Our Tax Future

Almost an actual proposal: Romney Specifies Deductions He'd Cut

Mitt Romney, speaking at a private fundraising event on Sunday, offered the first details of deductions he would eliminate or limit in order to offset the income tax cut he has proposed for all taxpayers.

Mr. Romney, the presumptive Republican nominee for president, said he would eliminate or limit for high-earners the mortgage interest deduction for second homes, and likely would do the same for the state income tax deduction and state property tax deduction.



He also said he would look to the Department of Education and the Department of Housing and Urban Development for budget cuts.

Mr. Romney discussed his plans while speaking to high-dollar donors at a private estate. During the backyard event, which could be heard by reporters outside on a public sidewalk, Mr. Romney offered policy specifics he has yet to unveil on the campaign trail.



Mr. Romney has pledged a 20% cut to income tax rates for taxpayers in all income brackets but has offered few details for how he would pay for the proposal. Mr. Romney also has vowed to bring federal spending under control, while offering few details on which programs he would cut.

The problem with all of these sorts of things is it is difficult to know what the impact will be at the level of the individual. Like most Americans I don't hold a mortgage on a second home, so there is no personal impact on my family there. However, I do itemize deductions including state income and property taxes. So I hear this proposal and I immediately think "Crap. I'll have to take the standard deduction."

But, what would the overall impact be?

It's hard to know exactly how the "20% cut to income tax rates for taxpayers in all income brackets" will be implemented, but right now my taxes came to 13% of taxable income. A 20% reduction in that rate would result in a 10.4% rate. However, using the standard deduction (sans the state income and property tax deductions) would raise my taxable income 3.5%.

The net result? Under Romney's plan my family would owe $1100 less in taxes.

I could live with that.

My Kingdom For A Tank Of Gas?

Roger Pielke Jr. has an eye opening graph on gas prices related to total personal expenditures.

Evidently, folks like me who didn't start driving (or paying for gas) until the mid 1980's were unaware we had it so good.

Live and learn.

Dr. Krugman's Perscription: Bury Head Deeper

Krugman on stuff:

Do the dismal economic numbers really reflect the turn to fiscal austerity? I keep hearing people say no, because austerity hasn’t actually happened yet in America. But they’re wrong.

The fact is that the fading out of the stimulus, and in particular of aid to state and local governments, is already and noticeably leading to substantial withdrawal of government demand.

This is, of course, lunacy. Yes, state and local governments buy services and supplies in the course of their duties and this does act as a source of demand in the economy more generally. However, by far the largest amount of spending in operating accounts is on salaries and benefits for public employees. The idea that such spending should be financed permanently by the use of Federal aid whenever state and local governments run out of money, which Krugman seems to be suggesting, is ludicrous. For starters, people move. Demographic changes and the resulting changes in things like the tax base (which could increase or shrink) or the need for services (which can also increase or decrease) mean that nothing is constant. Just because a government run out of funding for existing services doesn't mean that level of service should be maintained. Krugman believes it does because, for him, government has one big job, i.e. to get bigger.

In the real world, states and localities need to constantly evaluate the kind and level of services they provide, and what staff they need to provide those services. Additionally, those services will not be the same from locality to locality. The preferences of voters in the various locales will also play a large role in determining what is being paid for and what isn't. This is especially true when the funding for these services comes directly from the tax payers in the community. Switching the funding of these services away from local tax payers and towards federal aid has the effect of hiding the true cost of these services. This is great if you believe in the God given right of government to grow larger, but it is nonsense if you believe in democratic accountability and fiscal sanity.

The truth is if Middletown, America wants to have a library system, well, then Middletown ought to be prepared to pay for it without counting on everyone else to pick up the tab if they run a little short. No, if MIddletown runs short they need to ether A) find a local revenue stream to pay for he desired level of service, or B) do less.

What happened in localities across the country was they experienced a boom in revenues when real estate prices soared during the heights of the housing bubble. Their coffers swelled and they did what governments at all levels do when the coffers swell, they spent it. However, they often spent it in ways that created a higher baseline of spending, as would happen when you increase the numbers of employees you are paying. Unfortunately, increasing the number of public employees isn't the same thing as increasing the number of employees in a factory. Factories hire more employees because they believe there is more money to be made. This will come as a shock to many Democrats but, yes, factories can increase their payroll and at the same time increase profits. Public employees, by and large, never create profits. They are there to provide services (some vital, some not), but the money flows one way only.

Now, what happens when property taxes stop going up and in fact begin to decrease? The Krugmans of the world want to say "Nothing should happen, keep right on spending! Money grows on federal trees!"

However, it doesn't. The truth is none of the money spent on maintaining state and local spending at housing bubble rates stimulated anything. Instead all it did was allow politicians, local officials and voters/taxpayers to ignore reality.

A Water Carrier Too Far

Here is some “wisdom” for you courtesy of Jonathan Chait: What Caused The Deficit? A Reply To Megan McArdle

One of the most effective Republican themes of the last two years has been blaming President Obama for the explosive growth in the budget deficit since 2009. The accusation that "Obama's spending binge" has blown up the deficit has discredited any further fiscal stimulus, and helped encourage Republicans to use the debt ceiling as a hostage. The White House fought back with a chart showing that its policy changes contributed only a small fraction to the worsening deficit picture:

The chart the White House provides shows that, indeed, when you add up the seven years worth of deficits from the Bush years it is a larger number than the deficits Obama has racked up in three years.

OK, lets look at the deficits from 2001 to 2011.

 

And here are the raw numbers:

Federal Deficit
Fiscal Years 2001 to 2011

Year	GDP-US $ billion	Federal Deficit -fed $ billion
2001	10286.2	-127.89	a
2002	10642.3	158.01	a
2003	11142.1	377.81	a
2004	11867.8	412.90	a
2005	12638.4	318.59	a
2006	13398.9	248.57	a
2007	14077.6	160.96	a
2008	14369.1	458.55	a
2009	14258.2	1412.69	a
2010	14660.4	1293.49	a
2011	15079.6	1645.12	b
Legend: a - actual reported b - budgeted estimate in US fy12 budget

The average yearly deficit for this entire time period is $578bn. 

The average yearly deficit for the Bush years (2001-2008) is $251bn.

The average yearly budget deficit for the Obama years (2009-2011) is $1450bn.

OK, lets try and screw over the Bush numbers. Let’s throw out 2001’s budget surplus saying that was Clinton’s doing and, while we are at it, let’s take 2009 out of the Obama column and give it to Bush (since everything bad on God’s green earth is Bush’s fault anyway.) What do the numbers look like then?

The average yearly deficits for the Bush years (2002-2009) is $433bn.

The average yearly deficits for the Obama years (2010-2011) is $1469bn.

OK, but maybe that doesn’t tell the whole story. Maybe it was all those Bush tax cuts which acted like a poison pill which is only being felt now!

Alright, the Bush tax cuts were implemented between 2001 and 2003, and the Obama administration claims it cost the country $3000bn added to the deficit, or a yearly average of $375bn between 2004-2011.

Let’s see if such a story seems likely (data here.)

From 1996-2000 (the second Clinton term, when all was right with the world and everyone ate rainbows for dinner!) the federal government’s take via income taxes increased at the average yearly rate of  $73bn. Between 2001 and 2003 (when the Bush tax cuts were still in process) the average yearly tax decreased by an average of $73bn, as the recession took its toll. Between 2004 and 2008 after all of the tax cuts had been fully implemented, the average yearly take of the federal government increased by $90bn a year.

Remember, the Obama administration is claiming without the Bush tax cuts the yearly increase for the feds would have averaged not $90bn but instead $375bn. I’m sorry, but on what planet does that seem plausible?

Let’s do an experiment here. Let us pretend there are no such things as recessions, and let us further stipulate the increase in revenues of the Clinton years are a constant of economic reality. So, we will compare this fictional “Clinton number” with the real Bush numbers and see how close we can get to the $3000bn number uncritically accepted by Chait.

Before Bush tax cuts:

2001: C# - $1284bn  B# - $1145bn (+139)

2002: C# - $1357bn B# - $1006bn (+351)

2003: C# - $1430bn B# - $925bn (+506)

After Bush tax cuts:

2004: C# - $1503bn B# - $998bn (+505)

2005: C# - $1576bn B# - $1205bn (+371)

2006: C# - $1649bn B# - $1397bn (+252)

2007: C# - $1722bn B# -  $1533bn (+189)

2008: C# - $1795bn B# -  $1450bn (+345)

Do, in this completely unrealistic scenario where recessions do not exist and revenue growth is as constant a force as gravity, Bush comes up only $2658bn short all together.  The Obama administration and, evidently, the water carrying Jonathan Chait want you to believe the “realistic” number should be $3000bn.

That’s nuts.

Look, the recession has been bad and the recovery not so hot. Obama has every right to say, “Hey, we are really working under some economic constraints here.”  He has the right to say it because it’s true. However, the budgets he has submitted are not examples of constraints placed upon him by George Bush, they are his policy choices. To claim otherwise is simply dishonest.

(Post written using Windows Live Writer. I’m curious to see how this works!)

David Frum Ain't No Martin Luther

I agree with much of this piece by David Frum, but when he falls off the rails he really falls off the rails:

Give me a hammer and a church-house door, and I'd post these theses for modern Republicans...

5) We can collect more revenue without raising tax rates.

Republicans stand for low taxes to encourage people to work, save and invest. But how would it discourage work if we reduced the mortgage-interest deduction again?

Even if I agreed it wouldn't discourage work, what about the "save" and "invest" portions of the statement. Why did they all of a sudden disappear from the equation?

Did it hurt the economy when we reduced the maximum eligible loan to $1 million back in 1986?

I don't know. Why not link to a study confirming that it didn't. For all we know maybe it did have a negative impact. I hate it when people make rhetorical questions out of ones that are subject to empirical answers...like From does again in the very next sentence.

Do Canadians and Brits -- who lack the deduction -- work less hard than Americans?

Why, as a matter of fact they do. According to the Organisation of Economic Co-operation and Development Americans work 8 more work days than Canadians and 16 more days than Brits. Additionally, Americans rank 4th in productivity while the UK and Canada rank 11th and 14th respectively. Any other empirical questions you want to ask? (Please note: I am not saying this difference between American and other workers is due to the mortgage-interest deduction. I'm merely pointing out that the difference exists where Frum claims it doesn't.)

Wouldn't higher taxes on energy encourage conservation? Who decided to allow inflation to corrode federal alcohol taxes by 80% over the past 50 years?

Wait a second, how are raising taxes on energy and alcohol an example of raising revenue without raising taxes?

But even then I'm calling bullshit on the numbers Frum is using when it comes to the alcohol tax. The rate 50 years ago was first established in 1951 at $10.50 per gallon. This rate was increased from a $9 per gallon rate established during World War II. (The federal tax on distilled spirits went from $2 per gallon in 1938 to $9 per gallon in 1944.) In 2010 dollars the World War II rate would be the equivalent of $110 per gallon (or about $22 for each 750ml bottle in Federal tax alone.) The 1951 rate would work out to $87 per gallon (or about $17.40 per 750ml bottle.) Is Frum advocating we should, as a matter of course, be taxed routinely at nearly the same level as during World War II? Nonsense.

Now, if someone wanted to adjust the tax to be in line with the last time it was raised (in 1991), which would mean taking it from the present $13.50 per gallon to $21 (i.e. from $2.70 to $4.20 per 750ml bottle), I could see a rationale. This is particularly so as such a number would be in line with what we have historically taxed alcohol at when we didn't have a world war ongoing. Even during the American Civil War when the spirits tax was raised 1000% between 1862 and 1865, the resulting tax would only amount to $28 per gallon in today's dollars. It says something about the change in this country that after the Civil War ended the emergency tax rate was dropped and alcohol taxes dropped from $2 per gallon to 50 cents (about $8.09 in 2010 dollars.) After World War II the "crisis" rate was kept.

So, while I agree with Frum on many particulars, this cavalier attitude about other people's money is really grating. It is one of the main reasons so many people are distrustful of "mainstream" Republicans these days as being no different than most Democrats when it comes to big government.

A Nobel Prize Is Never Enough

Whinging is reaching new heights: When a Nobel Prize Isn’t Enough

LAST October, I won the Nobel Prize in economics for my work on unemployment and the labor market. But I am unqualified to serve on the board of the Federal Reserve — at least according to the Republican senators who have blocked my nomination. How can this be?

That is stymied Federal Reserve nominee Peter Diamond talking, and all I can say is...Wow. How many spectacularly wrong-headed things could he fit into one paragraph?

For starters, winning a Nobel prize is irrelevant in deciding the fitness of someone for public service. Period. Sure, it is a nice award to win and it is sure swell to be able to drop that into your bio - Diamond mentions it four different times in this one op-ed - but should winning this award be considered enough to make the confirmation process itself redundant? The suggestion is ludicrous. Diamond obviously does not think the notion is ludicrous, which in itself marks him as someone who may not be the best fit for public service.

Generally speaking, I believe Presidents should be largely deferred to when it comes to out-and-out political appointees. Judges and Fed. Reserves members are not in that category. The Board members do not serve for life, but they have 14 year terms, which argues the need for some sort of consensus on a nominee. That consensus may not be supplied merely because a nominee has a prestigious looking CV.

In fact, Diamond seems to be a fairly partisan individual:

Sen. Richard Shelby, the top Republican on the Banking Committee, called the Nobel laureate “an old-fashioned, big government Keynesian” at his nomination hearing on Tuesday. His objection: The MIT professor doesn’t have enough experience in making monetary policy.

Still, Shelby allowed that Diamond, whose nomination was re-sent by Obama to the Senate on Jan. 5, is a “very accomplished academic and economist.”

“Does Dr. Diamond have any experience in conducting monetary policy? No,” Shelby said. “Does Dr. Diamond have any experience in bank management or supervision? No. ... Does Dr. Diamond have any experience in crisis management? No.”

The Alabama senator also reminded the banking panel that Diamond had sided with some of Obama’s biggest financial decisions by supporting the stimulus package, arguing for higher taxes to fund Social Security and bailing out banks.

“Our economy is already suffering from excessive government debt and misguided regulation,” Shelby said. “Our financial regulators should be trying to take steps to strengthen our markets, rather than replace them with new layers of government.”

So, on all of the recently contentious political/economic questions Diamond has shown himself to be rather inflexible and one sided. Why should a Republican think you are a good choice? ANY nominee must try and supply that reason. Given the precarious state of the economy in the wake of the decisions Dr. Diamond has supported, one might have thought a little humility could have gone a long way.

Then again I may know more about humility than Diamond does. I haven't won a Nobel Prize.

Stupid Media Alert

Stupidity must be a disease because it seems to be pretty virulent: Census: Near-record level of US counties dying

Nestled within America's once-thriving coal country, 87-year-old Ed Shepard laments a prosperous era gone by, when shoppers lined the streets and government lent a helping hand. Now, here as in one-fourth of all U.S. counties, West Virginia's graying residents are slowly dying off.

Hit by an aging population and a poor economy, a near-record number of U.S. counties are experiencing more deaths than births in their communities, a phenomenon demographers call "natural decrease."

Years in the making, the problem is spreading amid a prolonged job slump and a push by Republicans in Congress to downsize government and federal spending.[emphasis added]

I'm sorry, but what does the Republican proposals have to do with this long standing demographic phenomenon? How are proposals causing anything to "spread"? The answers are, of course, absolutely nothing and in no way whatever.

Let's hear what the people who live in one of these areas has to say:

"There's no reason for you to come to Welch," says Shepard, wearing a Union 76 cap at a makeshift auto shop he still runs after six decades. "This is nothing but a damn ghost town in a welfare county."

That's right, because it is Republicans who are to blame for welfare dependency.

People Are Just Details I Guess

You know...I understand to some degree the glee shown by commentators like Michelle Malkin (see here and here) while engaging in ritual Republican union bashing concerning the goings on here in Wisconsin. I share the mistrust of the SEIU, and I am aware that it is the intransigence of the teachers unions over the years which has contributed to the Republican way of thinking that "you simply cannot reason with these people." I get it.

However, that is not all that is going on here in Wisconsin. A lot of the people protesting down in Madison are non-unionized university employees; people who have not had a raise of any kind in 6+ years and who have had a 3% reduction in pay the last two years; and who are being threatened with a permanent 13% to 20% reduction in take home pay by Walker now. These are not "fat cats living off the public teet." These are people making less than $25,000 a year. Given that Walker wants to make real raises illegal in the future (no raise could be greater than the rise in the CPI, and you won't get even the CPI raise every year), these workers are doomed to fall ever further behind.

I personally won't be affected by Walker's proposals since I'm an adjunct and, being serf-like already, I don't get any benefits. It just seems to me Walker wants to institute a solution upon the backs of people who were not the cause of the budget problem in the first place. Sure, go after backroom union deals and shady "retirement" packages, and the like. But people making $24,000 a year? Grad students who are living on Kraft Mac & Cheese and ramen noodles?

There is such a thing as too much collateral damage. Walker's nuclear response is a pretty damn clear example of that fact.

We Need A New "Normal"

Let the trumpets blow! The Obama budget has been loosed:

Long on tough choices, short on final answers, President Barack Obama’s new 2012 budget goes to Congress on Monday in what many hope is only an opening bid before he and Republicans come to the table on a bipartisan deficit reduction plan.

For the current year, the White House projects a more-than-$1.6-trillion deficit — even higher than the Congressional Budget Office forecast. But outlays would actually drop in 2012 and stabilize in the $3.7 trillion range, as deficits fall to $1.1 trillion in 2012 and $768 billion in 2013.

I guess where I come from the definition of "tough choices" is a little different. Granted, the spending increases in this budget are modest (2.8%) when compared to last year's budget (16.1%), but Federal spending increases are still rising faster than the rate of inflation.

Whatever you want to call this new budget it is not our entry point into a new era of austerity. When it comes to spending we are still the drunken sailor on leave. I don't think anyone should be applauded because this year we've only maintained our buzz.

Maybe at some point we ought to think about sobering up?

Forgetting 1 + 1 = 2

More brilliance in thinking! Foreclosures by Race and Ethnicity: The Demographics of a Crisis

Our new research shows that the foreclosure crisis is not over, and runaway foreclosures continue to drain hundreds of billions of dollars in wealth from families, hitting communities of color the hardest.

• An estimated 2.5 million foreclosures were completed from 2007 – 2009, and an estimated 5.7 additional ones are imminent.
• An estimated 17% of Latino homeowners and 11% of African-American homeowners have already lost their home to foreclosure or are now at imminent risk.
• The great majority of homes lost were owner occupied, as are those at imminent risk of being lost.
  

And this comes as a surprise how exactly? One of the stated goals of loosening the criteria for getting home loans (including the riskiest sub-prime mortgages) was to increase home ownership among minority groups. Those loans were always the riskiest, so it should come as no surprise that they would be hard hit by foreclosures when the economy hits a prolonged slump.

There is nothing profound in my observation; its simple common sense. Seemingly, it is a sense beyond many these days.

Where Is My Confidence?

Heh. U.S. must live within its means: Geithner

The United States must live within its means once its economy recovers if it is to preserve global confidence in the U.S. dollar's status, Treasury Secretary Timothy Geithner said on Friday.

How come when I read this all I hear in my head is a gambler telling his loved ones...

I'll quit, just as soon as I make one last big score.

I must be cynical or something.

Does This Really Need Further Comment?

Why am I not comforted by Obama's claim he is going to cut this deficit by half? Maybe because that would still be over twice as large as any deficit run since 1980.

Oh, yeah.

I'll See Your "3 Dangerous Myths" And Raise You One Dumb Idea

I saw this "advice" to small businesses courtesy of US News:

Sales forecasting: It's hard enough to get it right without all the ways we get it wrong. It was on my mind over the long holiday weekend, and in this case, it wasn't a particularly cheery back-of-the-mind thought. My company's recent sales reflect the economic downturn.

Not cheery, perhaps, but now more than ever, managing your sales forecast is really important and very much misunderstood. Most people fear forecasting. They think some expert should do it. Visions of econometric models and weighted moving averages dance, devilishly, in their heads.

So why do people hate forecasting? It's mostly because of myths and misunderstandings. Such as, among others, these three:

Myth 1: It's About Accurate Forecasting

Not really. We're all just human, so we don't predict the future all that well....

Myth 2: It's for Experts

Again, not really. In the real world, forecasting is a matter of good educated guessing in rows and columns on a spreadsheet. Real people, the ones who run the business, think about what they can realistically expect....

Myth 3: You Can Manage Without it

Managing a company without sales forecasting—the forecast, the actual results, and the management that follows—is about as smart as driving a car without a steering wheel, or maybe I should say with your windshield covered in black paint.

This prompted a response by yours truly:

Speaking as someone who ran a small business for a number of years, a lot of this strikes me as nonsense. I mean, I'm sure this is the way folks who teach business in universities want the world to work, but it is as far from the real world as I can imagine.

1. You admit up front that the "forecasts" have little to do with what actually happens. This is not a "so what" moment. Producing these "forecasts" take time and energy away from other things one could be doing. In any small business there are never enough hours in the day to do what needs to be done. Even the most cursory of a cost/benefit analysis would tell you to dump the attempts at "forecasting" as being, at best, non-productive, and, at worst, counter-productive.

2. I agree with the previous commentator; flexibility is the key. Forecasts can have the unintended effect of narrowing our options based upon what we believed would happen, as opposed to what actually happens. Yes, the author says you have to keep evaluating your situation, but how does a "forecast" help you do that? One could just as easily (or more easily) rely upon sales history (for example) to give one a comparison with present numbers.

3. It is a good rule of thumb to always be wary of what my father used to call "Onageristic Estimates." (An onager is the name of a wild ass....so an Onageristic Estimate is a "wild ass guess.") Such guesses were only employed when other methods/answers were, A) unavailable, or B) too costly (in one way or another.) You believed in an Onageristic Estimate at your own peril. The thought of an inventory manager basing her buying upon such a number should send shivers of horror through the mind of any small business owner.

That just about covers it.

I Don't Trust Many Politicians...

...but I trust Senator James Inhofe.

Dear Colleague,

I write to inform you of the actions I will be taking during the lame duck session of Congress regarding the funding status of the Troubled Asset Relief Program (TARP). Given the recent news about Secretary Paulson's execution of the TARP program, I firmly believe action is required by Congress. I plan to push for legislation that will require Secretary Paulson's plan for the remaining $350 billion in authorized TARP funds to be ratified by an affirmative vote in the U.S. Congress.

In my statement opposing the Paulson Plan last month, I laid out two primary reasons why I voted ‘no.' The first is that I wasn't convinced that asset-purchase program was the right way to do this, and the second is that it would lead to increased lobbying for handouts and bailouts by any industry facing financial trouble.

I stated at the time that my vote was against the Paulson plan - not against taking extraordinary action to provide necessary confidence to financial markets. I stated that "The Paulson plan would have Washington take $700 billion worth of toxic Wall Street assets from financial firms' balance sheets and put them on the balance sheet of the federal government.... I'm not confident in its success."

The critics were right. On October 14th, in a significant shift, Treasury outlined a plan to directly purchase equity stakes in of major financial institutions. The Wall Street Journal noted that "critics...say Treasury should have formulated a comprehensive plan earlier in the crisis." This past week, Secretary Paulson announced that he has completed a remarkable about face, as summarized by November 13th Investor's Business Daily front page headline, which read, "In Major Reversal, Treasury Won't Buy Bad Mortgage Debt." This is a complete reversal. Why did Paulson reverse course? Thursday's Los Angeles Times provides the answer. "Treasury Secretary Henry M. Paulson's decision to abandon plans to buy troubled bank assets shows that he has come to two conclusions about what was once the chief focus of the government's $700-billion bailout: The first is that it wouldn't work."

I know many of you have serious concerns about how Secretary Paulson has executed the financial rescue program and I share them with you. Congress abdicated its Constitutional responsibility by signing a truly blank check over to the Treasury Secretary. However, the lame duck session of Congress offers us a tremendous opportunity to change course. We should take it.

During the lame duck session, I will be taking the following actions. First and foremost, if Secretary Paulson submits his plan to Congress in order to access the remaining $350 billion while we are in session, a doubtful prospect, I plan to immediately introduce the disapproval resolution pursuant to Section 115 of the EESA and push for its enactment. I will also introduce and actively pursue enactment of legislation to do two things: First, it will amend Section 115 of the Emergency Economic Stabilization Act of 2008 (EESA) to require an affirmative vote on the part of Congress to approve Treasury's plan for the remaining $350 billion, instead of the current statutory process which gives Secretary Paulson far too much latitude. Second, it will require a freeze on any remaining funds of the first $350 billion. It is imperative that we not allow that amount of money to be added to a deficit approaching $1 trillion this year without any input from the legislative branch.

Secretary Paulson stated in a CNBC interview at 2:00pm on Friday, November 14th that "the financial markets have been stabilized." If that is the case, it is Congress's duty to have a say in what happens with the remaining authorized amount of $350 billion. It is clear that it was a mistake to sign a blank check to one man for such a tremendous amount of money. Though there are still significant challenges in financial markets, it appears that the threat of a catastrophic financial crisis, which was the justification for the grant of such sweeping authority, has subsided. Perhaps the additional $350 billion should not be added to the deficit. Congress should have a debate.

I Suspected As Much

I've been telling everyone I know here (and somewhere in the wilds of a Donklephant comment thread) that I got the feeling all the promises of cheap money from the Feds were what was "freezing" the credit market more than anything else. It looks like I'm not alone:

The Fed’s massive and numerous liquidity facilities are making things worse. The problem is more than banks unwilling to lend to each other, they are also unwilling to borrow from each other. Banks can get all the funding they need (and then some) from their central bank so they do not need to seek a loan from another bank. I believe it has gotten so bad that they don’t even bother to make a decent market for inter-bank loans anymore. No reason to, they don’t need them anymore as central banks have replaced them.

The head slapping "Well, no duh!" gets inserted about right here.

The Sub-Prime Mortgage Mess And Obama

There is one inescapable fact about the sub-prime mortgage aspect of our current economic difficulties and that is the party of Barack Obama have been a big part of the problem and have not been, and are still not, interested in being part of a solution. Maybe, just maybe, McCain is gonna fight on this point:

Our current economic crisis is a good case in point. What was his actual record in the years before the great economic crisis of our lifetimes?

This crisis started in our housing market in the form of subprime loans that were pushed on people who could not afford them. Bad mortgages were being backed by Fannie Mae and Freddie Mac, and it was only a matter of time before a contagion of unsustainable debt began to spread. This corruption was encouraged by Democrats in Congress, and abetted by Senator Obama.

Senator Obama has accused me of opposing regulation to avert this crisis. I guess he believes if a lie is big enough and repeated often enough it will be believed. But the truth is I was the one who called at the time for tighter restrictions on Fannie Mae and Freddie Mac that could have helped prevent this crisis from happening in the first place.

Senator Obama was silent on the regulation of Fannie Mae and Freddie Mac, and his Democratic allies in Congress opposed every effort to rein them in. As recently as September of last year he said that subprime loans had been, quote, “a good idea.” Well, Senator Obama, that “good idea” has now plunged this country into the worst financial crisis since the Great Depression.

To hear him talk now, you’d think he’d always opposed the dangerous practices at these institutions. But there is absolutely nothing in his record to suggest he did. He was surely familiar with the people who were creating this problem. The executives of Fannie Mae and Freddie Mac have advised him, and he has taken their money for his campaign. He has received more money from Fannie Mae and Freddie Mac than any other senator in history, with the exception of the chairman of the committee overseeing them.

Did he ever talk to the executives at Fannie and Freddie about these reckless loans? Did he ever discuss with them the stronger oversight I proposed? If Senator Obama is such a champion of financial regulation, why didn’t he support these regulations that could have prevented this crisis in the first place? He won’t tell you, but you deserve an answer.

Amen.

QandO points out this precis on our present economic disorder which could be called Bad Loans For Dummies:

America has a long and undistinguished history of populist politicians stacking the cards against lenders and in favor of risky homeownership. Proving that good intentions are no guarantee of good policy, President Jimmy Carter's 1977 Community Reinvestment Act, which required banks to make loans to low-income people, was just another legislative leg-up for high-risk borrowers. If socially laudable but economically reckless laws cause entirely predictable problems for lenders, don't be surprised if taxpayers have to bail them out.

The final proof that American social policies have made mortgage lending an unviable industry rests with Fannie Mae and Freddie Mac. If sensible business people don't get into the mortgage industry because it is fundamentally a bad business, the American way has been to send in a couple of quasi-government agencies to fill the gap.

Fannie and Freddie dominated the mortgage industry because ultimately government was prepared to fund activities that prudent lenders would not. When their implicit government guarantee became explicit, America's system of government-directed lending on socially desirable, but commercially imprudent, lending stood exposed.

If you don't know common sense when you read it then I'm not sure I can help you.

Your Confidence Boost For The Day

Lots of run of the mill stuff until you get to page 68:

9 SEC. 122. INCREASE IN STATUTORY LIMIT ON THE PUBLIC
10 DEBT.
11 Subsection (b) of section 3101 of title 31, United
12 States Code, is amended by striking out the dollar limita
13 tion contained in such subsection and inserting
14 ‘‘$11,315,000,000,000’’.

*gulp*

A Line In The Sand Or A Line In The Air

Ah, Congress puts it foot down when it comes to setting strict limits on how much taxpayer money can be doled out at any one time (pp. 40-41):

16 (1) Effective upon the date of enactment of this
17 Act, such authority shall be limited to
18 $250,000,000,000 outstanding at any one time.

Booyah! Take that those that would call this deal a "blank cheque"! You are gonna have to eat your words, right? Well...

19 (2) If at any time, the President submits to the
20 Congress a written certification that the Secretary
21 needs to exercise the authority under this paragraph,
22 effective upon such submission, such authority shall
23 be limited to $350,000,000,000 outstanding at any
24 one time.

Oh, I see. But, hey, this is just a safety net sorta thing. This the real strict line!

1 (3) If, at any time after the certification in
2 paragraph (2) has been made, the President tran
3 mits to the Congress a written report detailing the
4 plan of the Secretary to exercise the authority under
5 this paragraph, unless there is enacted, within 15
6 calendar days of such transmission, a joint resolu
7 tion described in subsection (c), effective upon the
8 expiration of such 15-day period, such authority
9 shall be limited to $700,000,000,000 outstanding at
10 any one time.

Mommy!

UPDATE:

It turns out that the mechanism for keeping the executive branch from doling out up to $700b at any one time will require a joint resolution from Congress.

Which the President can veto.

Oh, and I'm sure any override attempt will be pursued in good faith.

About Those "Golden Parachutes"

Think that Congress is gonna get tough on all those Golden Parachutes? Think again (pp. 32-33):

19 (c) AUCTION PURCHASES.—Where the Secretary de
20 termines that the purposes of this Act are best met
21 through auction purchases of troubled assets, and only
22 where such purchases per financial institution in the ag
23 gregate exceed $300,000,000 (including direct purchases),
24 the Secretary shall prohibit, for such financial institution,
25 any new employment contract with a senior executive offi
1 cer that provides a golden parachute in the event of an
2 involuntary termination, bankruptcy filing, insolvency, or
3 receivership.

So, as long as the bailout for your company is only immense (say $250m) as opposed to colossal ($300m+) you can still enjoy your golden parachute.

Boy, thats really stickin' it to the man!

Yes, I'm Reading The Damn Thing

Call me a glutton for punishment, but I'm actually going through the 451 page Leviathan of a bailout bill line by line. I'll post things as I come across them if they are interesting. I'm up to page 32 right now.

I thought this was interesting:

18 SEC. 111. EXECUTIVE COMPENSATION AND CORPORATE
19 GOVERNANCE.
20 (a) APPLICABILITY.—Any financial institution that
21 sells troubled assets to the Secretary under this Act shall
22 be subject to the executive compensation requirements of
23 subsections (b) and (c) and the provisions under the Inter
24 nal Revenue Code of 1986, as provided under the amend
25 ment by section 302, as applicable.

So, far all the screaming about executive compensation, as if that was somehow the cause of the problem, Congress is only proposing limiting the firms that suckle from the public teat.

That's fine, but it could hardly be less important.

So when will they rock my world?