Relevant and even prescient commentary on news, politics and the economy.

Guest Post: Rationality of Banks

Note: This post originally appeared, in slightly different form, at the author’s personal blog, Diogenes of Brooklyn. It appears here with that blogger’s kind permission.

He does talk in the third person sometimes.

by Diogenes of Brooklyn

Like most Americans, Diogenes knows nothing of economics and finance. But quite a lot about the ways that banks work, or don’t work, has become public knowledge.

Remember when we were taught that economics was about rational markets. Milton Friedman, patron saint of Republican economists, used to say on TV that everything is rational. Keynes thought markets were more or less rational, except when they went nuts, the government had to step in. Mr. Romney still says it in public: Just a little private enterprise competency in the White House and everything will be hunky-dory, or however they say that in the language of the Harvard Business School. It will get to be as good as it was the lasts time we had a President with a Harvard MBA (irony alert).

Nowadays there is not so much rationality. Especially about the toxic assets. The whole economy is in pretty bad shape, but the colossal failure started with the Real Estate Bubble. A little of it was about Fannie and Freddie and the very powerful and very evil Barney Frank, but over 80 per cent of the problem was The Banks and Wall Street and good old private capital. Wall Street had access to billions and billions of dollars that were not usefully employed. Most of the stock market in the doldrums, and the owners of the biggest chuck of money, the Chinese Government, could not invest the money at home for fear of distorting their very productive but fragile economy. That enormous pile of money was invested in MBS’s and CDO’s and all the rest. And that money in the mortgage market allowed the most enormous bubble in USA real estate. You know the stories, whole towns in California where nobody lives, and nobody will ever live. People who bought houses at inflated prices. Standard and Poors said when they rated the derivatives, that Real Estate prices had always gone up, they could not go down. A lot of people lost their jobs in the Great Republican Recession, and could not sell their houses at any amount, let alone an amount that would cover the mortgage, even if they had put up 20%. It was a mess, and it remains a mess.

For a while Diogenes was associated with a company who told the world they had $10 billion from overseas investors, and that these investors wanted to buy the toxic assets of US Banks, at 26 cents on the dollar.

Seemed like a pretty straightforward assignment, just call some large number of banks, talk to the people responsible for unloading the things, and arrange a deal. Not one bank that wanted to do a deal. For a while people said this was because we let them know the price in advance. It really was no secret how they came to the price of 26%: When Merrill Lynch had to unload a ton of these assets in order for Bank of America to take them over, the assets sold in a hurry at that price.

It was not about price. It turns out that all of the banks preferred to let the assets get picked up by FDIC for 16%, instead of selling them privately for 26%. HSBC turned over the assets that my associates wanted to buy at 26 cents, and gave them them up to the government at a lower price, 16%.

Seemed pretty stupid to me. And some of the banks lied to me. The VP at IndyMac told Diogenes they were selling these assets (actual foreclosed houses) one by one at 90 cents on the dollar, and would not entertain any bulk sales of any kind. And that they were working the portfolio down at a rate that was acceptable to the regulators. Turned out not to be true. David Letterman should someday be as funny as the guy from IndyMac.

In order to actually make a deal with investors, someone at the bank would have to take responsibility for de-valuing assets, in writing. That is, the bank officer would have to make a decision to sell assets that were on the books for a billion dollars, and make the bank lose 740 million dollars, before the sale could take place at 260 million. That guy would immediately lose his job and he would never be able to work in the banking business again. Let it go to FDIC, nobody has to sign off on it. As we say here in Brooklyn, Poi-fict.

The whole banking fiasco was based on an interlocking network of stupid rules and irrational markets. It is no wonder that if failed in a spectacular way. It’s a good thing the Republicans have decided to end the Dodd-Frank bill, and get Big Government out of the way of the bankers who really know how to operate the money markets. The collapse of the world economy has been so much fun, that we really ought to give them another go at it (irony alert).

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Republicans Want to Repeal Resolution Authority

Mark Thoma points us to

Republicans Want to Repeal Resolution Authority

the House Republicans on the Financial Services Committee just voted to repeal “resolution authority.”

Let’s review the history. When the crisis hit, the government bailed out many financial firms — shadow banks as they are known. That’s not what it does when an ordinary bank fails. When ordinary banks fail, the government takes over the bank, puts the good assets in one pile, the bad assets in another, then repackages the good assets into a new bank that is sold back to the private sector as soon as possible.

This has many advantages, including the ability to replace managers of failed firms instead of rewarding them with a bailout. So why wasn’t this approach adopted during the financial crisis? The Treasury argues that it did not have the legal authority to take over large shadow banks — these banks fell outside of the existing regulatory umbrella (there is dispute on this point, some people claim the government regulators could have twisted existing regulation to allow this, but government regulators insist otherwise). Thus, government regulators believed there were only two (bad) choices. Let too big to fail banks fail and suffer the economic consequences, or to bail them out, including bailing out the owners and managers who had led the banks to disaster. If it had resolution authority — the ability to step in take over when banks fail — the rewards to management could have been avoided, and taxpayers could have been better protected in other ways, but limits on legal authority gave regulators only two bad options. Do nothing, or bail the banks out.

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Guest post: Social Security Hurt by Republican Jobs Obstructionism

Guest post by Kenneth Thomas 

Social Security Hurt by Republican Jobs Obstructionism

The Center for Economic and Policy Research (CEPR) published its commentary on Monday’s release of the Social Security Trustees Report, which found that the Social Security trust fund would be exhausted in 2033. CEPR rightly blames the recession for the deterioration of Social Security’s finances. As I argued last September with regard to falling health care coverage, the new results from the Trustees show the need for a jobs agenda.

In fact, in just four years, the estimated trust fund exhaustion date (intermediate assumption) has gotten eight years closer. It was 2041 in the 2008 report, 2037 in the 2009 report, 2037 in the 2010 report, and 2036 in the 2011 report. Jared Bernstein charts these trends going back to 1985:


Source: Trustees Reports. via Jared Bernstein.

The CEPR analysis highlights just how crucial jobs are to Social Security’s solvency:

As workers have found themselves without jobs, Social Security has received fewer contributions. The 2007 Trustees’ Report projected 169.0 million workers in 2011 earning $6.5 trillion in taxable earnings. Last year, there were only 157.7 million workers earning $5.5 trillion.

In other words, there was a $1 trillion shortfall of income in 2011 alone compared to the pre-recession baseline. If this doesn’t highlight the need for much greater action on the jobs front, nothing does.
  
Yet what is the Republican response to this situation? At the federal level, there has been universal opposition to anything that might create more jobs as long as Obama is President. At the state and local level, as Paul Krugman points out, 70% of the decline in public sector jobs has come in Texas and in the states where Republicans took control of government in 2010.

What we see from the Trustees Report is that as jobs and income decline, Social Security is directly harmed. And I’m starting to have the feeling that for the Republicans, this is a feature, not a bug. crossposted with Middle Class Political Economist

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Reform that "high" statutory corporate tax rate? Not necessary

by Linda Beale

Reform that “high” statutory corporate tax rate? Not necessary

I got an interesting item pushed to me from an online-MBA website blog where today’s item was on “10 Big Businesses That Barely Pay Taxes“. It looks at companies like GE, duPont, Verizon, ExxonMobil, FedEx, Boeing, Google and others that aggressively maximize the offshoring of profits and the onshoring of deductions (like the “domestic manufacturing” reduction in the tax rate, the research deduction, etc.) in order to tap out on taxes at zero or awfully close thereto.

The companies tend to dislike such coverage of their very low tax rates of only slightly more than 0% when they are quite loudly (and hypocritically) protesting how uncompetitive the 35% statutory rate makes them. The site notes that most of the companies have claimed that they pay a higher rate than the one noted here–usually by counting their financial statement deferred taxes as though they were already paid. Deferred taxes, however, are just an accounting way of noting the possibility of future taxes–they may never be paid (for example, if offshore profits are not repatriated, or if corporations are successful in lobbying for another very-low-tax repatriation holiday), and years of deferral can convert what appear to be substantial taxes into de minimis amounts, since that money is meanwhile invested and earning more money.

Here are some excerpts (not in the same order as in the blogpost itself):

1.Boeing may own and operate factories and research facilities all over the U.S., but the mega-corporation isn’t paying much back to the government for the privilege of doing business in this country. In fact, the company hasn’t paid anything at all for three years running. Over those three years, Boeing made $9 billion in profits but didn’t pay anything in federal income taxes, actually getting back more than $178 million in tax benefits. …
2. … A study found that in 2008 FedEx paid no federal taxes, which the company claims is an anomaly caused by depreciation deductions. …
3. … Verizon hasn’t paid a cent in taxes for the past three years. …[i]t actually makes money from the government in the form of tax subsidies and is the third largest collector of these benefits in the U.S., … . Like GE, Verizon has denied these tax evasion allegations, stating that they pay billions in taxes every year, but like GE, Verizon is counting deferred taxes in these calculations. …
4.GE has raked in more than $81 billion during the past decade, but little of that profit has been returned to the government in the form of taxes. While the corporate tax rate has held steady at 35%, GE has paid an average of just 2.3% of its income in taxes since 2002. And that’s just an average, some years the company didn’t pay taxes at all, getting off scot-free in 2002, 2008, 2009, and 2010 …

crossposted with ataxingmatter

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SAVING SOCIAL SECURITY SIMPLIFIED

by Dale Coberly

SAVING SOCIAL SECURITY SIMPLIFIED

The Trustees Report came out again this week.

And all the newspeople told us again that we are doomed. Doomed.
"Social Security is running out of money!"

Except it isn't.

And all the Professional Defenders of Social Security rushed out to
tell us, "We can save Social Security: just make the rich pay for it!"

Except they won't.

And they really shouldn't. And we shouldn't want them to. Most
workers understand that Their Social Security is Their money. They
paid for it. They need to know that IT'S NOT WELFARE.

But all the paid experts and politicians, and all the high end
newssources can only think in terms of welfare. So the Bad Cop says
we got to cut it. And the Good Cop says we got to make the rich pay
for it.

But actually all we really need to do is just pay for it ourselves...
as we always have.

It wont cost much. An additional 40 cents per week each year will
pay for the whole "shortfall."

You don't have to take my word for it. The Congressional Budget
Office says the same thing. A CBO Study: Social Security Policy
Options, July 2010
, Option 2 (page 17) says "Increase the Payroll
Tax Rate by 2 Percentage Points Over 20 years... this option would
raise the combined payroll tax rate gradually, by 0.1 percentage
point (0.05 percentage points each for employers and employees) every
year from 2012 to 2031... This option would extend the trust fund
exhaustion date to 2083."




Please note that while the tax would be increasing at one tenth of
one percent per year... combined... wages would be increasing over
one full percent per year. So in today's terms the tax for the
employee would increase by 40 cents per week (and another 40 cents
for the employer), while wages are going up eight dollars per week
each year.

CBO Option 3 would Increase the Payroll Tax Rate by 3 Percentage
Points Over 60 years. This would be a twenty cents per week increase
in the tax each year for the employee and the employer.

With both of these Options it is likely that a similar increase would
need to be enacted at the end of the twenty, or sixty, year period.
This is unlikely to be a problem after people have seen that a
gradual increase is not a "burden." In fact it is unlikely they will
even notice it. Nor will the increases continue forever. The
Trustees Projection is that the need for increases will flatten and
fall to essentially zero after life expectancies stabilize between
2050 and 2070 or so.

Remember it is not a tax going into a government black hole. It is
You saving your own money, protected by "pay as you go with wage
indexing," so that if all else fails you can retire when you need
to. You get your money back with interest in an annuity that will
last the rest of your life. No matter what.

Now here is the hard part for you.

You need to think about this and make sure you understand it. Then I
am going to ask you to sign a petition. Yes, I hate petitions too.
But it's the only way I can think of to spread the word to the people
that they can save their own Social Security for pennies per week.
And not have to turn it into welfare by "raising the cap," or make
it worthless as retirement insurance by cutting benefits, means
testing, or raising the retirement age.

The petition calls for enactment of CBO Option 2 or 3. It is not so
important exactly which of these is enacted, or some variation. What
is important is that people learn how cheap it would be for them to
save their own Social Security. They won't learn it from the media,
the politicians, or the experts.

Please visit http://signon.org/sign/fix-social-security-with?
source=s.em.cp&r_by=4120788 and sign the petition. Then, and I know
this is an imposition, ask your friends to read this and talk about
it, and sign the petition.

Thanks!

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A credible backstory?

by Mike Kimel
Today is a travel day for me. I’m flying to Toronto to give a lecture on ensemble methods, a statistical approach which involves combining estimates produced by other methods. Its something I first worked on in 2001, and come to think about it, perhaps it deserves a post. But not today.

Today’s post, written a few days ago, isn’t about statistics or economics. In fact, I have no idea what it is is about, but I do want your opinion. What follows is absolutely true with any caveats being due to my poor memory.

In the late 1990s, I was living in Little Rock, AR, where, on weekends, I used to enjoy mountain biking. Once, while biking with a friend through the woods in the middle of nowhere (if memory serves, we weren’t even on a trail but rather biking down a dried up riverbed with no signs of civilization for miles around), we stumbled on a coffin. Said coffin was cheaply made of metal and showed clear signs of having spent quality time underground. But there were a couple other more notable things about the coffin. The first is that someone had clearly taken a sledgehammer to the front of the coffin and broken it open. I’m not sure why – I would have assumed that the coffin could have simply been opened by lifting the front cover. Another odd thing is that the coffin, which had spent some time underground, was empty. The interior lining was somewhat rotted, providing more evidence that it had spent time underground.

We looked at the coffin for a few moments, and then, wordlessly, got back on our bikes and went back the way we came. We never rode in that area again. The other night, I was thinking about this long ago episode and realized that though I pride myself as an individual who has a lot of imagination, I can construct no credible backstory for what I saw that day. Can you?

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Cross-conflicting regulations, employer confusion

by Tom aka Rusty Rustbelt
Health care thoughts: Cross-conflicting regulations, employer confusion

Most of you will be familiar with the medication drowsiness warnings to the effect of “don’t operate machinery or heavy equipment, etc. etc.” This is from FDA regs. (www.FDA.gov.)

OSHA has extensive guidance about employee safety with manufacturing machinery, heavy equipment and driving and the impact of drowsiness. (www.OSHA.gov)

So it seemed sensible for employers to ask for voluntary disclosure by employees taking pain medications in these work environments, because OSHA puts the safety burden on the employers.

Not so fast! The EEOC (www.EEOC.gov) is litigating cases claiming the request for medication information is a violation of the Americans with Disabilities Act. For a plain English summary of a recent case see The EEOC.

So pretend you are the employer.  Which regulation do you see as primary? Anyone have a workable solution?

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Common Cause Claims ALEC Violated Tax Exempt Lobbying Restrictions

by Linda Beale

 Common Cause Claims ALEC Violated Tax Exempt Lobbying Restrictions

 The Common Cause organization filed a complaint with the IRS under 26 USC 7623, the tax whistleblower act,  alleging that the American Legislative Exchange Council violated the lobbying restrictions applicable to tax exempt organizations through underreporting and operating in furtherance of private corporate interests.   The complaint argues that “ALEC’s primary purpose is to provide a vehicle for its corporate members to lobby state legislators and to deduct the costs of such efforts as charitable contributions. ALEC drafts “model” legislation provided by its corporate and legislative members, and lobbies for the adoption of that legislation. These goals are fundamentally inconsistent with ALEC’s claimed tax-exempt status as a charitable organization.”

The following paragraphs are from the introduction to the complaint.

This matter concerns the massive underreporting of lobbying by the American Legislative Exchange Council (“ALEC”). While ostensibly a nonprofit organization under Section 501(c)(3) of the Internal Revenue Code, ALEC’s primary purpose is to provide a vehicle for its corporate members to lobby state legislators and to deduct the costs of such efforts as charitable contributions. ALEC drafts “model” legislation provided by its corporate and legislative members, and lobbies for the adoption of that legislation. These goals are fundamentally inconsistent with ALEC’s claimed tax-exempt status as a charitable organization under 26 U.S.C. §501(c)(3), because (i) “no substantial part” of a charity’s activity can be “attempting to influence legislation,” and (ii) ALEC’s activities do not qualify under any of the enumerated purposes of Section 501(c)(3).

This scheme causes harm to taxpayers in two distinct ways. First, ALEC’s activities constitute an abuse of its 501(c)(3) tax exemption, which is reserved for organizations “operated exclusively ” for a limited number of purposes, such as “religious, charitable, scientific … or educational purposes ….” 26 U.S.C. §501(c)(3). Second, ALEC’s corporate members improperly deduct from their taxable income the dues and other contributions made to ALEC; such expenditures are non-deductible lobbying expenses under Section 162(e). In fact, because ALEC solicits very few contributions from individuals, its false claims of tax-exempt status appear driven by the desire of ALEC corporate members to deduct lobbying expenses as charitable contributions.
ALEC’s primary, if not sole objective is to “influence legislation.” Its bylaws state that its purpose is to “formulate legislative action programs,” “disseminate model legislation and promote the introduction of companion bills in Congress and state legislatures,” and “[e]establish a clearinghouse for bills at the state level, and provide for a bill exchange program.” 1 As recently as April 11, 2012, ALEC boasted that “for years, ALEC has partnered with legislators to research and develop better, more effective … legislation. 2Notwithstanding these claims, however, ALEC has reported ”for years“ to the IRS that it has not spent a single penny on lobbying or attempting to influence legislation. These tax returns are patently false.  (Complaint available here, on BNA’s tax service)

The complaint goes on to specify how ALEC develops legislation and works to get that model language enacted.  The following is an excerpt from this portion.

ALEC boasts about how frequently its bills are introduced in state legislatures to show its influence over the legislative process, publishing “scorecards” to demonstrate the high numbers of ALEC bills enacted. [Exhibit 9] In its 1995 scorecard, then-ALEC Executive Director Samuel A. Brunelli explicitly stated that corporations join ALEC to drive a legislative agenda in a cost effective way: “’This was a landmark legislative year in ALEC’s history,’ said ALEC Executive Director Samuel A. Brunelli. ’With our success rate at more than 20 percent, I would say that ALEC is a good investment. Nowhere else can you get a return that high.’” [Exhibit 11] Similarly, in a brochure that ALEC distributed to recruit more corporations for its private sector membership, it claimed that “during each legislative cycle, ALEC legislators introduce more than 1,000 pieces of legislation based on these models, approximately 17 percent of which are enacted. ” [Exhibit 12] It is telling that ALEC expresses its success in corporate terms, as a good “return” on a corporation’s “investment” in tax-exempt lobbying.
Beyond quantifying its influence by measuring how often its lobbying efforts succeed, ALEC trumpets how its Task Forces and other programs provide corporations with direct access to state legislators. In a near textbook definition of lobbying, the recruitment brochure states “ALEC provides the private sector with an unparalleled opportunity to have its voice heard, and its perspective appreciated, by the legislative members.” !d. The brochure further explains that “[t]his partnership identifies issues and then responds with common-sense, result- oriented policies. The two groups work in unison to solve the challenges facing the nation, with results that will define the American political landscape in the 21st century.” Jd. In other words, ALEC provides a network to influence the legislative process and deliver “results” to its private 13 corporate membership – namely, legislation favorable to corporate members’ interests. These statements by ALEC belie any claim that it is engaged in “education” rather than lobbying . The ALEC Task Forces provide a venue for corporations to lobby legislators while deducting the expenses as charitable donations.

The complaint goes on to outline the way ALEC presses for legislation, including issue alerts and one-on-one contacts with key legislators, bill tracking documents, model press releases and talking points to assist legislators in getting its model legislation passed,  hearing testimony by staffers in support of the ALEC legislation, and even  luxury conferences three times annually to which legislators are encouraged to bring families for subsidized work/vacations.

Legislator members on ALEC Task Forces are also eligible for “ALEC scholarships,” which reimburse a legislator’s accommodation, transportation and other expenses to attend the ALEC national conferences. Scholarships are also available for legislators to attend other events, including “ALEC Academies,” which are described as a “two-day intensive program on a specific issue;’ attended by invited members of both the public and private sector. Contributions to the ALEC scholarship fund are made by corporations who are solicited directly by legislators at the individual state level. See Exhibit 18 (a breakdown of payments to the ALEC in Ohio scholarship fund). According to the tax filings of PhRMA, the pharmaceutical lobbying group and ALEC private sector member, it provided $356,075 to the ALEC scholarship fund in 2010. 13Many of these expenses are likely deducted from corporate taxable income. The ALEC conferences are nothing more than a forum for tax-subsidized lobbying. ALEC provides logistical support in the form of travel, accommodations, entertainment, and family services, in order to facilitate lobbying by ALEC’s corporate members targeting ALEC’s legislative members.

The complaint considers whether ALEC even qualifies as a 501(c)(3) organization.  Suggesting that the only possible qualifying purpose that might be claimed is educational, the complaint concludes that ALEC clearly fails to satisfy any concept of an educational non-profit.

[E]ven if a tortured interpretation of the regulations led to the conclusion that ALEC is not engaged in lobbying, ALEC would fail to satisfy the most basic requirement for 501(c)(3) status – operations that are exclusively for charitable purposes . ALEC’s operations are neither charitable nor educational, much less exclusively so. They are pecuniary and political, and devoted to fostering the enactment of bills that will financially benefit and further the ideological goals of ALEC’s corporate membership.

crossposted with ataxingmatter

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Guest post: Why Tax Cuts for the 1% Are Self-Defeating

Tim had written as a guest poster for Angry Bear as ‘reader T-bone’ a few years ago and is returning to writing, currently at Polymic.  This post was published about a month ago.

Guest post by Tim Martinez

Why Tax Cuts for the 1% Are Self-Defeating

Why Tax Cuts for the 1% Are Self-Defeating
Annual U.S. income share of the top 1%.

A new GOP budget released Tuesday brings renewed attention onto the issues of tax policy and the economy. Of course, there will be debate over what effects various policy options would have on the economy, something I have previously addressed in a previous article. But inevitably, there will also be arguments made by Republicans regarding the fairness of those policies as well.

The problem with many of the GOP arguments made in regard to fairness is that they lead to a self-defeating paradox in either the logic of the argument, or in the outcomes of their recommended policy solutions.
For example, one common argument made is on the grounds that it is unfair for the wealthiest to pay higher taxes since they are already paying the most federal income tax while many people pay none at all. But this argument is flawed in multiple ways.

First of all, the logic of this argument is paradoxical. As the wealthy get wealthier while others fall behind in comparison, the share of tax burden on the wealthy would continually increase. In other words, this logic would suggest that the closer the wealthiest come to earning 100% of total income, the more unfairly they are being treated since their share of income taxes edges closer to 100% as well. And by contrast, it would be considered more fair for the wealthy if their incomes fall while others’ incomes rise, since taxes paid would be more equal.

Second, the big irony here is that the policies that would seem to make it more fair for the wealthy in the short-term (lowering their tax rates at the expense of other policy options) are policies that would tend to further increase income disparity in the long-term. This is due to these policies’ lower effect on creating demand (lower economic multiplier), which means less need for labor (a weaker labor market).
Let me explain. The wages that average working people can expect depends on the overall demand for labor. If unemployment is very low, businesses must compete harder for labor. People will find more opportunities available, more competing offers, and find it easier to change jobs. This pressures business to offer more competitive wages, among other things.

In other words, policies that facilitate strong demand and thus strong employment lead to higher incomes for labor, which narrows income disparity. This real income growth due to strong employment is something we can see happening in China, for example.

In addition, this type of stronger income growth will itself fuel stronger demand. We typical refer to this as a strong middle class. The stronger demand it generates in the economy supplants the need for demand-creating policies, which means those polices can be slowly rolled back. This can even happen automatically to an extent, as a larger, wealthier middle class pays more taxes, and that increased revenue can be used even for a tax cut for the wealthiest.

Achieving an ideal conservative vision of the economy and of government tax policy by enacting conservative-favored policies is a self-defeating paradox. Ironically, the path to this ideal conservative outcome can only be achieved by first enacting liberal policies

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