is turning their Maserati’s in as collateral, as yours and my money goes to keeping their banks solvent.
We tried this in the seventies and it didn’t work. Japan tried it more recently in the nineties, and they still haven’t dug completely out from underneath the mess.
When a country goes around and infuses cash by bailing out banks so their financier friends do not suffer, we are left with damaged businesses which still has to transfer some of their potential income to debt payments for a very long time. Better to let the pieces fall where they may; a company dies, gets carved up, and someone picks up the pieces and almost immediately, starts the revival process….with no overhanging debt bleeding the books for years to come. The efficiency needed to make money, starts immediately. Sure, one or two people lose a lot. But the country gains, the same way a corporation gains by declaring bankruptcy. Just wipe the debts away and begin making money immediately. Put America back to work
Two hundred billion was pumped in just last week. When are we going to pay it back? Having a recession would be less costly than paying that amount back year, after year, after year, after year…..
The President convened an Economic Council to monitor the breakup of Wall Street. They are to report back to him.
The best bet for pulling ourselves out of this recession flies in the face of conventional wisdom. The best tactic would be to have the President sign an Executive Order, eliminating all the Bush tax cuts on incomes 10 million or more. Then start refilling our treasury immediately.
We just paid out 200 billion to help those who just received 400 billion in bonuses the past few years. It would be helpful to get some of that back. For when everything else is failing, we certainly do not need a bankrupt Federal government to boot………
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March 18, 2008 at 2:33 pm
kavips
I missed this:
Interbank lending almost ground to a halt yesterday, with banks fearful of dealing with each other, prompting talk of another round of coordinated central bank aid.
March 18, 2008 at 6:12 pm
Shirley Vandever
I feel like we’re going to hell in a bucket, and I for one am not enjoying the ride.
March 18, 2008 at 8:55 pm
Duffy
“But is a bailout a good thing?”
NOOOooooooooooooooooooo! No. More. Bailouts. Period. This is not 9/11 or Katrina when we had terrorism or national disaster strike. If Bear was bailed out in the form of a takeover, fine. Some are speculating that bankruptcy would have been better for stakeholders.
“During the last several years, these companies collectively paid out 400 Billion in bonuses. No one is turning their Maserattis in as colateral, as your’s and my money goes to keeping their banks solvent.”
Those bonuses are for work performed during that year. If the market is up, they get paid. To ask them to give back the money they’ve earned because they’re going belly up now is unreasonable.
“We tried this in the seventies and it didn’t work. Japan tried it more recently in the nineties, and they still haven’t dug completely out from underneath the mess.”
Correct. They’ve had an economic flu for 15 years now. They’ve tried to shore up their businesses with cash handouts a mistake we ought not to repeat here.
“When a country goes around and infuses cash by bailing out banks so their financier friends do not suffer, we are left with damaged businesses which still has to transfer some of their potential income to debt payments for a very long time. Better to let the pieces fall where they may; a company dies, gets carved up, and someone picks up the pieces and almost immediately, starts the revival process….with no overhanging debt bleeding the books for years to come. The efficiency needed to make money, starts immediately. Sure, one or two people lose a lot. But the country gains, the same way a corporation gains by declaring bankruptcy. Just wipe the debts away and begin making money immediately. Put America back to work”
Bravo! Bravo! This goes for airlines too.
“The best bet for pulling ourselves out of this recession flies in the face of conventional wisdom. The best tactic would be to have the President sign an Executive Order, eliminating all the Bush tax cuts on incomes 10 million or more. Then start refilling our treasury immediately.”
No. Those tax breaks will also stimulate the economy by employing people or consuming goods.
“We just paid out 200 billion to help those who just received 400 billion in bonuses the past few years. It would be helpful to get some of that back. For when everything else is failing, we certainly do not need a bankrupt Federal government to boot………”
That 400 billion was paid out to tens of thousands of people not just a few people. There are some making big money but not as many as you think.
March 18, 2008 at 10:02 pm
kavips
Do the current tax breaks stimulate the economy by employing people or consuming goods?
In theory they are supposed to. But whereas the GNP has grown this past seven years, none of that growth has filtered down to people who’s incomes have remained flat, or dipped over the past seven years. Why?
Because no one wants to throw good money away after bad. The smart move whispered among any investor today is to buy gold. But that would not put any American back to work.
What is urgently needed is for individual investors to put their money into real assets which put people back to work. But no sane person will throw away their money in uncertain times like these. But taking a rash course of action, like building a factory whose use we yet do not know, is exactly the course of action that needs to be done.
Since individuals lack the will to try something this bizarre, but necessary, we need another course of action. The U. S. Government, as a representative body of all of us, WILL work in our nation’s best interests. Build a dam, repair a bridge, build something to put Americans back to work.
If wealthy investors would look out for the common good, keeping the tax breaks just might work. But the beauty of the marketplace, is that everyone looking out for their own self interest, benefits all as a whole. That model does not work when all the money is in the hands of a few, and they are unwilling to throw it away for the benefit of all.
Repeal the tax cuts immediately for incomes over 15 million, put money towards investment in our infrastructure, and we will see the tide begin to turn.
March 19, 2008 at 12:39 am
Duffy
“In theory they are supposed to. But whereas the GNP has grown this past seven years, none of that growth has filtered down to people who’s incomes have remained flat, or dipped over the past seven years. Why?”
Because some people stay where they are in terms of income either by making poor choices, having poor prospects, for some it is externalities they have no control over.
“Because no one wants to throw good money away after bad. The smart move whispered among any investor today is to buy gold. But that would not put any American back to work.”
Why not? You’re not going to buy a lump of gold and hold it. It is illegal for lumpenproles to own gold. You’ll have to invest in a gold fun which thereby employs people. Even if you could buy gold all you’re doing is exchanging your dollars for a product.
“What is urgently needed is for individual investors to put their money into real assets which put people back to work.”
Savings account? Real estate? 401K? Any investment aside from putting it under your mattress i going to create economic activity and jobs. Savings = Jobs, Spending = Jobs
” But no sane person will throw away their money in uncertain times like these. But taking a rash course of action, like building a factory whose use we yet do not know, is exactly the course of action that needs to be done.”
That’s highly subjective and overly broad. A factory for Hummers might not make sense but one for Blu Ray DVD players probably would.
“Since individuals lack the will to try something this bizarre, but necessary, we need another course of action. The U. S. Government, as a representative body of all of us, WILL work in our nation’s best interests. Build a dam, repair a bridge, build something to put Americans back to work.”
So it’s WPA all over again. Sounds great but you’re creating stimulus via monopsony which will further distort the market. Also large labor products will drain the labor pool for private firms and put them out of business. Increasing demand on that labor pool will also increase associated costs by creating a market shortage which increases the costs of your bridge and dam etc.
“If wealthy investors would look out for the common good, keeping the tax breaks just might work. But the beauty of the marketplace, is that everyone looking out for their own self interest, benefits all as a whole. That model does not work when all the money is in the hands of a few, and they are unwilling to throw it away for the benefit of all.”
How do you define “wealthy”? Again, rich people, looking out for themselves do benefit all. Rich people either spend lots of money which employs people and stimulates the economy or they save and invest it which does also.
“Repeal the tax cuts immediately for incomes over 15 million, put money towards investment in our infrastructure, and we will see the tide begin to turn.”
No no no. Very few people have incomes over $15MM. I’d be curious to see what kind of money would flow back into the treasury if their taxes were raised. It is unlikely that it would be anything significant.
Public sector spending is no way to get out of a recession. Here’s an idea: STOP SPENDING ZILLIONS AND ZILLIONS OF DOLLARS ON UNCONSITUTIONAL INITIATIVES. There are billions and billions of absurd pork projects. Start with that and you’ll see things turn around.
Lastly, if you’ve ever been even remotely involved with government projects, especially construction projects, you know that graft, corruption, cost over-runs, padding etc. are epic.
March 19, 2008 at 1:04 pm
kavips
I said: “In theory they are supposed to. But whereas the GNP has grown this past seven years, none of that growth has filtered down to people who’s incomes have remained flat, or dipped over the past seven years. Why?”
You said: “Because some people stay where they are in terms of income either by making poor choices, having poor prospects, for some it is externalities they have no control over.”
I say: Whereas I speak of a systemic problem, you reply with a personal problem. What you argue could be true on an individual basis. But for the average of all America’s income to remain flat as the GNP rises, points to a systemic problem. it should be worth noting, that this trend only started occurring during this administration.
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I said: “Because no one wants to throw good money away after bad. The smart move whispered among any investor today is to buy gold. But that would not put any American back to work.”
You said: “Why not? You’re not going to buy a lump of gold and hold it. It is illegal for lumpenproles to own gold. You’ll have to invest in a gold fun which thereby employs people. Even if you could buy gold all you’re doing is exchanging your dollars for a product.”
I say: You missed the point. Spending money on something that is economally dormant, siphons money out of the mainstream of circulation. No extra person is put to work, no additional income is generated, only a commission fee is assesed were one to buy a certificate authenticating they had paid money for gold located somewhere in some vault……That is the whole problem with decreasing taxes on the wealthy. They may, but often don’t benefit the economy as efficiently as do their poorer neighbors.
___________________________________________________________
I said: “Since individuals lack the will to try something this bizarre, but necessary, we need another course of action. The U. S. Government, as a representative body of all of us, WILL work in our nation’s best interests. Build a dam, repair a bridge, build something to put Americans back to work.”
You said: “So it’s WPA all over again. Sounds great but you’re creating stimulus via monopsony which will further distort the market. Also large labor products will drain the labor pool for private firms and put them out of business. Increasing demand on that labor pool will also increase associated costs by creating a market shortage which increases the costs of your bridge and dam etc.”
I say: What you say is true in a tight labor market, but is necessary in a labor vacuum. When no one has work, or income to buy products, a good government steps in and provides one. The fuel and food purchased by those employeed, starts the initial resusitation of the local economy.
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“I said: “If wealthy investors would look out for the common good, keeping the tax breaks just might work. But the beauty of the marketplace, is that everyone looking out for their own self interest, benefits all as a whole. That model does not work when all the money is in the hands of a few, and they are unwilling to throw it away for the benefit of all.”
You said: “How do you define “wealthy”? Again, rich people, looking out for themselves do benefit all. Rich people either spend lots of money which employs people and stimulates the economy or they save and invest it which does also.”
I say: Ah. Here is the crux where we disagree. Wealthy is over 15 million a year. It’s hard to spend 15 million a year. They spend a fraction of that on goods and services that employee lots of people. So they invest it. In what? Stocks, bonds, or real assets: factories and businesses. If they do the latter,then your point is correct. We agree. But experience proves that they prefer to by paper, hoping its value will increase. When it doesn’t, all they have is ink on paper. Nothing substantial was created from out of that wealth. Now, assume they were taxed at 29%. Much of that 15 million would be pumped back into their business, I know that is what I would do, so if any taxes were to be paid, it would be on the 3 million I cleared after costs were deducted….My selfish averice just put 12 million into a business, some of which goes to employees who will spend it tin their local economies. On the other hand, buying paper stock certificates puts no employee’s money into the local economy… This tax strategy worked quite well for all Americans during the Clinton years.
____________________________________________________________
I said: “Repeal the tax cuts immediately for incomes over 15 million, put money towards investment in our infrastructure, and we will see the tide begin to turn.”
You said: “No no no. Very few people have incomes over $15MM. I’d be curious to see what kind of money would flow back into the treasury if their taxes were raised. It is unlikely that it would be anything significant. ”
I say: In March 2006 Forbes reported 793 billionaires in the US with combined net worth of $2.6 trillion. In March 2007 Forbes reported 946 billionaires in the US with combined net worth of $3.5 trillion. That is a 1-year increase of 19% in the number of billionaires and an increase of $35% in their net worth during a time of increasing poverty. Severe poverty is at its highest point in three decades.]
Just take the yearly difference, .9 trillion, times the 29% tax rate, and one comes up with 261 billion of uncollected income that this country could use, just going to waste. That would be enough to make our nations yearly debt payment, you know, the one caused solely by actions stemming from the Bush/Cheney administration?
March 19, 2008 at 10:21 pm
Duffy
I say: Whereas I speak of a systemic problem, you reply with a personal problem. What you argue could be true on an individual basis. But for the average of all America’s income to remain flat as the GNP rises, points to a systemic problem. it should be worth noting, that this trend only started occurring during this administration.
I reply: Granted but it is far more complicated than Republican policies don’t work. I think we assume that government has a great deal of control over the economy vis a vis tax policy when really monetary policy trumps fiscal policy.
I say: You missed the point. Spending money on something that is economally dormant, siphons money out of the mainstream of circulation. No extra person is put to work, no additional income is generated, only a commission fee is assesed were one to buy a certificate authenticating they had paid money for gold located somewhere in some vault……That is the whole problem with decreasing taxes on the wealthy. They may, but often don’t benefit the economy as efficiently as do their poorer neighbors.
Not so. That money that was used to purchase that gold then goes to work elsewhere. It is not “pulled out the economy”. It goes into an investment firm that hires people or lends money to other people for economic activity. The only way to literally pull money out of the economy is to horde it personally and not put it in any sort of financial institution. Rich people don’t do that, even with precious metals. If they were, it would only increase the power of the dollar by reducing the number of bills in circulation. Further, rich people hire people who then spend into the local economy. Whereas poor people don’t employ anybody and their economic impact is reduced to direct retailer stimulus (or savings)
I say: What you say is true in a tight labor market, but is necessary in a labor vacuum. When no one has work, or income to buy products, a good government steps in and provides one. The fuel and food purchased by those employeed, starts the initial resusitation of the local economy.”
Not so. A good government will lift the economic burden on business in the state or offer incentives to entice investment and development. The state may create work in the short run but remember it gets its money from taxpayers so you’d be robbing Peter to pay Paul.
I say: Ah. Here is the crux where we disagree. Wealthy is over 15 million a year. It’s hard to spend 15 million a year. They spend a fraction of that on goods and services that employee lots of people. So they invest it. In what? Stocks, bonds, or real assets: factories and businesses.
Here’s where your analysis falls down. Investing in stocks and bonds is investing in factories and businesses. They don’t personally own a Wiget factory they invest in Widget Inc. who takes their capital investment and opens a new factory. You seem to draw a bright line between personally opening a business and buying shares in same. Why?
If they do the latter,then your point is correct. We agree. But experience proves that they prefer to by paper, hoping its value will increase. When it doesn’t, all they have is ink on paper. Nothing substantial was created from out of that wealth.
No. As stated above it is their capital investment that allows businesses to open more factories, expand services, hire people etc.
Now, assume they were taxed at 29%. Much of that 15 million would be pumped back into their business, I know that is what I would do, so if any taxes were to be paid, it would be on the 3 million I cleared after costs were deducted….My selfish averice just put 12 million into a business, some of which goes to employees who will spend it tin their local economies. On the other hand, buying paper stock certificates puts no employee’s money into the local economy… This tax strategy worked quite well for all Americans during the Clinton years.
Wrong again. Increased investment in a company gives them more cash to hire more people (that’d be employees) who then have money to spend in said local economy. Either that or they expand operations by building a new factory which employs the builders, electricians, plumbers etc and once it’s finished it employs factory workers.
I say: In March 2006 Forbes reported 793 billionaires in the US with combined net worth of $2.6 trillion. In March 2007 Forbes reported 946 billionaires in the US with combined net worth of $3.5 trillion. That is a 1-year increase of 19% in the number of billionaires and an increase of $35% in their net worth during a time of increasing poverty. Severe poverty is at its highest point in three decades.]
Just take the yearly difference, .9 trillion, times the 29% tax rate, and one comes up with 261 billion of uncollected income that this country could use, just going to waste. That would be enough to make our nations yearly debt payment, you know, the one caused solely by actions stemming from the Bush/Cheney administration?
I’ve added some bolding here. Notice anything? You’re mixing apples and oranges. Net worth != income. A vast majority of the super rich are wealthy due to their holdings not cash on hand or income. Yes there are some guys that make lots of cash per year but most billionaires have their money tied up and working for them. The top three guys at Google make $1 per year. Likewise Steve Jobs, Jerry Yang (Yahoo!), Jon Corzine (Governor of New Jersey), Arnold Schwarzenegger (Governor of California), Michael Bloomberg (Mayor of New York City), Henry Samueli (Broadcom Corporation), Richard Kinder (Kinder Morgan) etc. Tax their income and they’ll restructure their compensation packages to be debt and equity instrument based.
We’ve tried taxing high earners in the past. All it does is stagnate the economy (remember stagflation and the misery index?). It’s never worked anywhere. Sweden has the highest marginal rates in the world and likewise the slowest growth and industries propped up by public sector investment and spending. Remember the Celtic Tiger? How’d they do that? Cutting corporate and personal income taxes and red tape.
March 19, 2008 at 11:43 pm
kavips
I will reply backwards.
You said ” We’ve tried taxing high earners in the past. All it does is stagnate the economy (remember stagflation and the misery index?). It’s never worked anywhere.” I beg to differ. It worked here in this country between 1992 and 2000. We did not tax excessively which is the difference between your model and my viewpoint. It worked and worked well. Beforehand, we were in an economic slump and we pulled it out. We are not asking for 50% taxation; just a return to the glory years 8 years ago. Just lift the tax breaks on those making 15 million or more. It worked before.
And there is a clarification on real assets versus paper assets. If I buy a new stock issue, then I contribute money to a business and they can invest. Your point in that case is correct. But when I buy stock that you bought from someone who bought it before you, no new money goes to the firm. You get your price and hopefully some profit on the transaction and some form of compensation goes to the firm that made the commitment. But when we are talking of stock buys amounting to .5 billion, not having that money revert back to the economy does little to help us.
From the larger picture, a better investment would be to hand it over to the Federal Government. (tongue in cheek). Better good would come about for all. Reduced National Debt would be one good outcome. Of course that voluntary change in ownership of ones cash will never happen. But requiring just a small amount of tax money, and allowing deductions to use that money and not turn it over, would do this country a favor.
Later, when debt has been diminished, we can return to the economic model which reduces taxes and as well as reduces the government’s footprint, along the lines of those followed by the Celtic Tiger….
And I did mix “net worth” and “income” in my analysis. Just from a practical application, I used the loose interpretation that the differential between two years of net worth, would equal the income gathered for one year. For instance if my net worth jumped from 100,000 to 200, 000 in one year, one could assume that I made at least 100,000 that year, whether through appreciation of actual income. Therefore my estimate is a low ball number of 261 billion. The amount could be much higher which we could then use to pay down our national debt.
March 20, 2008 at 11:05 pm
Duffy
Grrr….I replied but the innernets ate my comment….
I will reply backwards.
Good, that will match your logic. Ha! I crack me up.
I beg to differ. It worked here in this country between 1992 and 2000. We did not tax excessively which is the difference between your model and my viewpoint. It worked and worked well. Beforehand, we were in an economic slump and we pulled it out. We are not asking for 50% taxation; just a return to the glory years 8 years ago. Just lift the tax breaks on those making 15 million or more. It worked before.
You are ignoring some relevant points here. Clinton took office at the tail end of a recession and the ensuing tech boom would have occurred with or without commensurate tax changes (in either direction). Likewise you are touting the 90’s as a model but what we saw was a dramatic increase in “paper” assets. Dot Com companies and day traders exploded in terms of numbers and wealth (both realized and unrealized). We did not see a dramatic increase in domestic manufacturing or other “real” investments as you supported earlier. To the contrary, Bill Clinton created NAFTA which did more to send such jobs and businesses to Mexcio and to a lesser extent, Canada.
And there is a clarification on real assets versus paper assets. If I buy a new stock issue, then I contribute money to a business and they can invest. Your point in that case is correct. But when I buy stock that you bought from someone who bought it before you, no new money goes to the firm. You get your price and hopefully some profit on the transaction and some form of compensation goes to the firm that made the commitment. But when we are talking of stock buys amounting to .5 billion, not having that money revert back to the economy does little to help us.
If that .5 billion does not go back into the economy, where does it go? Is it all sent to vaults or overseas?
From the larger picture, a better investment would be to hand it over to the Federal Government. (tongue in cheek). Better good would come about for all. Reduced National Debt would be one good outcome.
Yes because we all know that the first thing any politician does with money is pay off debt.
Of course that voluntary change in ownership of ones cash will never happen. But requiring just a small amount of tax money, and allowing deductions to use that money and not turn it over, would do this country a favor.
Do you send your excess money to the treasury? If not, why not? Surely you have a few extra dollars you could spare. If everyone, not just the rich, sent $100 to the treasury for debt retirement only we’d be much better off. You’re assuming that all this new tax revenue is going to be put toward deficit and debt retirement. No. Friggin. Way. Why is it moral to pick a man’s pocket simply because he has more money than others?
Later, when debt has been diminished, we can return to the economic model which reduces taxes and as well as reduces the government’s footprint, along the lines of those followed by the Celtic Tiger….
Never. Going. To. Happen. If you remember the income tax was supposed to be temporary to fund a war. Look how that turned out. That was 1917. Similarly, it was never supposed top more than 10% or so. If the original income tax rates were applied today, the bottom bracket of 1% would start at $75330.06 in 2007 dollars for a married couple. A rate I could surely get behind. The top rate would be 7% for people earning more than $9,416,257.92 sounds fair to me. Note also that income tax was not intended to be progressive but rather, flat.
The only real way we are ever going to service deficit and debt is by reducing the cost of government first.
And I did mix “net worth” and “income” in my analysis. Just from a practical application, I used the loose interpretation that the differential between two years of net worth, would equal the income gathered for one year. For instance if my net worth jumped from 100,000 to 200, 000 in one year, one could assume that I made at least 100,000 that year, whether through appreciation of actual income. Therefore my estimate is a low ball number of 261 billion. The amount could be much higher which we could then use to pay down our national debt.
That makes no sense. If I owned stock that increased dramatically in value due to a merger or something did my income increase? I can’t spend stock until I cash it in. Most Americans have the bulk of their net worth in their house. Your model would show most Americans at a net loss in income for this year and possibly the next because the differential in their net worth year over year decreased dramatically. My house was worth $200K last year and is now worth $100K and I earned 30K this year and $25K last year. I’m down 95K in net worth so my income would be ($47.5) in the red. If taxes worked like that you’d see everyone and their brother looking for a refund and then some this year.
Also, when you increase tax rates the rate of people circumventing the taxes (either legally or illegally) increases. Hong Kong, Ireland, the UAE and Eastern Europe have all learned that cutting taxes and regulations leads to dramatic, sustained economic growth. Why can’t we figure out the same?
P.S. FWIW I am very much enjoying this exchange. Polite debate is sorely lacking IMNHO.
March 23, 2008 at 10:42 am
kavips
I too enjoyed it. I couldn’t help but notice how different this matching of wits was from those of another two bloggers that were simultaneously taking place on several other blogs.
I said: “I will reply backwards.”
You said: “Good, that will match your logic. Ha! I crack me up.
”
I apologize for breaking the trend, but the above comment still causes me to chuckle far too much to seriously respond to your last round of arguments.