Saturday, December 25, 2010

Merry Christmas!

Growing up, today was always a time to reflect. During my conservative upbringing, Christmas Day was a Holy Day. We'd start with a Christmas Even midnight mass, go home to sleep and dream of presents under the tree. In the morning there'd be more joy and presents than the year before. They were magical days, particularly when under my grandparent's tree with snow on the ground. Toys quickly forgotten were the child's highlight, but the memories are much more important. 

It saddens me that I've lost the joy of those mornings. Perhaps that's part of growing up. Perhaps that's the price I pay for no longer believing the day is holy. I can live with that. 

Merry Christmas, everyone. 

Tuesday, December 21, 2010

It pays to be poor?

In a discussion of the Obama tax deal and extension of unemployment insurance someone said to me, "It sure pays to be poor." At first I thought they said "pays to be pure" and while I agree that purity is worth the extra expense, I didn't see how it was relevant to the discussion at hand. Then I realized they said "pays to be poor". 

This, of course, is a conservative mantra here in the United States that government social programs are so generous there is no incentive to work, the poor pay no taxes, and this financial windfall for not doing anything has created a lazy welfare class. 

On the face of it, this is an absurdity. When you dig deeper it's even more ridiculous. 

Let's take a look at it. 

No incentive to work. 

Welfare pays on average $500 in cash and food stamps for a single person household per month. That's $6,000 per year, of which only $3,600 is cash. Per year. For a family of 4 these numbers would increase to approximately $1,400 per month, or $16,800 per year, of which $11,800 would be cash. 

Unemployment insurance is a bit more generous. On average payments are $300 per week,  or $15,600 per year. This can vary quite a bit based on where you live and what you were earning before you lost your job. You see, we pay unemployment insurance .... it's insurance for times like this when you lose your job. If you were making a high salary before you got laid off, you will receive a higher weekly payout to try to keep you solvent while you look for a new job.

So no, benefits are not so generous that they create a disincentive to work.

The poor pay no taxes. 

Social Security, Medicare, unemployment insurance, and other state/local program taxes ... these are all taxes paid on income for which there is no refund. You get to deduct these taxes from your federal (and state) income tax bill so you're not paying taxes on taxes, but you don't get them back if you don't make enough. Because you're paying into the funds for each of these programs in case you need to use them. So unless unemployed or getting paid off the books, we all pay all of these taxes whether we're rich or we're poor. In fact, the only break anyone gets on these taxes are among those who make more than a certain amount, because social security tax is only applicable to the first ~$106,000 of income. After that you no longer pay that tax. So it pays to be rich, apparently. 

And there are other taxes. The biggest and most obvious is sales tax. This is a percentage of everything you purchase if you use legitimate sources for goods and services. The poor spend a higher percentage of their income rather than saving/investing, so they pay a higher proportion of their income in sales taxes. 

Finally, well not finally, but the last tax point I'll make is this. Renters may not pay property taxes directly, but you better believe those taxes are rolled into the price of the rent by the landlord. So no, renters don't get free school for their kids without paying taxes for that education. 

So, nope, the poor pay taxes. Perhaps not quite the same percentage as the wealthy, but they do pay them and it's a substantial portion of their income. 

Poor people are lazy.

I'm not even going to acknowledge this nonsense with a response. 

But I will leave you with this. We've reached the point in the United States where our leaders will gladly give 25% of a nearly $900B tax break to the richest 1% of Americans, but there are counties in United States that need foreign aid to take care of their poor children

That's pathetic. We should be ashamed. 

Monday, December 20, 2010

The Party of No

I get politics. I really do. There's a ebb and a flow to what politicians will support at a given time.

I especially get the minority party's attempts to slow down or block legislation the majority party wants to pass.

This might be particularly true during a lame duck session in which the minority party is about to become the majority party.

But blocking the 9/11 First Responders Bill? Why? What's the purpose?

The GOP has stood on the shoulders of 9/11 for 9+ years - strong on terror, counterinsurgency, strengthen our borders, more and more blank checks for our military ... but they can't approve of legislation to help pay the health care costs to the heroes of 9/11? Those selfless individuals who risked their lives to rescue those trapped in the buildings and sifting rubble afterward to look for survivors?

I realize Jon Stewart has done a piece on this that's better than anything I could do, but I want to point out the duplicity. The legislation would set up a $7.4B trust fund to pay the health care expenditures for the first responders. That's about what we spend for 40 days in Afghanistan.

And Republican Senators are actively filibustering this piece of legislation, which is completely paid for by closing a corporate tax loophole. Oh wait. I think I might have just hit on something there. Corporate.

Net Neutrality?

I'm curious to hear from readers on their take on net neutrality.

Proponents of FCC rules protecting a neutral internet claim the rules are necessary to prevent service providers from making deals with businesses to allow their websites to load faster than their competitors.This is the argument Senator Al Franken makes on the Huffington Post.

Opponents of FCC rules protecting a neutral internet claim the rules are unnecessary, because no abuses are taking place and the rules will reduce the dynamic and free space that is the internet by inhibiting private investment into new technologies and improvements to internet access. This is the argument Robert McDowell makes in the Wall Street Journal.

Interestingly, both of these editorials are unhappy with the FCC vote tomorrow. Franken thinking it's worse than doing nothing and McDowell thinking it's the beginning of the end.

As someone who is highly suspicious of the abilities of corporations to govern themselves I think we're looking at a "not if, but when" scenario. At some point, if it's not happening already, the internet providers will find ways to monetize speed and access. It's also possible that large multi-industry corporations will block or slow their competitor's pages, because they hold the gate key. This is Franken's argument with regard to Comcast charging Netflix's streaming partner, Level 3 Communications, additional fees due to the bandwidth Comcast customers are eating up watching movies online.

I also don't think I see McDowell's investment argument happening either. There will still be a robust marketplace for making the internet faster and better. I imagine we're only seeing the beginning of what is possible with online information and communication. Phone companies didn't stop innovating when federal regulations cracked down on monopolization and FCC rules for the web will not stop innovation either.

Anyway, what's your take?

Friday, December 17, 2010

The Head Scratching Continues

Word has gotten out that the Financial Crisis Inquiry Commission (FCIC), a bipartisan panel of 5 Democrats, 4 Republicans, and an Independent, has suffered a fracture in its efforts to write a report to explain the financial crisis.  Given how the deficit reduction commission recently fumbled the ball I guess this shouldn’t be too big a surprise.

It appears that the Republicans on the commission have decided to issue an alternative report written by just the 4 of them, which will blame the government for the financial crisis. Namely, Fannie & Freddie Mac and the 1970s Community Reinvestment Act, which mandated lending to minorities.

The narrative here is that Fannie & Freddie, driven by the CRA, lead the charge into subprime lending and took the financial system down with them. It’s a complete fiction. Well, not complete. Fannie & Freddie did play a role and the CRA did encourage lending to minorities, but it was a minor role at most.

Here’s the thing. Well, a couple things. First of all, Fannie & Freddie don’t originate loans. They purchase loans, sometimes risky ones, from loan originators to help those originators make more loans by taking current risk off their books. They do this to free up the mortgage market. And here’s the other thing … by 2006 – the peak of the subprime mortgage boom – Fannie & Freddie had essentially left the market. They were purchasing less than 10% of subprime mortgages. Most of these toxic loans were being bought up by the big banks as fast as they could be initiated so that mortgage bonds could be created. See my previous post on how all of that works.

Additionally, by 2006 – the top of the boom – just 6% of subprime mortgage loans were originated by lenders subjected to the rules of the Community Reinvestment Act. So 94% of subprime mortgages were being originated by lenders with no government mandate to initiate these loans. Should I even comment on the underlying racism that assumes the subprime loans were going to minorities? Plenty of white folk got caught up in this predatory lending too, you know.

But there’s a kicker. This Republican contingent is made up of some pretty smart and presumably reasonable men.  Namely, FCIC vice chair Bill Thomas (former House Ways & Means Chair), former Congressional Budget Office head (Douglas Holtz-Eakin), former head of President Bush’s National Economic Council (Keith Hennessey), and former general counsel for the Treasury Department (Peter Wallison) . That’s a lot of brain power. A lot of people with a lot of experience with the financial markets.

And this is what they did.  At an FCIC meeting they brought up a vote to the commission to ban the worlds “Wall Street”, “deregulation”, “shadow banking”, and “interconnection” from the final report. They actually wanted to censor the report from using words that might help explain what happened – and might put some of the blame on the banks that gambled heavily on the subprime mortgage market and lost badly.

Do these people live in a backwater where its still okay to ban books and censor documents? I don’t want to make it personal, but let’s make it personal for a minute. Why the hell would you try to ban words from a report on the biggest financial meltdown since the Great Depression? Why would you try to hide the real reasons for the crisis behind the obscurity required by a word ban?

I’ll let you work out why they want to ban these words. And it isn’t pretty. 

Tuesday, December 14, 2010

A Fundamental Disconnect between "We the People" and Them the Banks

Today I'd like to talk about the plutocracy. The very rich and very powerful moneyed interests that have taken our government from "We the people" to "We the wealthy and powerful" ...

A fundamental part of this problem is the pervasiveness and power of corporations in our economy and our political process. The recent Citizens United Supreme Court ruling opened up nearly limitless campaign spending for corporations and this all goes back to corporate personhood, which, like most policy changes, was based on what seemed like a good idea at the time. The original idea was that if a corporation were not a person, they could not be sued by individuals. So that's a good thing, right? The trouble is the unintended consequences. That corporate personhood has now been extended to freedom of speech. But corporations, particularly successful corporations, have far more resources to get their free speech out into the public arena. I can't afford TV spots or radio ads or product placement. Most of us can't.

We were warned.

By Thomas Jefferson, "I hope we shall crush in its birth the aristocracy of our moneyed corporations, which dare already to bid defiance to our laws."

And even Adam Smith, though corporations as they existed even in Jefferson's time were much different than what Smith experienced. He only saw the corruption and grasp for power of joint-stock companies like the East India Trading Company. And that was enough to warn us against them. Of course, that's now what anyone learns in school about him.

Bill Moyers' recent speech at Boston University elucidates the issues here much better than I could hope to do.

Noam Chomsky, of course, has written extensively about it, but I found this piece particularly interesting. He lays out the historical development of corporations and at least partly explores why corporations maybe didn't need to be granted the same rights as individuals, but that the courts and lawyers made sure it happened.

You could argue that none of this really matters. We've always had wealthy people manipulating the government to their own advantage. And I'd totally agree with that. The trouble I have with corporations exerting this same power is that corporations do not have the same incentives as individuals. Even someone as insanely rich as Vanderbilt or Rockefeller or Gates still has to live in a community. They are still influenced positively or negatively by changes in their community. And as such they have a non-financial incentive to provide benefit to that community. That's why these giants of industry are also such philanthropists - giving back to the community to build a university or a hospital or an art museum.

But how often do you see corporations taking their profits and making enormous contributions to the common good? It's startlingly rare. There is no incentive to do so for a corporation. In fact, a corporation has a disincentive to reduce its bottom line. A wealthy person doesn't mind parting with some wealth for a good cause - they know they have more money than they could ever spend. A wealthy corporation doesn't think that way. The profits earned today become shareholder dividends tomorrow and help keep the corporation solvent in hard times. But it's all about money. Anything else is secondary. Any corporate investment in a community is largely for its own good. To build a stronger workforce, to improve infrastructure, etc.

But what is money? Money is simply convenient way to transfer value. My effort, or "work" has a value. Likewise, your "work" has a value. But I can't directly trade my work for your work unless your work is exactly the kind of work I need and my work is exactly the kind of work you need. That's what makes bartering inefficient. You spend too much time looking for someone with which to trade work. Rather, we use money to simplify this process. I am paid by someone who values my work. I pay someone whose work I value. And they pay you for your work.

So why did money become so damned important? Why is this now the measure of a man? A measure of a person's value? It's absurd, but we're so caught up in spending our lives trying to earn a living we forget largely what makes a human being.

And through corporate personhood we've taken this all a step further. Now there are entities, or "persons", whose entire purpose on earth is to make money. Not to provide comfort to a sick relative. Not to create a work of art. Not to play in a band. Not to cook a meal for friends. Not to read a book. Not to swim in the ocean. Not to do anything that makes us human ... just to make money. And these "persons" have become the most powerful in our society.

It's destructive and it's unsustainable. And it's only getting worse.

What brought on this particular blog entry today was reading that Representative Spencer Bachus (AL-R), the incoming Chairman of the House Financial Services Committee was quoted as saying, "In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks." This is the man set to lead the House Committee for regulation of financial services. We're just over 2 years since this same financial services industry destroyed our economy. And now we're seating a guy who thinks the purpose of the government is to serve the banks.

I'm disgusted. And you should be too.

Sunday, December 12, 2010

What on earth happened?

Today I'm going to attempt to tackle something that's perhaps the most poorly understood part of the financial crisis  - the central role of the bond and derivatives markets in causing the crisis. This is going to get complicated, but I'll try to keep it as simple as possible was explaining it as accurately as I can.

I'm going to speak specifically of consumer credit bonds and credit derivatives. And I'm going to simplify where necessary.

To catch you up with some basic concepts, bonds are essentially extensions of credit to governments, corporations, or credit markets.

A government bond is pretty straight forward and extremely secure investment. When the federal government runs a budget deficit, they sell bonds to investors to cover the cost over-run. The government then pays back those bonds with interest to the investors. The federal government has never defaulted on these bonds - thus they are considered the safest investment in the bond market. Nearly risk free, or AAA rated.

Corporate bonds are not quite as safe, but essentially the same concept. If a corporation needs additional revenue to expand their operations, cover losses during a quarter, etc. they will work with an investment bank to create a corporate bond. The bond investors are then paid back with interest by the corporation. The only way for these bonds to go bad would again be if the corporation defaulted, which would essentially result in a bankruptcy. So the bond holders only lose out if the company goes belly up. Corporate bonds, particularly those to blue chip companies such as Microsoft or Proctor & Gamble, represent nearly risk free investments, or AAA rated.

Consumer credit bonds are a different animal. Investment banks began buying up consumer debt - credit card balances, auto loans, student loans, mortgages, and began bundling them into bonds. Let's focus specifically on mortgage bonds since the housing market was the fundamental driver of the financial crisis.

Traditionally, when a bank lent a home buyer the money to buy a home, the bank held the mortgage and the buyer paid back the loan over time. Most of these transactions were conducted by local banks and they only gave loans to credit worthy customers who were deemed able to pay back the loan on their house. The banks had an incentive to create mortgage terms that would optimize the likelihood that the buyer could pay back the loan in full.

As our banking system became more and more complex and our economy grew, national mortgage companies began issuing home loans. And in order to issue more and more credit to home buyers (these companies earned fees on each originated loan so increasing the number of loans was important), these national mortgage companies began selling off mortgages to other banks. These banks then began creating mortgage-based bonds. These were pools of thousands of mortgages, which made them safer than buying individual mortgages. If you owned one mortgage and the buyer defaulted, you'd lose approximately 50% of your investment after the foreclosure was processed. But if just a few mortgages within the mortgage bond defaulted, those losses would be more than covered by the interest payments of the thousands of other mortgages within the bond, which hadn't defaulted. It took a substantial number of defaults for the bond to fail.

This was all well and good at the beginning of this process. The mortgages being initiated and bundled into these bonds were very much like the mortgages traditionally given to buyers by local banks. The buyers had high credit ratings and a low risk of default. The ratings agencies (Standard & Poors, Moody's, and Fitch in the U.S.) gave these mortgage bonds similar AAA ratings, just as they'd give to all federal government and many corporate bonds.

But the ability to sell off the loans mortgage companies originated, changed their incentives. They no longer held the risk of default - they'd passed it off to a buyer. They were immune to the effects of a default. They quickly realized that they could increase their profits by doing two things. One was giving loans to people who they would not have given them to if they held the risk - and the other was to push people into adjustable rate mortgages, which were designed to require refinancing once the introductory teaser rates expired and the mortgage payments went up.

This combination of lowering credit standards and a preference for adjustable rate mortgages lead to the subprime mortgage phenomenon. Lending credit to the least credit worthy customers and pushing them into loans that would require them to refinance within a couple years. This was predatory and nobody cared. The customers got access to easy credit to either buy homes or refinance their existing homes (to use the equity to pay down other debt or buy nice things). Anybody remember the ubiquitous advertising from The Money Store and other companies promising to combine customer's credit card, car loan, and mortgage debt into a single low monthly payment? Those were subprime lenders. They'd prey on people with overextended credit or poor credit ratings.

But they kept selling those mortgages to the banks creating the consumer credit bonds. And the banks began stratifying the morgagess by their creditworthiness. Traditional mortgage bonds remained traditional mortgage bonds - those made up of mortgages that were least likely to default. But these subprime mortgages were then bundled into similar bonds, but made up of lower credit worthy loans that were substantially more likely to default. And a curious thing happened. The credit rating agencies still gave AAA ratings to many of these bonds ... essentially claiming that the bonds were nearly risk free - giving them the same ratings as federal government bonds.

A quick breakdown of bond ratings can be found HERE.

Investment banks who originated these bonds needed their bonds to be investment grade - many public pensions and other investment houses were prohibited from buying bonds that did not meet certain ratings thresholds - for the biggest institutional investors these are often AA or AAA only. So had the subprime mortgage bonds been rated lower than that, the market for these bonds would have been much smaller. But since the ratings agencies were giving AA or AAA ratings to a full 70 or 80% of these subprime mortgage bonds, there was a robust market for them.

And the investment banks quickly realized they could save those mortgage bonds that were given lower ratings. They took these B rated bonds and repackaged them into collateralized debt obligations, or CDOs. These were pools of subprime mortgage bonds put together to create a new derivative. The concept was the same as going from holding a single mortgage to a mortgage bond ... holding a pool of bonds was considered substantially less risky than holding a single mortgage bond. As such, the ratings agencies again gave 70 or 80% of these CDOs AA or AAA ratings. They took the worst of the mortgage bonds, the B rated crap, and repackaged them into investment grade derivatives.

Remember, AAA rated bonds and CDOs were considered virtually risk free. Yet they were made up of large pools of subprime adjustable rate mortgages given to the least credit worthy home buyers. These were ticking time bombs. And they were being packaged and sold to pensions, hedge funds, institutional investors, college endowments, etc.

A few very savvy investors realized what was happening. They didn't necessarily fully understand the details, but they knew that these subprime mortgages represented the least credit worthy customers and that they had been largely enticed into adjustable rate mortgages with introductory teaser rates that usually lasted 2 years. That meant in 2 years one of two things were going to happen - the homeowners were going to refinance or they were going to default.

Enter the credit default swap or CDS. The credit default swap is pretty simple. It's an insurance policy on a bond or derivative. The buyer of a CDS believes that the bond is at risk of default and is buying insurance against that happening. The CDS is usually sold as a percentage of the presumed value of the bond and is renewable yearly. By way of example, if you wanted to buy a CDS on $1 billion worth of a AAA-rated subprime mortgage bond you might pay 0.5% of that value per year. So you'd essentially pay $5 million to insure the bond against default for one year. If the bond defaulted during that year, you'd get paid $1 billion. If it did not default during that year you'd be out $5 million. So essentially it becomes a bet. The buyer of a CDS is betting the odds of a bond defaulting during that year. Now the CDS holder can renew the CDS every year for the life of the bond (mortgage bonds exist until all buyers have either defaulted or paid off their loans). So if you believed there was a high likelihood that the AAA-rated subprime mortgage bond would default within 5 years, it'd cost you $25M to make that bet. And the payoff if you were right would be $1B. To put it into our level of financial understanding, you'd be spending $25 in insurance over 5 years for a chance to win $1,000. If you believed the bet would pay off within 5 years you'd be a fool not to make that bet, right?

And here's the kicker. Unlike traditional insurance, with a CDS you did not need to own the underlying property. I can't buy fire insurance on your house - I can only buy it on my own house. Otherwise, I'd have an incentive to burn your house down. Also, if we both held fire insurance on your house and it burnt down, the insurance company would have to pay both of us for a single property. That's an absurd way of doing business, but that's exactly how CDSs work. You could buy CDS against bonds or CDOs you didn't actually own.

Well, the smart guys in finance realized that particularly the AAA-rated subprime CDOs were absolute crap. That their likelihood of defaulting was not almost impossible ("nearly risk free") but were virtually certain. These smart guys leveraged as much of their investment portfolios as possible buying very cheap CDSs on these AAA-rated CDOs.

Things get much more complicated than this, but ultimately investment banks that were leveraged heavily in these CDSs for subprime bonds and CDOs were on the hook for hundreds of billions of dollars when these subprime bonds and CDOs began defaulting en masse. You see, the sellers of the credit default swaps did not need to hold capital equivalent to their exposure so once these bonds stated crashing like the junk they were, these banks did not have the capital necessary to pay out the insurance policies they'd sold. Not only that, but the bonds and CDOs they were holding became worthless overnight.

In other words, the CDS buyers broke the bank at the casino.

And the American taxpayers were on the hook for the costs, because if the bond and derivatives markets crashed, credit markets would freeze and the entire economy would collapse. These investment banks that so terribly misjudged the risks inherent in their gambles were too big to fail. Trillions of dollars of investment grade securities evaporated and the biggest losers were the institutional investments that were required to invest in only investment grade bonds or CDOs. Those pension plans, university endowments, etc. They'd been betrayed by the very banks they were supposed to be trusting to insure their solvency.

Friday, December 10, 2010

Mr. Sanders goes to Washington

Granted, Senator Bernie Sanders (VT-I) has been in Washington, DC for a long time. He was in the House for 16 years before assuming his Senate seat in 2007. 

But he's currently filibustering the tax deal between President Obama and GOP leadership. 

This is an old school filibuster. Not the usual threat of filibuster that results in a cloture vote (if the vote fails the bill cannot be debated). His filibuster has now entered its 5th hour. He had some help from Senator Mary Landrieu (LA-D) but now he's back on his own and has been talking nearly nonstop since 10:25 this morning - it's currently 3:15pm. He's showing no signs of stopping. 

He is laying out, in great detail, why the United States cannot afford this tax deal. He's supporting his argument with facts backed up with research and expert opinion. The fundamental problems with this deal have been discussed in great detail elsewhere, but essentially 25% of the tax breaks are going to the top earners, taxes will actually go up for the poorest among us, 99ers are not included in the unemployment extension, and we simply cannot afford to continue to give enormous tax breaks to corporations and wealthy individuals when our infrastructure, education, and working class opportunity are crumbling before our very eyes. 

For my money, he's one of the only members of the Senate willing to stand up for the working class in the face of the plutocracy.

We should be furious about this deal. It doesn't seem like we care a whole lot. Voters get what they deserve. Deserve better.

Wednesday, December 8, 2010

What's wrong with this picture?

The House passed legislation to expand the school lunch program for needy children. The bill will now go to the White House for the president's signature. Sounds like a win for the impoverished, right?

The $4.5B plan will be partially offset by $2.2B in cuts to the food stamp program.

So let me get this straight. A program to feed poor children at school was offset by cuts to a program that will take food off their tables at home. 

At the same time we have an unfunded war in Afghanistan costing $5.7B per month

 This in the same week we saw a tax cut deal that will add approximately $900B to the national debt and overwhelmingly favors the wealthy.

The plutocracy reigns.

World Press Freedom Day 2011!

Without a hint of irony, yesterday (Tuesday, 7 December 2010) the State Department announced the U.S. would host World Press Freedom Day 2011 with a commemoration entitled, "21st Century Media: New Frontiers, New Barriers".

I particularly like this statement embedded in the 2nd paragraph:  we are concerned about the determination of some governments to censor and silence individuals, and to restrict the free flow of information. 

Also yesterday a U.S. State Department official called the Columbia University School of International and Public Affairs warning students not to discuss WikiLeaks on Facebook or Twitter so they didn't hurt their job prospects. The State Department has since denied the communication, but Columbia has confirmed they received a call from an alum who is a State Department employee.

The U.S. State Department had previously banned its employees from viewing WikiLeaks.

Obama's Tax Defeat

Make no mistake. The bipartisan tax agreement between the White House and Congressional Republicans will save you money over the next 2 years. 

That is unless you make less than $20,000 a year ($40,000 for a couple filing jointly). 

That's right. This big tax cut agreement increases the tax burden on the lowest earners. You see, the Making Work Pay credit goes away. That credit for low and middle wage earners gave them $400 to individuals or $800 to families. But the benefits of this new plan are less than $400/$800 for those lowest earners so they actually end up losing a few dollars a week. A few dollars a week that these lowest earners need more than the top 1% of earners need their average $70,000 tax cut under this plan.

That's right. The rich just got richer. It happens every time.

Of course, they were already rich. In fact, the super rich make out best of all. Those in the top 1% will receive 25% of the benefit of this new tax plan.

There was also no movement on closing the loophole that allows hedge fund managers to file their income under capital gains, because they earn fees and a percentage of the take on whatever their hedge fund makes their investors each year. Why does this matter? Because they aren't investing or earning off their own money. They're investing and earning off their investors. So it's income, not capital gains. These guys who make millions and even billions of dollars each year currently pay a 15% capital gains tax. That's the equivalent to the 2nd lowest tax bracket in our income tax structure for 2010. An individual making over $34,000 will move into the next bracket, taxed 25% on anything over that amount. So a hedge fund manager is taxed at a substantially low rate than is his secretary. 

Further, there's a one year reduction in our Social Security tax. For an individual at the maximum social security income ($106,800), they'll save $2,136 this year. Think about that for a minute. We've cut back on our Social Security revenue collection at a time when we're worried that Social Security will be insolvent soon. Well, it just got sooner. Well done.

Of course, none of this will be paid for by spending decreases. Nope, it'll just go into the deficit. Into federal bonds that those with excess money can invest in to earn interest on top of their tax breaks. Makes perfect sense, right? We lend money to ourselves and charge ourselves interest. All so we can have a little extra cash in our pocket. 

President Obama defended this tax plan with this, “I’ve said before that I felt that the middle-class tax cuts were being held hostage to the high-end tax cuts. I think it’s tempting not to negotiate with hostage-takers, unless the hostage gets harmed. Then people will question the wisdom of that strategy. In this case, the hostage was the American people, and I was not willing to see them get harmed.”

This is a perfectly reasonable response. Most of President Obama's reasons are soundly rational.
At a time when the average American is really hurting financially. When millions of homes are being foreclosed upon. When there are 5 potential workers for every available job. When unemployment stands at 9.8%. That's not the time to draw a line in the sand and dare your opponents to cross it. That's the time to stand up, do what is right, and protect the interests of the working class. If that means you have to make concessions to the wealthy, that's apparently the price you pay in today's political environment. 

The trouble is, of course, he didn't stand up for the weakest of the weak - for the working poor making less than $20,000 a year. I guess they were the hostages that didn't make it out alive. Pity.

Tuesday, December 7, 2010

Witch hunt or justice served?

Julian Assange was arrested in England today. The purported crimes occurred in Sweden over the summer when two women accused him of unlawful sexual intercourse.

This article sums up the details of the case as known so far.

AP photo.

If the details laid out in the article are true, it's pretty clear the guy has a rockstar mentality and takes advantage of women who are blinded by the glow of his fame. That makes him a cad, not a criminal. But it sure is convenient for the entities he's harmed with his leaks. I wonder if Interpol would have been so zealous in pursuing him had he been a footballer on holiday instead of the most notorious cyber-activist of our day?

It's the economy, stupid. (Part 1 of many)

Where to begin? From my perspective, virtually everything related to governing and the philosophy thereof is related to economics. Other things, particularly social issues which are so important to some people, are simply window-dressing when it comes to governance compared to the fundamental purpose of our government, which is to provide a safe environment in which our economy can grow and our people can be well fed, clothed, and pursue life, liberty, and happiness to their heart's content. 

Unfortunately, our government has done a poor job of this in the past 30 or so years.  It began with the misguided economic principles of Ronald Reagan and Alan Greenspan and has continued through each administration since, culminating with the near collapse of our credit markets in the early days of the financial crisis. Those were the dark days when the Troubled Assets Relief Program (TARP) was driven through Congress like a nail through balsa wood. No time to deliberate. No time to read and reflect. Must pass this legislation immediately or our banking system will collapse. 

It wasn't true. I won't go into the details. Movies like Inside Job and books like  13 Bankers provide plenty of insight into what happened during the crash and how it could have been prevented. How TARP could have been better managed. How that moment provided an opportunity to put regulations in place that would prevent a future bubble/burst of that magnitude from happening again. But since the TARP program was administered by former financial industry executives, they had no incentive to handcuff the industry that had made them wealthy beyond most of our imaginations.

Suffice it to say, a huge windfall befell the financial services industry, an industry that had grown from just 4% of GDP in the late 1970s to over 8% of GDP in the late 2000s. A doubling of a century old industry in just 30 years. How? Well, look no further than Reagan & Greenspan - deregulation of the banking industry. Investment houses went from private partnerships playing with their own money to publicly traded corporations with stockholders interested in short term gains over long term viability. And again from publicly traded corporations to publicly traded corporations gambling with bank deposits from regular banking customers.

Coupled with this deregulation of the banking industry, which had provided walls of protection between bank deposits and risky speculation, was the creation of a completely unregulated market of derivatives trading and the unregulated rating of these derivatives by the private ratings agencies and you have a recipe for disaster. 

That leaves us where we are today.

We're clearly in deep economic doldrums. Our economy's growth is sluggish. New jobs are not even keeping up with new workforce additions (every month people finish school or turn 18 and want to start working) so our latest jobs report shows that unemployment has risen from an atrocious 9.5% to an abysmal 9.8%. Underemployment is much higher - people who would like to work full-time but can only find part-time work. The stimulus plan, implemented almost 2 years ago, is fast coming to an end - it was a 2 year program.

Congressional Republicans have remained entrenched and unified in their support of Ronald Reagan's trickle down economic theory. That theory which in 1980 was presciently referred to by future President George H.W. Bush as "voodoo economics". 

It's actually not a bad theory, in theory, when the economy is soundly based on manufacturing and service industries and the economy is growing at a robust rate. But our economy has been increasingly converted to a paper dragon. The real economy, that based on concrete commodities or usable services, has been shrinking in many sectors, particularly wholesale goods manufacturing and construction. Meanwhile, the financial industry has more than doubled in size. And virtually all of the wealth in the last boom was created inside this industry. And they created nothing. Nothing of value. They traded in derivatives, which do not spur economic growth, do not spur job creation, do not spur technological innovation. Because nothing of value has been created and we've been shedding the kinds of jobs that do actually create something of value, we're in bad shape. 

Here we can take a step back for a moment.

Businesses create jobs when their output no longer meets the demand for their goods and services. The other reason a business might create jobs is if forecasts suggests there will be increased demand soon and there are incentives in place to develop that capacity now rather than waiting for when the demand hits. This is manipulated by the Federal Reserve through interest rate reductions. Most companies take out loans to develop additional infrastructure - when interest rates are low those loans are most attractive.

Demand for goods and services increases when the working classes have more income to spend. Tax cuts to the middle class, unemployment insurance, Welfare payments - all of these programs put money into the hands of people who will spend that money. Tax cuts for the wealthy result in investment in securities (e.g., derivatives), not increased demand for goods and services. 

Each $1 the U.S. government doles out to the unemployed results in $1.61 in economic stimulus. Welfare/food stamps are even better: $1.74. The Bush tax cuts? $0.32. The way this works is that when an unemployed person or welfare recipient gets their check, they spend what they're given. The people they pay for goods and services then spend the money they earn so the money goes right back into the economy a 2nd time. Thus each $1 can result in more than $1 in stimulus. Much of the Bush Tax cuts (and that's all of them, not just the tax cuts for the wealthy) go into people's pockets without additional spending for the economy, because most of the tax benefit goes to higher income earners - either the wealthy, who get the lions share, or the middle class who is still working, who is currently focused on reducing family debt levels and saving more for the future. So just $0.32 out of each $1 goes back into the economy. It's still stimulative, but at less than 1/5th the stimulative effect of extending unemployment benefits. 

This chart shows how much of the tax cuts go to each income group.



The most stimulative of these tax savings are in the lowest income brackets, probably those <$100,000 or so. Those are the people most likely to put the money directly back into the economy through increased purchasing power. Everyone else is much more likely to save money or invest it, which while theoretically a force for the economy, is much less so now that investment firms traffic so heavily in the derivatives markets.

And as you can see, the Republican plan, which is the plan that has just been agreed upon in yesterday's compromise between the Obama Administration and Congressional Republicans, gives by far the largest tax break to the wealthy who will be the least stimulative - they're not only least likely to spend their money, they're also the most likely to actively seek out complex securities for investment.

I realize this one rambles a bit, but I had to get that off my chest. I'm not too happy with the tax cut plan. 

Monday, December 6, 2010

Deficit Reduction simplified

It's clearly not as simple as this, but it's still pretty simple. If you want to reduce the federal deficit you need to combine increased revenues with decreased spending. The Deficit Reduction Commission's recommendations rely overwhelmingly on reducing spending through cuts and reforms to programs that help "the rest of us" in favor of maintaining lower taxes on corporations and the wealthy.

I give you the Daily Kos compilation, Deficit Reduction Graph-O-Rama

Ezra has this chart, "the single best explanation of why it's so much easier to say you want to cut government spending than it is to actually cut it."
spending poll graph
The blue line reports the results of an Economist/YouGov poll asking people "If government spending is reduced in order to balance the budget, which of the following government programs should receive lower federal funding than they currently do?" The red line is the percentage of the budget these programs actually account for.
The only program that more than a third of the public wants to see cut is foreign aid. Bummer, then, that it accounts for less than a single percent of the budget.
But the fact that people want a smaller budget deficit but no reductions in actual spending is old news, and well accounted for in Congress. What's interesting about this chart, however, is that a sizable minority of the population wants to cut defense spending. In fact, defense spending's size of the budget and the number of people who want to cut it match up much more closely than most of the other two bars on the graph.
Which leads to one of the best blog posts on the deficit, ever, from Dave Johnson at
Dear Deficit Commission,
It's not hard to figure out why we have a huge deficit. It's so easy I don't have to use words. Here are some pictures:
Bill Clinton raised taxes on the rich. Bush cut them.
Now, about that huge national debt...
The second chart kind of explains itself. The third chart can help you find a place to get some money:
Defense Budget
(Note: There is no more Soviet Union.)
In case that isn't clear enough, try this:
Defense Spending and Debt chart
Let me know if you still have any questions.
Add to this whole mix the general public support for raising taxes on the wealthy, including support from some of those wealthy people, it's actually not that difficult to figure out where the money can come from, and where it should go.

Me again: I don't think reducing military spending and raising taxes on the wealthy are the only solutions necessary to control federal spending, but these two avenues are clearly the low hanging fruit in the tree of options. Let's start there and then move toward trying to find ways to capitate health care expenditures (allowing Medicare/Medicaid to negotiate prices with pharmaceutical & device manufacturers would be a start) and spur the economy (which would create increased tax revenue without raising taxes).

All Out War

It's impolite to admit it, but we're at war. I'm not talking about Iraq, Afghanistan, or even Pakistan or Yemen. I'm talking about at war with ourselves. We have a domestic battle going on. And again, I'm not talking about red states versus blue states or the intellectual elites versus the mama grizzlies. I'm talking about class warfare. 

Conservatives call it "redistribution of wealth", and they're right. There's an effort by liberals in this country to redistribute the wealth. There's a reason for this. A sound reason. For the past 30 years the wealth has been redistributed in the opposite direction. 

Senator Bernie Sanders (I-VT) in this youtube video from the Senate floor, lays out the facts of this case in much more clear terms than I can hope to recreate here so I'll let the gentleman from Vermont stand on his own. 

Highlights (I'd argue they are lowlights):

- In 2007, the top 1% of Americans earned 23.5% of all income in the United States, up from just 8% in mid-1970s. 

- This top 1% earned more than the bottom 50% of all Americans combined. 

- The top o.1% (1/1oth of 1%) earns 12¢ of every dollar made in the United States.

- Between 1980 and 2005, 80% of all new income went to the top 1%. That leaves 20% for the remaining 99%.

- Wall Street executives largely responsible for the financial crisis are now earning more than they made before the bailout.

- We have the most unequal distribution of income and wealth of any developed country on earth. 

- Some in Congress have come out in support of $700B in income tax breaks over the next 10 years to the top 2% of earners. This would result in an average $100,000 tax break to each person in the top 2%. 

- Eliminating the estate tax would cost $1T over the next 10 years and that break would go virtually entirely to the top 3/10th of 1%.

- Our trade policy has resulted in the loss of millions of jobs earning livable wages in exchange for cheap goods overseas and higher corporate profits. 

- In 2009 ExxonMobil made $19B in profits, paid $0 in taxes, and received a  $156M refund from the IRS. 

All of these are verifiable facts. Not opinions. 

So at a time when our economy is in distress, we have sustained high unemployment, our federal budget deficit is growing daily through a combination of increased outlays to help the poor and unemployed and decreased tax revenue,  a substantial number of our leaders think it is sound policy to extend tax breaks to the top 2% of earners and eliminate the estate tax altogether, providing a $1.7T windfall to these highest earners over the next 10 years.

So we're clear, the extension of tax breaks to the wealthy represents just a 2.8% increase in their top marginal tax rate. This means they pay the same as everyone else on all taxes in all lower brackets. Only once they exceed $200,000 in taxable income as an individual or $250,000 as a couple do they pay an additional 2.8% of their income over those thresholds in taxes. The GOP is claiming this is necessary to create economic growth. These tax breaks have been in place for nearly 10 years. Where's the growth? It's a myth. It's a fiction. It doesn't work. We need the tax revenue to cover expenditures for the poor, the elderly, and the infirm. 

This is part and parcel to an assault on the working and middle classes by the moneyed elite in this country. It began under Ronald Reagan and it has continued under every president since, Republican and Democrat alike. Only now, under President Obama, has there been any pushback whatsoever against this systematic financial rape of the American people, and the resulting hue and cry from the wealthy and their shills has been shouts of "Socialism!", "Communism!", "It's a war. Like when Hitler invaded Poland in 1939!" All this when President Obama's policies and the Democrat-controlled Congress have been largely business friendly. His Justice Department has not pressed charges against a single Wall Street executive for defrauding investors. The financial reform law falls far short of what is likely necessary to avoid future bubble/burst cycles. The health care reform law does not actually capitate expenditures for healthcare. 

It's clear why this state of affairs exists. These moneyed interests own Congress. Their campaign contributions and political action committees trade treasure for power. Politicians who dare to stand up to these forces do so at their own peril. Wall Street, which had backed President Obama overwhelmingly in the 2008 election, poured their millions into Republican coffers in 2010. Apparently the president was too critical of their excesses and their payback was to support his opponents. No matter who wins the elections, the American public, at least the 98% or 99% of us who don't hold the purse strings, lose. 

You'll find this is a common topic for me to discuss. I've hesitated to call it war for a long time, but that's where we are. We have a choice. We can either continue to accept the status quo or we can stand up for egalitarian principles in which our interests are given equal weight to those with loads of cash.

More WikiLeaks thoughts.

Yesterday's blog on WikiLeaks spurred quite a bit of discussion, particularly outside the comments section of the blog. I don't know how often I'll follow-up to discussions based on the amount of feedback I've received, but today I'll do that, but I'll try to keep it brief. There's something else I'd like to tackle today as well.

One thing that particularly caught my attention was this exchange with a close friend. 

Me: I'm still coming to grips with all of this [WikiLeaks stuff] and my opinions will no doubt evolve. 

Friend: I struggle to understand why anyone would like the evolution of their opinion to take place in the public domain.

From my perspective, this is precisely the purpose of this blog. I am not here to try to convert anyone to my point of view. My point of view is imperfect. I do not have perfect information or perfect judgment about the information I do have. None of us do. As such, we should always strive to seek the truth. If the truth does not jive with our opinions, we should change our opinions, not seek evidence that supports our opinions. That's rational. That's enlightened. That's how I hope all of us will think about these issues.

I freely admit to being a trusting optimist. I take Julian Assange at his word that his motives for operating WikiLeaks as he does is to improve access to information to spur an open society. I choose not to question his motives until evidence is presented that proves otherwise. That doesn't mean that I think Mr. Assange is making perfect decisions with what information to release. 

The same friend sent me a piece from The Economist which argues that, "[WikiLeaks] needs to lay down some clear, public ethical guidelines about how and why it does what it does. And it needs to bring in a board of directors of people from a wide range of countries, backgrounds and institutions to review the organisation's conduct on ethical and other grounds."

I think these are excellent points. Unless WikiLeaks is open about their editorial processes, they may fall into the same trap that they accuse others of falling into. WikiLeaks has a process for verifying the information presented by sources and makes an editorial judgment about the risks involved to individuals named in the documents, but their process for doing this is not transparent. Making this process transparent will increase the public's trust in their journalistic paradigm. 

I think a primary threat to WikiLeaks is their acceptance of documents as genuine. It seems very likely that at some point an organization or individual will leak false information to WikiLeaks in order to damage another organization or individual. If WikiLeaks does not see through the ruse, their credibility will be severely damaged. I could even imagine this occurring simply to damage WikiLeaks and not a third party.

The piece continues, "Who's WikiLeaks? Besides Mr Assange, I don't know, and they're not really telling."

Another excellent point, but one which I'm afraid the overwhelmingly negative response to the diplomatic cable leak makes much more difficult to address. Mr. Assange is now under threat of criminal charges. He's received hundreds of death threats. His bank accounts have been frozen. Why would other WikiLeaks personnel reveal their identities in the face of such threats? There is an organized assault on their credibility and ability to operate. Calling for them to reveal themselves is nice, but I don't blame them for keeping themselves secret during this maelstrom of criticism. Perhaps once things die down, as they did after both the Iraq and Afghanistan wikileaks, the organization will come to grips with some of these credibility issues. 

Sunday, December 5, 2010

Like we need another opinion about WikiLeaks ... but here it is

A couple weeks ago I didn't expect this to be my first topic of conversation, but I've been fascinated by the reaction to the diplomatic cables they released.

A few highlights ... 

An apparently coordinated series of denial of service cyber attacks were launched against the website hours before the diplomatic cables were released. They're still having trouble keeping the site up. At least some of the attacks appear to have come from someone who considers himself a "hacktavist for good." I appreciate the sentiment, but think it is misguided. WikiLeaks is not the enemy.

The U.S. based company EveryDNS dropped WikiLeaks supposedly due to the cyber attacks. Although, experts in the field have claimed this is extremely uncommon for DNS companies to do. This move forced WikiLeaks from their .org address to a .ch address based in Switzerland. & now have dropped WikiLeaks from their services. Whether this is based on their own judgment or under pressure from the U.S. government is currently unknown, but given what the leaks have revealed about how the government operates to get its way, I would not be surprised if the two companies were strongly advised to disassociate themselves from WikiLeaks.

Representative Peter King (R-NY), the leading Republican on the House Homeland Security Committee, has called for trying WikiLeaks founder Julian Assange for treason. Ignoring the fact that treason applies to citizens acting against their state and Mr. Assange has never been a U.S. citizen.

The Obama Administration has not ruled out legal action against WikiLeaks. 

Conservative intellectual, David Frum (who I admire) summarily stated, "The actions of WikiLeaks founder Julian Assange are reckless, amoral, and dangerous."

Senator Mitch McConnell (R-KY) has called Assange a "high tech terrorist" and likely 2012 GOP Presidential hopeful Newt Gingrich says he should be treated as an "enemy combatant." These are hyperbolic statements even by the low, low standards of today's political soundbites.

Federal employees have been blocked from viewing the documents from government computers, because they are still technically secret. 

Why does all of this matter? Why should we care?

The more I think about it, the more I think what we are facing is a coordinated assault by the U.S. government on a free press, which is protected by our first amendment. It seems that Washington is having a collective knee jerk reaction to a new technological innovation. WikiLeaks is a new approach to journalism - it's crowd sourced. Any whistleblower with information to leak can submit it to the website with a promise of anonymity. This represents a revolutionary shift in an open society.

And yet what is the overwhelming response from our leaders and our punditocracy? Righteous indignation. A call for legal and possibly military action against a website that does exactly what news organizations do, but without the editorializing. WikiLeaks simply provides a forum for the release of information that the submitter and website administrators think is important for the public to know.

Don't get me wrong, the apparently disaffected soldier who leaked the diplomatic cables should be punished to the full extent of the law. He violated his oath to the U.S. government. He gave potentially dangerous and vital information to a foreign national. However, by going after WikiLeaks the government is in danger of shooting the messenger. The cat is out of the bag and you can't put this one back in.

If WikiLeaks is destroyed another wiki-leak site will fill the void. Technology allows this to happen and if we truly believe in a free press we should not be applauding attempts to silence the opposition. The lesson here is for the U.S. government to overhaul their e-security systems, re-think what deserves to be classified, and who should have access to that classified information. This can minimize the likelihood of another breach of national security of this magnitude. The lesson is not to find ways to silence our critics.

This is not without precedent. The Pentagon Papers regarding the Vietnam War were leaked by insider Daniel Ellsberg to the New York Times, who began publishing excerpts on June 13, 1971. Ellsberg was charged with felonies by the Justice Department. His case ended in mistrial after it was revealed the feds engaged in illegal wiretapping and other activities in order to convict him. The Justice Department also tried to censor the NY Times, requiring them to end their publication of the material. The Times v. U.S. case ultimately went to the Supreme Court. The Times were allowed to continue publication.

All is not lost. Libertarian congressman Ron Paul (R-TX) has come out in support of WikiLeaks. He tweeted the following (Yes, I kind of hate myself for "reporting" a tweet): "Re: Wikileaks – In a free society, we are supposed to know the truth. In a society where truth becomes treason, we are in big trouble.”

This gets to the heart of the matter. The release of the diplomatic cables is embarrassing, will have far reaching and currently unknown consequences around the globe, and likely changes how our diplomats will work going forward. However, the unrestricted access to information is fundamental to our being an informed electorate.

Julian Assange may never win a U.S. popularity contest, but he's not the enemy. He's the messenger. Don't shoot him.

An Introduction

What is an egalitarian elite? A play on words, obviously. But more than that.

The word "elite" has been bandied about a lot lately in our public discourse. "Intellectual elites", "liberal elites", "media elites", etc. The word "egalitarian", sadly, has not been part of our public discourse in quite some time. It should be. It means, to save you having to look it up if you're unfamiliar: (adj.) asserting, resulting from, or characterized by belief in the equality of all people, esp. in political, economic, or social life.

That's fundamental to our very existence in the United States of America.

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed."

That's the pre-amble to the Declaration of Independence, penned largely by Thomas Jefferson (he wrote the first draft anyway). So from the very beginning egalitarianism has been in our national psyche. This sense of equality among Americans is what allows us all to share the same freedoms regardless of our background. It has set us apart from many other societies around the world in which equality is not a priority. It gave rise to the concept of "American Exceptionalism" - the belief that we are exceptional among all people in the world. Which, of course, is not very egalitarian.

So what is the purpose of this blog?

I'm still trying to figure that out. I know I want to focus on issues germane to our country and the world since what happens in the world's largest economy affects virtually everyone on the planet. I want to do that while avoiding political labels and "politics" in general. That doesn't mean I won't often write directly about political issues, but I will do my best to avoid partisanship. I would rather focus on the philosophy of governing. I know that may sound boring, but I hope to make it interesting - getting to the underlying beliefs behind many of the policies that are proposed or enacted by our government.

Ultimately I hope to have a voice in the public conversation about these issues. I feel that far too much of our civic energy is poured into policy advocacy or partisan power struggles and far too little is put into understanding the philosophical underpinnings of our disagreements. It's very easy to dismiss our adversaries as evil, stupid, or insane. It's much more difficult to understand why we disagree and try to find solutions to these conflicts. I hope in some small way I can lend some assistance in this process.

So back to the beginning. What is an egalitarian elite?

That's me. I'm egalitarian. I grew up in a lower middle class suburban family in the South. I attended public universities. I worked in a grocery store in high school. I'm also an elite as currently defined by our media. I live in New York City. I'm an Ivy League academic.

Welcome to my blog.