Archive for October 13th, 2008

Obama’s Magic Show

October 13, 2008

Ken’s Take: Obama fans might want to skip this one. McCain fans will wonder why J-Mac can’t rattle this stuff off in debates. Open-minded folks should keep reading.

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Excerpted from WSJ: “Obama’s Magic”, Strassel, Oct.10, 2008

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And now, America, we introduce the Great Obama! The world’s most gifted political magician! A thing of wonder. Just watch him defy politics, economics, even gravity!

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To kick off our show tonight, Mr. Obama will give 95% of American working families a tax cut, even though 40% of Americans today don’t pay income taxes! How can our star enact such mathemagic? How can he “cut” zero? Abracadabra! It’s called a “refundable tax credit.” It involves the federal government taking money from those who do pay taxes, and writing checks to those who don’t. Yes, yes, in the real world this is known as “welfare,” but please try not to ruin the show.

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For his next trick, the Great Obama will jumpstart the economy by raising taxes on businesses that are today adrift in a financial tsunami! That will include … small-business owners, and the nation’s biggest employers who currently pay some of the highest corporate tax rates in the developed world. Mr. Obama will, with a flick of his fingers, show them how to create more jobs with less money. It’s simple, really. He has a wand.

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Next up, Mr. Obama will re-regulate the economy, with no ill effects whatsoever! Did someone in the audience just shout “Sarbanes Oxley?”  Usher, can you remove that man?

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Just watch the Great Obama perform a feat never yet managed in all history. He will create that enormous new government health program, spend billions to transform our energy economy, provide financial assistance to former Soviet satellites, invest in infrastructure, increase education spending, provide job training assistance, and give 95% of Americans a tax (ahem) cut — all without raising the deficit a single penny! And he’ll do it in the middle of a financial crisis. And with falling tax revenues! Voila!

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Moving along to a little ventriloquism. Study his mouth carefully, folks: It looks like he’s saying “I’ll stop the special interests,” when in fact the words coming out are “Welcome to Washington, friends!” Wind and solar companies, ethanol makers, tort lawyers, unions, community organizers — all are welcome to feed at the public trough and to request special favors. From now on “special interests” will only refer to universally despised, if utterly crucial, economic players. Say, oil companies. Hocus Pocus!

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And for tonight’s finale, the Great Obama will uphold America’s “moral” obligation to “stop genocide” by abandoning Iraq! While teleported to the region, he will simultaneously convince Iranian leaders to peacefully abandon their nuclear pursuits (even as he does not sit down with them), fix Afghanistan with a strategy that does not resemble the Iraqi surge, and (drumroll!) pull Osama bin Laden out of his hat!

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We’d also like to thank Mr. McCain for keeping all the focus on himself these past weeks. It has helped the Great Obama to just get on with the show.

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Full article:
http://online.wsj.com/article/SB122360618747721991.html

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Taxes: The 95% illusion … what’s a tax cut?

October 13, 2008

Excerpted from WSJ: ” Obama’s 95% Illusion”, Oct. 13, 2008

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One of Obama’s most potent campaign claims is that he’ll cut taxes for no less than 95% of “working families” … (and cut aggregate income taxes).

How does he conjure this miracle, especially since more than a third of all Americans already pay no income taxes at all? First, by proposing one of the largest tax increases ever on the other 5%.

There are several sleights of hand, but the most creative is to redefine the meaning of “tax cut.”

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For Obama , a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase “tax credit.”  Obama is proposing to create or expand no fewer than seven such credits for individuals:

  • A $500 tax credit ($1,000 a couple) to “make work pay” that phases out at income of $75,000 for individuals and $150,000 per couple.
  • A $4,000 tax credit for college tuition.
  • A 10% mortgage interest tax credit (on top of the existing mortgage interest deduction and other housing subsidies).
  • A “savings” tax credit of 50% up to $1,000.
  • An expansion of the earned-income tax credit that would allow single workers to receive as much as $1,110 if they are paying child support.
  • A child care credit of 50% up to $6,000 of expenses a year.
  • A “clean car” tax credit of up to $7,000 on the purchase of certain vehicles.

Here’s the political catch. The credits  would be “refundable,” which is Washington-speak for the fact that you can receive these checks even if you have no income-tax liability. In other words, they are an income transfer — a federal check — from taxpayers to nontaxpayers. Once upon a time we called this “welfare.”  Mr. Obama’s genius is to call it a tax cut.

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The Tax Foundation estimates that under the Obama plan 63 million Americans, or 44% of all tax filers, would have no income tax liability and most of those would get a check from the IRS each year.

The total annual expenditures on refundable “tax credits” would rise over the next 10 years by $647 billion to $1.054 trillion, according to the Tax Policy Center.  By redefining such income payments as “tax credits,” the Obama campaign also redefines them away as a tax share of GDP. Presto, the federal tax burden looks much smaller than it really is.

There’s another catch: Because Mr. Obama’s tax credits are phased out as incomes rise, they impose a huge “marginal” tax rate increase on low-income workers. The marginal tax rate refers to the rate on the next dollar of income earned. The marginal rate for millions of low- and middle-income workers would spike as they earn more income.

[Review & Outlook]

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Full article:
http://online.wsj.com/article/SB122385651698727257.html

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Ups & downs … Keep Your Money in the Market

October 13, 2008

Excerpted from WSJ: “Keep Your Money in the Market”, Burton Malkiel, Oct. 13, 2008

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As the world economy reels under the weight of the worst financial crisis since the Great Depression, we have been left with a broken financial system. Financial institutions around the world have suffered life-threatening, self-inflicted wounds by purchasing over a trillion dollars of complex mortgage-backed securities backed by dodgy loans based on inflated real-estate values.

These assets have been financed with enormous leverage and with short-term debt. Just prior to its “rescue,” Bear Stearns had a debt to equity ratio of over 30 to 1, making it susceptible to a “run on the … shadow banking system” built on derivatives.

The long-run solution to the present crisis must involve substantial deleveraging and a recapitalization of our financial institutions. In the meantime, credit has been essentially frozen and a world-wide recession seems almost inevitable.

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Investors should not panic. The best position for investors today is not “fetal and 100% in cash.”

We are not going to have a depression, and we have survived financial crises before.

A century of investing experience, as well as insights from the field of behavioral finance, suggest that investors who bail out of equities during times like these are almost always making the wrong decision.

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By all means, young 401(k) investors, and those in their prime earnings years, who are stashing away funds from every monthly paycheck, should stay the course. If you decide to eschew equities during periods of ubiquitous pessimism, you will lose all of the advantage of “dollar cost” averaging (buying more shares when prices are low than when they are high). Asset allocations should be shifted to safer securities over time as the investor ages, but only gradually and on a set schedule as through a “target maturity fund.”

If you are now approaching retirement and failed to move to a more conservative asset allocation, you should not do so now in response to a time of panic. If anything, well diversified investors should, at the end of each year, consider rebalancing to ensure that your portfolio composition remains consistent with the risk level appropriate for your financial circumstances and tolerance for risk. But this is likely to mean shifting into equities and not out of them.

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We will have a serious recession now, but a 1930s-style depression is highly unlikely. We will not let the money supply decline by 25%, as we did in the ’30s, and automatic stabilizers (like unemployment insurance) are now a significant element of fiscal policy. Don’t forget that the U.S. economy is still the most flexible in the world and our “innovation machine” is alive and well.

No one has consistently made money by selling America short, and I am confident the same lesson is true today.

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Mr. Malkiel is a professor of economics at Princeton University and the author of “A Random Walk Down Wall Street,” … he was Ken’s Econ 101 prof, and a faculty reviewer of Ken’s thesis “Money & Stock Prices: An Econometric Study”

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Full article:
http://online.wsj.com/article/SB122385741803727333.html

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Short course: The real cause of the subprime loan mess …

October 13, 2008

Ken’s Take:

Cuts through all of the rhetoric to the root cause: (1) the government “encouraged” bad loans   (2) the government allowed bundling of loans into MBSs (mortgage backed securities)  (3) the government provided an implied guarantee to the MBS bundles via Fannie and Freddie —GSEs ( government sponsored entities)  (4) the MBS bundles were resold up the financial food chain — separating their risk from their origination (5) the MBSs established a platform for very highly leveraged financial derivatives (e.g. CDOs, default swaps)  (6) when home prices peaked, the derivatives lost value and couldn’t support the associated borrowings, creating — in effect — the mother of all margin calls.

Dems are at the root of the problem, but the GOP isn’t blame free.  The Community Reinvestment Plan was a Dem brainchild, Clinton authorized the bundling of subprime loans, and Frank-Dodd-Reid have stopped regulation of Fannie and Freddie.  But, Bush also pushed for “a culture of (home) ownership” and had a GOP Congress until 2006 that should have been able to force greater regulation on Fannie and Freddie.

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From IBD: “America’s Second Wake-Up Call!”, Oct. 10, 2008

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Do you know the real cause of the out-of-control subprime loan mess that’s creating so much fear and hurting every American?

In 1995, President Clinton mandated new regulations that coerced banks to make significantly more subprime loans to inner-city residents previously viewed as unqualified buyers in high-risk areas. Many subprimes were variable-rate loans made without down payments or documentation of borrowers’ incomes. Banks were rated on how well they complied and faced big fines if they didn’t do what government regulators wanted.

The government’s worst decision was allowing and encouraging banks, for the first time, to bundle these subprime loans in giant packages with prime loans. These packages were then sold to other investors as safe because they were government-sponsored by Fannie Mae and Freddie Mac. The first of these government-encouraged packages came to market in 1997.

For the banks, the loan bundles were profitable because they could be sold quickly and thereby absolve the banks of any risk in the loans they made.

The banks could then use the money to make even more of these lower-quality, government-required loans, and Fannie Mae and Freddie Mac bought them with virtual abandon.

It evolved into a Big Government pyramid scheme . In short, this was yet another well-intended, government-designed and run program that failed miserably and had the usual unintended consequences.

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September 2003: Treasury Secretary John Snow, in testimony to the House Financial Services Committee, recommended that Congress enact legislation to create new agency to regulate and supervise financial activities of housing-related government entities to set prudent and appropriate minimum capital requirements.

Rep. Barney Frank, the committee’s ranking member, strongly disagreed, saying: “Fannie Mae and Freddie Mac are not facing any kind of financial crisis . . . . The more people exaggerate these problems, the more pressure there is on these companies, the less we’ll see in terms of affordable housing.”

• April 2004: Rep. Barney Frank ignored warnings, accusing the administration of creating an “artificial issue.” “People pay their mortgages,” he told a group of mortgage bankers. “I don’t think we are in any remote danger here. This focus on receivership, I think, is intended to create fears that aren’t there.”

• July 2005: Senate Majority Leader Harry Reid rejected legislation on reforming Fannie and Freddie. “While I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that would limit Americans from owning homes and harm our economy in the process,” he said.

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Full article:
http://www.ibdeditorials.com/IBDArticles.aspx?id=308530236252361

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Posted in Government & Politics, Mortgage Crisis | 2 Comments »