Saturday, April 19, 2008

WSJ: The Loophole Factory

The following appeared on page A18 in the Tuesday April 15, 2008 issue of the Wall Street Journal.

“People say all the time: ‘We can’t pick winners and losers.’ Well then fine. Take every single dollar of subsidy out of the federal tax code. Get rid of it all…Let’s have a real level playing field where nobody gets a penny in subsidy.” – Hillary Clinton, quoted in USA Today, April 5, 2008

Now, there’s a capital idea – and just in time for April 15. The simplest, fairest and most economically efficient tax code would end all special interest tax advantages and flatten tax rates. Except Mrs. Clinton was ridiculing this idea. She went on to say, that if subsidies vanish from the tax code, we’d “hear the squeals of protest from Wall Street to Houston to Silicon Valley.”

Her philosophy certainly fits with that of the current Congress, which is becoming a tax loophole production factory for the powerful. Exhibit A is the “Foreclosure Prevention Act,” which passed the Senate last week and contains $25 billion in tax subsidies for home builders and industry interests hurt by the housing crunch. Builders will be able to offset current losses against taxes paid in the past three years, which will mean billions of dollars of tax rebate checks from Uncle Sam.

This giveaway came only a few weeks after the National Association of Home Builders threatened to suspend their PAC contributions to Congress “until further notice” – meaning until they saw more return on their political investments. Congratulations. That gambit paid off big time. Other winners include the large Wall Street banks that have lost money in the subprime mortgage meltdown, including Citigroup, Merrill Lynch, and Morgan Stanley, which also qualify for rebates to offset current losses.

Republican Johnny Isakson of Georgia won Senate passage of a $7,000 tax credit for those who buy foreclosed properties. This won’t prevent foreclosures or make these properties more affordable. Instead it will only prop up the sales price of the inventory of abandoned homes that the banks now own. Meanwhile, the House bill contains a $7,500 tax credit for first-time home buyers. The powerful Realtors’ lobby and mortgage banks that own foreclosed properties blazed the money trail across Capitol Hill to get that one passed.

Oh, and while they were at it, the Senators voted 88-8 to add $6 billion in tax deductions for renewable energy producers. (If you wonder what this has to do with the mortgage “crisis,” you just arrived off the turnip truck.) This industry is already teed up to get nearly $10 billion in tax breaks in the energy bill, including subsidies for wind and solar power producers, hybrid vehicles and biodiesel. Much of this social engineering comes from the same people on Capitol Hill who insist that taxes don’t change industry or personal behavior.

With this loophole factory open for business on Capitol Hill again, business lobbies are spending more money than ever to curry Congressional favor. The real-estate industry may be in dire financial straits, but housing industry PACs have already contributed $56 million to political campaigns this election cycle, according to the Center for Responsive Politics. reported last week that 40 new business lobbying firms have registered since January to represent the likes of concrete makers, home builders, Freddie Mac and the Realtors. Wall Street investment banks are also pumping up the volume of campaign contributions as they seek financial relief from the subprime mess.

Congress is creating all of these new loopholes even as overall tax revenues are slowing and this year’s budget deficit could reach $450 billion to $500 billion. This will play nicely into the hands of Democrats who contend that the lower tax rates of 2001 and 2003 must expire to pay the government’s bills. So we could soon have the worst of all worlds: a leaky tax code full of exceptions for powerful interests, but with ever higher rates to make up for the loopholes, plus any extra revenue from the tax hike. The losers are taxpayers who aren’t powerful or rich enough to afford a tax lobbyist.

At least this exercise is making clear what Democrats really mean by tax “fairness.” It means raising tax rates so they can then sell tax breaks to the highest corporate bidder. We have certainly come a long way from 1986, when a Democratic Congress joined with Ronald Reagan to strip the tax code of most tax deductions and lower tax rates to a high of 28%. That reform spirit is dead on Capitol Hill.

Senators Clinton and Barack Obama are racing across the country promising Americans that they will clean up a process that “favors Wall Street over Main Street.” Fat chance. Their party and most Republicans just voted for a housing bill that is the biggest victory for corporate special interests in years – and there’s much more to follow. Happy Tax Day.

Pages in the federal tax code
1985 – 26,300
1995 – 40,500
2007 – 67,200

Economist Kaufman says Fed failed as regulator

The following appeared on page 20 in the Monday April 14, 2008 issue of the Financial Times.

By Aline van Duyn in New York

Henry Kaufman, the distinguished Wall Street economist, has added his voice to the debate about the Federal Reserve’s role in the credit crisis, saying the central bank failed to give enough importance to its role as a regulator.

In a video interview with the Financial Times, Mr Kaufman criticized the Fed’s monetary policy. He said it allowed too much credit expansion over the past 15 years and that this contributed to the market turmoil.

“Certainly the Federal Reserve should shoulder a substantial part of this responsibility…it allowed the expansion of credit in huge magnitudes,” Mr Kaufman said.

“Besides its monetary policy approach, [the Fed] really indicated very clearly that it was performing its role as a supervisor…in a minute fashion, not in an encompassing fashion. Monetary policy had a high priority, supervision and regulation within the Fed had a smaller policy.

Mr Kaufman, who is on the board at Lehman Brothers, has long advocated tougher regulation of the biggest financial firms, arguing that they need to be made “too good to fail”, rather than remain “too large to fail”.

The near-collapse of Bear Stearns last month, and the Fed’s intervention which resulted in a purchase of the Wall Street firm by JPMorgan Chase, has triggered a renewed debate about whether banks can regulate themselves, or whether regulators need to impose tougher rules.

The credit crisis, which stems from losses on securities backed by risky mortgages made during the height of the housing bubble, could lead to total writedowns of nearly $1,000bn for banks and investors around the world, according to the International Monetary Fund.

Mr Kaufman said a distinctive feature of the financial crisis was “much greater lapses in official supervision and regulation than in earlier periods”.

He said there should be a new federal regulator appointed who would work with the Federal Reserve but who would have responsibility for “intensively” regulating the 30 or 40 biggest financial firms. Failure to do so could lead to a “crisis that’s bigger than the one which we have today”.

“The supervision of major financial institutions requires deep skills in credit, deep skills in risk analysis techniques and it requires within that organization, very skilled, trained professional people,” Mr Kaufman said. “That is lacking in the supervisory area in the United States.”

He added that recent proposals from Hank Paulson, secretary of the US Treasury, to overhaul US regulation “lack focus”.

Friday, April 18, 2008

Lure of Stimulus Payments May Produce Record Filings

The following article appeared in the April 12-13, 2008 (Weekend Edition) of the Wall Street Journal, Page A2.

It’s crunch time for millions of procrastinators.

With Tuesday’s federal-income-tax deadline drawing near, many Americans will spend much of this weekend calculator in hand, tax software loaded, searching for last-minute deductions or credits, sifting through investment documents and trying to decipher Internal Revenue Service instructions.

Thanks in-part to the lure of economic-stimulus payments, record numbers of returns are being filed this year. Through April 4, the IRS says it had received about 96.8 million returns, up 9.3% from a year earlier.

Uncle Sam is promising these special payments as part of an economic-stimulus package passed by Congress, and the payout requires a tax return to be filed. These payments typically will be as much as $600 for an individual or $1,200 for married couples filing jointly, plus $300 for each child under 17. Not everyone is eligible; the payments begin to phase out once income exceeds a certain level.

The payments will begin flowing to about 130 million households next month in an effort to juice consumer spending and mitigate the economic slowdown.

As usual, most filers so far this year are getting refunds, which also could bolster consumer spending, unless those dollars are simply eaten up by higher gas costs and mortgage debt. The IRS approved about 75.1 million refunds through April 4, up 2.1% from a year earlier. The dollar amount of refunds rose 5.1% to $183.04 billion. The average refund: $2,436, up about 3%.

Many taxpayers think of refunds as a convenient form of forced savings. But the Treasury doesn’t pay interest on refunds. Thus, those people effectively are giving interest-free loans to Uncle Sam.

The Treasury Department reported Thursday that individual income-tax revenues for the six months through March rose to $503.6 billion from $479.2 billion in the same six-month period a year earlier. For the full fiscal year, the government’s budget estimate calls for individual income-tax revenues of more than $1.2 trillion. (The government’s fiscal year ends Sept. 30.)

As for the dreaded audits, the IRS has audited only about 1% of all individual-income-tax returns in each of the past few years. Still, the number of individual-income-tax audits reached a 10-year high in 2007, and the IRS plans to increase the number of audits this year, with an eye on high-income taxpayers. This year, the IRS reported that audits of taxpayers making $100,000 or more rose 14% in 2007 from 2006, while audits for people making $200,000 or more rose 29%. They surged 84% for those with incomes of $1 million or more.

Amid the current mortgage crisis, there are a few new related tax-list twists to watch out for this year. Among them is a deduction for private-mortgage insurance premiums. There’s also a provision that will provide relief in certain cases where a lender forgave a debt on a taxpayer’s home.

Also, there are new record-keeping requirements for cash contributions: You can’t deduct any of your monetary donations, no matter how tiny, unless you have proof, such as a cancelled check or a receipt from the charity.

As for taxpayers who can’t finish their returns in the next few days, the IRS says the agency expects to receive a record 10.3 million extension requests, up from 10 million last year. Extensions automatically give the filer until Oct. 15, although it doesn’t give any additional time to pay whatever is owed.

Ramsey: Recession-proof yourself

From Dave Ramsey's April 2008 newsletter.

The media has correctly predicted 36 of the last 2 recessions.
– Zig Ziglar

“The sky is falling! The sky is falling!” That sounds just like what all the media people are telling us these days. “Recession! Recession!” Calm down, Chicken Little! The sky is NOT falling, and we are not in a recession.

By definition, a recession doesn’t happen until the Gross Domestic Product (GDP) numbers - how you measure the number of goods made and sold in the USA - goes down for 6 consecutive months. That has not happened yet; therefore our country is not currently in a recession. However, the economy has slowed. We could be at the edge of a recession. But it’s no reason to completely freak out and think the world is going to collapse. Don’t let the talking heads on the nightly news make you emotional and cause you to freak out about the economy. If you let your emotions dictate your actions, you’re going to be broke your whole life.

What Can I Do About It?
Regardless of the condition of the national economy, it’s a MUST that you take a look at your own personal economy. Do you have your $1,000 emergency fund saved? Are you tackling your debt snowball like crazy? If you follow my Baby Steps in order, you’ll be able to prepare for yourself and your family so that you’ll hardly notice when the national economy or your household economy faces potential setbacks:
Baby Step 1: $1,000 Emergency Fund
No one eagerly anticipates negative, unexpected events. But guess what? They’re going to happen. It’s just a fact of life. Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time. This beginning emergency fund will keep life’s little Murphies from turning into new debt while you work off the old debt. Continue

Baby Step 2: The Debt Snowball
The principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, nothing gets accomplished because all your effort is diluted. List your debts in order with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan. Continue

Baby Step 3: Fully Funded Emergency Fund
Ask yourself, “Self, what would it take for you to live for 3 to 6 months if you lost your income?” Your answer to that question is how much you should save. Remember, this stash of money is NOT an investment; it is insurance you’re paying to yourself, a buffer between you and life. Continue
Most importantly, remember one last thing. Your economy is up to you. If you are out of debt and have money in the bank, then the media can talk up a storm about a recession, but you won’t feel it. When you have a plan, live on less than you make and save money, you are not in trouble. If you have a paid-for house, who cares if foreclosure rates are up? YOU are all right. If you have no credit card debt and the plastic companies decide to raise interest rates to 50%, how much will you care? NOT ONE BIT! Take care of your personal money situation, and everything else will take care of itself.

There’s no time like the present to get started and recession-proof yourself! I promise… it’s a plan that works EVERY time!

FT: A towering disciplinarian

The frugal former Fed chief blames the current crisis on lack of restraint, says Chrystia Freeland.

This article appeared in the April 12-13, 2008 weekend edition of the Financial Times on page 7.

In an age when Manhattan financiers own helicopters to escape the traffic on their weekend treks to the Hamptons, Paul Volcker embodies the customs of another time. The 80-year old former chairman of the US Federal Reserve astonishes his hosts at New York dinner parties by asking where the nearest subway stop is; and, according to William Neikirk, one of his biographers, when he was running the world's most important central bank Mr Volcker ferried his dirty washing from his modest Washington crash pad to his daughter's home in Virginia to save on laundry costs.

But "Tall Paul", as the shy, cigar-chomping 6ft 7in banker was nicknamed by reporters, represents bygone days in more than the penny-pinching habits of a Depression-era child. Henry Kaufman, legendary Wall Street economist, describes his friend of 50 years as "a classical person. I'm not saying that he studies philosophy, but he has deep feelings about responsibilities". Another friend, hedge fund manager and philanthropist George Soros, calls him "the exemplary public servant - he embodies that old idea of civic virtue".

This reputation, and Mr Volcker's defining achievement as the banker who slayed the double-digit inflation of hte late 1970s, lent a special weight to the speech he delivered this week about the country's economic crisis. "The bright new financial system - for all its talented participants, for all its rich rewards - has failed the test of the marketplace," he told the Economic Club of New York. Despite all the noise of the volatile markets, the world listened.

"He is a towering figure," says Roger Altman, the boutique investment banker who served in the Carter administration when Mr Volcker was at the Fed. "Almost no one can speak with the authority with which he does. That authority comes from his own remarkably successful tenure at the Fed and his own integrity and his reputation for straight talk."

It is the fate of central bankers, even those who left the job more than two decades ago, to have their words parsed for hidden meanings. Some analysts saw his remarks as an attack on Ben Bernanke, the Fed's current chairman. Others contrasted Mr Volcker's critique of the new financial paradigm with the latest comments of his successor, Alan Greenspan, in defence of his own laisser-fair tenure.

Mr Volcker - reputedly not a natural politician - told a person he is close to that these perceived internecine quarrels are a mis-representation of his views. Like a good central banker, he plans to resume a gnomic silence and allow his comments to "sit out there and settle" until their meaning becomes more apparent. Some of what he said, however, is pretty clear already.

He had harsh words for private sector bankers, whose compensation practices were "most invidious of all" in the loosening of the nation's financial discipline: "the mantra of aligning incentives seems to be lost in the failure to impose symmetrical losses - or frequently any loss at all - when failures ensue". He cautioned that "it is the United States as a whole that became addicted to spending and consuming beyond its capacity to produce". Foreign money and homegrown "financial legerdemain" disguised the problem for awhile, but the man who administered the most bitter monetary medicine the country has swallowed since the second world war warned that it is again time for "painful but necessary adjustments."

Perhaps most pointedly, Mr Volcker asked why government-sponsored lenders such as Fannie Mae and Freddie Mac were not doing more to restore confidence in the mortgage market. And he reminded his listeners that the Fed's main job is not to "take many billions of uncertain assets on to its balance sheets", but rather, as "custodian of the nation's money", to "protect its value and resist chronic pressures towards inflation".

For Mr Volcker, delivering bad news is practically a professional calling. Bob Karesh, who was a graduate student at Harvard with Mr Volcker, recalls a 1979 diner they shared after a meeting between Mr Volcker and President Jimmy Carter. The conversation had been a job interview of sorts and Mr Volcker told his old classmate he feared he had flunked it by warning that "the next Fed chairman might really have to tighten up".

Mr Carter appointed him anyway. But while Mr Volcker survived the public's fury at his punishing interest rates and the subsequent recession, the presient did not. Ronald Reagan, elected in part thanks to that dismal economic mood, appointed Mr Volcker to a second term, but then replaced him with the more expansionist Alan Greenspan.

Mr Volcker, who had divided his earlier career between government and the private sector, went back to Wall Street. Even someone as frugal as he was, he told friends, needed to make a little money. Yet before long, he was back to his true love - public service - doing everything from chairing an effort to develop international accounting standards to investigating the UN's troubled Oil for Food programme to helping police the World Bank.

"He has tackled one difficult subject after another," says Gerald Corrigan, former head of the New York Fed.

Mr Volcker's oldest confreres trace his civic commitment to his father, the city manager for their town of Teaneck, New Jersey. "Paul is not an intimate person," says Mr Kaufman, but he is known for his care for his family. All his friends mention his devotion to his late wife Barbara, who suffered debilitating rheumatoid arthritis, and whom Mr Volcker was often seen wheeling along 79th Street, near their Upper East Side home, or to private dinners.

His greatest private pleasure is fly-fishing - Mr Karesh says a whole room in his apartment given over to paraphernalia. Mr Kaufman says his old friend finally decided to initiate him into the sport about 10 years ago. The pair spent two days in the waters of the Beaverkill, New York, yielding just one small fish, which Mr Kaufman landed in the first hour. Yet Mr Kaufman recalls the experience with relish: "It was amazing how patient he was in teaching me."

Pete Peterson, the private equity billionaire, describes his long-time friend as a "lovable curmudgeon". He says Mr Volcker enjoys the fact that his colleagues "are never sure where he is going to come out" on an issue - as with his recent endorsement of Barack Obama's campaign for president. Mr Soros sums up his fellow "old fogey" thus: "He has no great ambition to wealth - he gets a lot of satisfaction from the respect he has earned."

LTTE: Why are we pawning our offspring's future?

The following letter to the editor appeared in the April 12-13, 2008 weekend edition of the Financial Times on page 6.

Sir, I am living a rather ordinary sort of life. But when I read the April 10 edition of the FT I felt transported to Wonderland. On the first page, I read that the bankers are claiming an epiphany. They will be good boys from now on, holding to higher standards of lending probity and reasonable pay.

Further down the page a headline claimed higher oil prices seemed likely to induce the Federal Reserve to cut rates. No inflation-fighting here. Rather, Ben Bernanke, the Fed chairman, wants to promote more borrowing and spending to keep the decrepit US economy out of the grave. Never mind that it is excess household debt that has helped propel us into today's perilous position.

And, by the way, more debt means less savings, less investment and less economic growth. Does Mr Bernanke think about the effects of all this on his grandchildren? Do we consider what the effect will be on our grandchildren? What kind of society pawns the future of its offspring?

Turning to page two, I read that a panel of banking regulators has endorsed a $300bn-$400bn federal guarantee of refinanced mortgages.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, considers this will "avoid more dire consequences for all Americans". What dire consequences does she mean? Are they worse than increasing the national debt by more than $300bn? Are the consequences more dire for me who saves in order to weather rainy days such as we are having now courtesy of incompetent regulators who let the credit mess develop under their noses?

- Channing Wagg
Boxborough, MA 01719 US

Thursday, April 17, 2008

Financial Times - Iceland interest rates rise to record 15.5%

This article appeared on page 2 of the Friday April 11, 2008 issue of the Financial Times.

By David Ibison
in Stockholm

Iceland has the highest interest rates in Europe after the central bank raised rates by 50 basis points to a record 15.5 per cent yesterday as it storve to restore confidence in its struggling currency and quench fears of a banking crisis.

The move puts the tiny North Atlantic nation above Turkey's rate of 15.25 per cent and comes just two weeks after it imposed an emergency 1.25 percentage point rise to 15 per cent, underscoring the depth of its problems.

On top of the aggressive action taken by the central bank, the authorieis are also considering further moves to ease investors' fears, such as co-ordinated action by Nordic central banks to provide additional liquidity, if needed.

There was disappointment that this proposed action plan was not unveiled yesterday.

"A sluggish reaction will hurt the financial system, financial stability and the authorities' credibility," said Glitnir Research, the research arm of the Icelandic bank, in a report. "Moreover, non-action will also play a large role in the credit rating of Iceland's sovereign debt, which is on negative outlook at all three major rating agencies, Moody's, Fitch and S&P."

But the central bank did make clear it was prepared to bolster Iceland's foreign exchange reserves in the near future.

"A policy rate increase in and of itself does not solve the problems that have developed in the FX swap market," it said. "Increased issuance of risk-free bonds that are accessible to foreign investors should open up other channels for currency inflow."

Confidence in the krona, Iceland's currency, has been damaged this year because of economic imbalances in the economy and fears over the viability of the banking sector. The krona has weakened by some 25 per cent against the euro this year.

The inflation rate was 8.7 per cent in March, well above the government's target of 2.5 per cent, and the central bank said yesterday it expected inflation to peak at 11 per cent by the third quarter of this year, pushing interest rates up further.

"Persistent inflation will be most damaging to indebted businesses and households and can undermine financial stability for the long term," it said. "It is therefore of paramount importance that inflation be brought under control."

Iceland's economic weaknesses have been exacerbated by the deterioration in global financial markets, which have led to a drastic reassessment of risk and undermined confidence in its highly leveraged banks.

On top of these macro-economic pressures, the authorities in Iceland also believe the country's financial markets may have been weakened via a speculative attack by international hedge funds.

Tuesday, April 15, 2008

Happy Tax Day

Happy Tax Day everybody! Once again, the Federal government will collect more revenue than it knows what to do with, but not enough to make up for frivolous spending.

As of yesterday (per TreasuryDirect), the public portion of debt stands at: $5,349,210,909,674.63
Intragovernmental holdings are: $4,095,188,999,068.57

Giving us a Tax Day 2008 bill of: $9,444,399,908,743.20

Good luck in making it through the next year financially.

National Debt Clock