Tax Philosophy

I've always favored consumption taxes over income taxes. We should seek to discourage consumption and encourage income-generating activities.

On the other hand, public property should not be given away to private interests without compensation. Oil companies (and other mining interests) should pay royalties for their use of lands and resources that belong to the people at large. The level of payment should be similar to what they would pay a private landowner.

--SCC

Palin and the Science Classroom

From the Alaska Daily News:

The volatile issue of teaching creation science in public schools popped up in the Alaska governor's race this week when Republican Sarah Palin said she thinks creationism should be taught alongside evolution in the state's public classrooms.

Palin was answering a question from the moderator near the conclusion of Wednesday night's televised debate on KAKM Channel 7 when she said, "Teach both. You know, don't be afraid of information. Healthy debate is so important, and it's so valuable in our schools. I am a proponent of teaching both."

Her main opponents, Democrat Tony Knowles and Independent Andrew Halcro, said such alternatives to evolution should be kept out of science classrooms. Halcro called such lessons "religious-based" and said the place for them might be a philosophy or sociology class.

The view expressed by Halcro is pretty much where I land on the issue.

Palin later backpedaled, after her staff informed her that her view was unconstitutional:

In an interview Thursday, Palin said she meant only to say that discussion of alternative views should be allowed to arise in Alaska classrooms:

"I don't think there should be a prohibition against debate if it comes up in class. It doesn't have to be part of the curriculum."

Palin's supporters claim that she does not support an imposition of Creationism in the classroom. This claim is based on the fact that she has not proposed it during her 18 months or so in office.

Her real beliefs are best represented by what she said before her aides had a chance to educate her on what the Constitution says. The fact that she did not try to impose Creationism in the classroom has more to do with Constitutional limits than her desire to circumvent the Constitution.

--SCC

Obama and the Iraq Pull-Out

I've always thought that Obama's position is more nuanced than his supporters (or his opponents) would have us believe. He's left himself weasel room in terms of "conditions on the ground" and the definition of "combat troops" (as opposed to "advisors," "trainers," or "peacekeepers," I suppose). I have been saying for a while that Obama is smart enough and precise enough of a speaker that he was leaving himself the weasel room because he intended to use it.

--SCC

Fannie, Freddie, and the Financial Collapse

Lenders were writing and pushing subprime mortgages, and packaging them into securities, before the FMs got involved. Fannie and Freddie made the problem worse, but they didn't create it.

Here's a liberal response to the Republican charges. I object to this article's attempt to whitewash Democratic responsibility for large portions of the crisis, but it at least acts as a counterweight to the RNC's talking points memos.

Here's a somewhat more balanced commentary.

My point on the other is that the structural problems caused by the deregulation of investment banks would have emerged one way or another, even without the mortgage crisis. You had a number of large companies writing out large "insurance policies" without adequate capital backing, and without any form of regulation. In any time period, that is a recipe for disaster.

It's pretty hard to be fully responsible for something that was happening before you arrived in the marketplace.

Fannie and Freddie made things worse, but focusing on them to the exclusion of serious structural problems in our financial system is like slaughtering Mrs O'Leary's cow to fix the Chicago building codes.

Financial markets need transparency and accountability, and that only comes about through responsible regulation. We need CDS transparency and probably a regulated exchange. The size of the CDS overhang dwarfs any other structural problem in our financial system. If we don't take care of it, we will be fighting fires until we do the right thing.

The easy answer is seldom the right one.

--SCC

The Party of Big Government

Republicans have been complaining that Obama represents the party of big government.


That rhetorical flourish would mean a lot more if the Republicans had done anything about reducing the size of government or even reducing waste, fraud and mismanagement. Instead, we've seen massive increases in both the size and inefficiency of government under their watch.

Maybe they should have spent more time governing than invading countries who didn't attack us, torturing POWs for useless non-information, and tapping the phones of American citizens.

Oh, I forgot. The Republicans are so ineffective that Nancy Pelosi stole their lunch money while they controlled all three branches of government. I knew this was all the Democrats' fault somehow.

(Ok, that was a cheap shot. I think we actually agree about many of the failings of the Republican party, and we could probably say the same about the Democrats. Where's Ross Perot when you need him?)

--SCC

Bush and Regulatory Incompetence

I've been intrigued by attempts by the RNC to exonerate Bush for failing to regulate the financial markets. According to the RNC, the problem was that those Evil Democrats (TM) in Congress prevented the passage of legislation that would have allowed him to regulate the markets.

Bush had no problem imposing his own policies on torture or domestic surveillance under the guise of "signing statements." If he had been so hot to introduce regulation, he could have done so on his own hook, as the head of the executive.

In fact, additional regulatory powers were part of the compromise that led to the bipartisan repeal of Glass-Steagall.

Contrary to RNC talking points, Fannie and Freddie did not start the rush to securitizing subprime mortgages. They joined in, and they made the problem worse, but they didn't start it. Claiming that they did betrays a lack of understanding about the nature of the current financial crisis.

Beyond that, you have to look at CDSs to see the mechanism by which problems in one part of the financial system are dominoing through other parts of the financial system. (People who watch such things were very relieved that the final settlement of the outstanding Lehman-related CDSs was on the low side of the estimates. The high side of the estimates could have made things really interesting. The fact that the estimates varied so widely shows exactly the transparency sorts of problems I've been talking about.)

Regulation of these CDSs was well within the powers of the regulators who were appointed by Bush. It is silly to try to give his administration a pass and blame the entire mess on the minority party in Congress. Fortunately, there are a lot of people for hire who specialize in oversimplification and silly mudslinging.

Blaming Fannie and Freddie exclusively is like blaming Mrs O'Leary's cow for the Chicago fire. The underlying problem was lax building and fire codes. If it hadn't been for the cow, there would have been little Timmy playing with matches or a lightning strike on Mrs O'Leary's barn.

The mortgage crisis was a precipitating event. Fannie and Freddie alone do not explain how the consequences of rising default rates were able to propagate through the international financial system so quickly and thoroughly.

Both parties participated in setting up a financial system that was under-regulated and that relied far too much on private ratings agencies and fraudulent (or at least opaque) financial statements. I don't find the finger-pointing exercise to be helpful or even particularly enlightening. Both parties gleefully accepted money in exchange for their connivance in setting up underregulated financial markets.

The real solution is to provide more transparency in financial instruments, especially derivatives. As long as derivatives (such as CDOs and CDSs) are opaque, there will be smart people who will be able to hide sludge in an apparently AAA asset. The only hope is to allow buyers and analysts to uncover the sludge. Obviously, this will probably require re-definition of some of these derivatives, and may require that a regulated exchange be set up for things like CDSs.

We're seeing so much butt-covering going on that nobody is looking at how to implement fire codes in our financial system.

In my view, sunlight is the best way to deal with a political infection. If we can force greater transparency on the financial markets, investors will be able to make more informed decisions. Premiums will be placed on experts who can perform insightful analysis rather than on tricksters who can hide toxic waste in a AAA rated bond.

One of the most frightening interviews I heard over the last couple of weeks was with someone who had been explaining CDSs to an official at the SEC. Evidently, that official thought that CDSs were being used exclusively as "insurance" and not as the world's biggest unregulated gambling salon. And the official had no idea that nobody was checking to see if the underwriters of CDSs actually had the capital reserves to make good in the event of a default. "Asleep at the switch" doesn't even start to cover it.

--SCC

Black Racism and Obama

Since black voters go overwhelmingly for the Democrat in most elections, it is hard to say that they are all voting for Obama because he is black.

The Republicans have only themselves to blame for losing the black vote. They did it deliberately in order to take the rural white southern vote away from the Democrats.

--SCC

Pirates!

Piracy appears to be alive and well.

Ukraine needs to dig deep and find some courage, unless they want to change the flag on their ships to a great big bullseye.

--SCC

Over-Simplifying the Crisis

It is an over-simplification to refer to this as a "mortgage" crisis. The problem with the mortgages is a precipitating event, but the structural issues that have been revealed are much deeper.

In particular, the lack of transparency and reportability of the CDOs and CDSs is what has caused the freeze-up in inter-bank lending. These issues can be resolved by setting up a regulatory framework for dealing with CDSs, and by requiring better information reporting on the instruments underlying a CDO.

Despite attempts by both parties to blame the other one, the fact is that both have been complicit in setting up a system that lacked adequate fraud protections and regulatory requirements.

I know that the popular media (and therefore the politicians) focus on the foreclosures and the mortgage defaults, but I think that is because they are easier to understand than having to think about how to properly regulate a marketplace of financial interests.

Pretty clearly, the "Masters of the Universe" can't be trusted to play with scissors without adult supervision.

--SCC

Trying to Pick the Winner

People should definitely vote for whomever they believe to be the better candidate. I don't get people who try to get on the bandwagon and vote for the "winner."

I'm not so convinced that Obama is as far ahead as the polls indicate. For whatever reason, polls seem to undercount Republicans. I've heard some theories about this from statisticians:

1. Republicans are less likely to talk to pollsters.


2. Evangelicals vote more faithfully than other groups.


3. People say that they are going to vote for Obama in order to seem "enlightened" even if they really plan on voting for McCain.

--SCC

The Role of Deregulation

The International Herald Tribune published an article on the role of lax regulation in the explosion of CDOs on Wall Street.

The article outlines how, in 2004, the big investment companies petitioned the SEC for the right to place the capital from their safety nets into play on the marketplace.

One commissioner, Harvey Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.

"We've said these are the big guys," Goldschmid said, provoking nervous laughter, "but that means if anything goes wrong, it's going to be an awfully big mess."

Part of the quid pro quo was that the SEC would have increased visibility into the activities of these firms to make sure that they were not abusing their new freedom.

The 2004 decision for the first time gave the SEC a window on the banks' increasingly risky investments in mortgage-related securities.

But the agency never took true advantage of that part of the bargain. The supervisory program under Cox, who arrived at the agency a year later, was a low priority.

The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Cox more than a year and a half ago.
...
"It's a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs," said Roderick Hills, a Republican who was chairman of the SEC under President Gerald Ford. "The problem with such voluntary programs is that, as we've seen throughout history, they often don't work."

If you can't trust the big boys to regulate themselves, whom can you trust?

"We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing," said Professor James Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).

Finally, there has been a recognition that this plan is not working:

Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.

"The last six months have made it abundantly clear that voluntary regulation does not work," Cox said.

The decision to shutter the program came after Cox was blamed by Senator John McCain, the Republican presidential candidate, for the crisis. McCain has demanded Cox's resignation.

You would think that we would have learned this lesson from the past. Unfortunately, politicians are blinded by the large political contributions they receive from the "Masters of the Universe" on Wall Street.

--SCC

CDOs, CDSs, and the Panic

Republicans have been making an effort to lay this entire mess at the feet of the Democrats. This is entirely consistent with their ongoing efforts to avoid responsibility for anything bad that might have happened while they were in charge of the government.

Republicans controlled all three branches of government for most of the decade, including the critical years that saw a peak in the issuance of sub-prime mortgages. (If the Evil Democrats (TM) were so effective that they were able to run the government during those years, maybe they really should be elected, if only to replace the staggering ineffectiveness of the Republican majorities.)

CDOs peaked in 2006.

According to the Securities Industry and Financial Markets Association, aggregate global CDO issuance totaled US$ 157 billion in 2004, US$ 272 billion in 2005, US$ 552 billion in 2006 and US$ 503 billion in 2007.

Not that it's relevant, since this is something that would be regulated by the administration in power, not the Congress.

The Republican argument hinges on the idea that Pelosi and Reid were able to affect the rates of mortgage writing immediately upon taking power (even before passing any major relevant legislation), but that the Republican administration was helpless to stop them.

If the Republicans are such a bunch of feebs, why would I vote for them?

The truth is that both parties bear a portion of the blame for the crisis.

While the focus of the mainstream media has been on CDOs, the role of CDSs has been underreported.

Credit default swaps sit at the center of this whole mess. There are several times the level of outstanding debt contained in what amount to little more than casino-style bets. While these have existed in the past, they really came into vogue during the last decade.

Here's a reading assignment for the masochistically inclined:

Ok, I'll take mercy on you. The bottom line is that these are a way for investors to get insurance via an investment vehicle. Why don't they call it insurance? Because then it would fall under a number of state-level regulations, since insurance is regulated by the states. Among other things, insurers are required to prove that they have enough cash reserves to pay any reasonably expected number of claims.

So all the investment banks "share" risk by selling each other insurance. Now what happens if you have a systematic failure, where everyone needs to file a claim on their insurance?

Lousy shame that nobody managed to ask that question when they were designing their risk models...

So why didn't the regulators realize that insurance was being sold in a relatively unregulated environment? I'll leave that one as an exercise for the reader...


Here's a much better explainer:

Some key sections that should really tick you off:

As with reclamation of strip mines, the insurance companies will file for bankruptcy. Government, via a $700 billion emergency rescue plan, will step up to the plate. The costs will be paid by taxpayers who have seen only losses and no gains. Pursuant to a rescue plan that prohibits any and all forms of congressional or judicial oversight or opportunity to object.

Except for reports, to be filed twice yearly. Something akin to the fox being required to periodically report how many chickens he stole from the hen house, without being required to return any of the stolen chickens. And who will keep this count? The fox.

The inevitable bankruptcy of A.I.G? What other option exists for a company with a market value of $12 billion and liabilities of about $450 billion on credit default swaps written to hedge funds, many of which are headquartered offshore and thus pay no taxes in the United States. For this, the government is paying $85 billion in taxpayer's money. In return, the government, meaning the taxpayers, will be entitled to receive 80 percent of the company's stock. Stock that is all but assured to be totally worthless.

For insurance company executives, financial risks of corporate bankruptcy are all but non-existent. Lehman Brothers is a prime example. On September 15, Lehman filed bankruptcy - the biggest in America's history. Hours before, the New York headquarters was scrambling for cash. Other banks were refusing to provide loans to Lehman. Banks with loans outstanding were demanding immediate repayment. Counter parties to Lehman's credit default swaps were selling out at ten cents on the dollar.

Lehman's response: Hours before the bankruptcy filing, Lehman transferred $2.5 billion from the London office to the American holding company. This money had "accrued as part of group profits from the first nine months of the year" and will be used to pay employee bonuses. As a result, the London office had no funds with which to make the payroll.
...
Paulson, who steadfastly refuses to consider taking a hard look at A.I.G. and other financial firms. How could these companies, managed by the so-called "best and brightest" guys in the room, have committed such a long and horrendous series of "poor judgments"?

By accident, or sheer incompetence?

Hard to believe, given that everyone in the room knew millions of explosive mortgages were being written to families without sufficient income, or in some cases no documentation of any income at all, based on fraudulent appraisals and supported by fraudulent AAA ratings.

Given the size and blatant nature of the disaster, accident and incompetence excuses simply don't fly. Something more was involved. That something is the number and size of vultures who bet on and stand to gain from the disaster, and how much they stand to gain. Too many people owning fire insurance on my neighbor's valuable house.

Even though I agree with almost all of the above, I don't see that we had any choice but to do the bailout. In my opinion, Barney Franks had it right: Once Paulson had announced that a depression would ensue without the bailout, his pronouncement became a self-fulfilling prophecy.

Basically, I agree with his analysis that our economy has been kidnapped and is being held for ransom. Unlike him, I think we have to pay off the kidnapper.

Flame away...

--SCC

Alternative Minimum Tax

Here's a good article describing the extent of the problem with the Alternative Minimum Tax. Without a real fix for this problem, the AMT will take a bigger and bigger bite out of middle class incomes.

--SCC

Wall Street and the Financial Collapse

You've got to love Wall Street types. When the money is coming in, it's all about how they are so smart that government needs to get out of the way because they can protect themselves against fraud.

Then, when things are bad, it is the government's fault for getting out of the way while they were all trying to cheat each other.

By the way, I highly recommend the book "Liar's Poker" for a look at how Wall Street really operates. You should be able to pick it up second-hand for a song.

These guys aren't dumb. They're just convinced that they're so smart that they'll be able to find a chair before the music stops. The after-the-fact whining about how somebody should have saved them from themselves just rings false.

Congress (both parties) does not provide adequate oversight because they are bought and paid for by the same people who are trying to keep the cake-walk music going for just one more big score.

--SCC