ataxingmatter

After the No-Deal Bailout, Now What?

As everyone by now knows, the Paulson-proposed, Congress-modified bailout deal failed yesterday in the House.  The failure of the legislation led to a big dip in stocks, but some recovery has taken place today (up to about 10,750 at about 2 pm).  See CNN Money, Stock Rally Speeds Up.

A few things need to be clear. 

• The proposed bill was not perfect, but was better than Paulson's original proposal and could be tweaked some to be even better.  The bill might be workable with three changes:
  1. adding bankruptcy modification for mortgages,
  2. remaking the oversight board to have real power and more breadth by including people outside the close-knit administrative circle such as key congressional committee chairs and possibly non-governmental organizations with a knowledge and a concern for ordinary Americans, and
  3. either reshaping the deal as a capital contribution for equity interests in the bank or at least requiring equity interests as part of the deal in exchange for the infusion of cash for toxic waste assets).
• This crisis was  brought about primarily by two factors: 
  1. Congress's failure to regulate swaps and other financial products and loosening of the rules on massive consolidation of financial institutions with everything under one hat and
  2. massive risktaking and speculation by financial institutions and hedge funds, based on the idea that there were huge profits to be made (which were made, especially by top executives and wealthy shareholders) and losses could be passed off to investors through securitizations with no fear of accountability on the horizon because of the lack of adequate regulation.
• This crisis, and lack of liquidity, is real. When there is a market disruption like this, credit freezes throughout the system, spreading like ice on a lake.  First its counterparties to the big swaps (AIG) and big banks who have too many of the toxic waste securities on their own tabs (Washington Mutual, Lehmann), but then its small regional banks who offer the mortgage loans, student loans, consumer credit and working business loans to their communities.  The credit freeze will affect everybody, one way or another.  Banks are worried about their balance sheets, and when banks get worried, interest rates tend to rise and loans tend to get harder to get.
• The backups aren't many.  The Federal Reserve has been blasting with all its weapons (and maybe a few that were not supposed to be--or thought to be--in its arsenal).  But it too is at crisis level.  See this Brad Setser entry at the Council on Foreign Relations, Do Not Doubt This is a Real Crisis: More on the Fed's Balance Sheet.
• Possible solutions, now that the House has not acted?  Angry Bear's Robert Waldmann, in What is to be done?, suggests two (possibly concurrent) ways out of the mess, not unlike part of my recommendation on modifying the current proposal by changing it to an equity purchase.
  1. Preferred Shares, backed up by a contingent tax surcharge on millionaires
  2. Toxic, Inc., an entity into which financial institutions are required to place their toxic waste in return for equity shares

Citizens for Tax Justice and Fox Newswoman Kelly agree (!): McCain Misrepresents Obama Tax Proposals

McCain's ads have been hitting hard on taxes, suggesting that Obama wants to raise taxes for ordinary Americans in the middle class. As noted here before, it's just plain wrong to suggest that Obama supports raising taxes on ordinary Americans.  Obama has made clear that he wants to extend tax cuts for the middle class beyond 2010 and permit the Bush cuts to die only for those making $250,000 or more.  Citizens for Tax Justice has estimated that for 2008, about 3.2% of taxpayers would have adjusted gross income greater than $200,000 and only 2.1% would have AGI greater than $250,000.  See Who's Rich, January 2008. 

 It is problematic for the media--and often people like me who talk about these issues all the time--to start thinking of taxpayers with incomes in those ranges as "middle class".  The media started to talk that way in discussing the annual AMT patches, which save huge amounts of taxes that would otherwise be due under the AMT for those whose AGI is between $200,000 and $500,000 and quite small amounts for those in the lower income brackets.  (I've fallen into the trap myself, when I glossed over the fact that Joe Biden with his annual income in the hundreds of thousands is indeed rich, in a posting about his charitable contributions.)  Those with incomes of a couple of hundred thousand a year or more are, in fact, among the rich in this country, even though they don't have the unseemly extraordinary incomes of the CEOs and hedge fund managers with their multimillion dollar annual salaries.  So all but the rich would be protected from the expiration of the Bush tax cuts under Obama's proposals. 

Citizens for Tax Justice released a fact sheet making it clear that McCain's charges are misleadingly (intentionally) wrong.  See Obama's Tax Cuts Would Go to the Middle Class; McCain's Would Go to the Wealthy.  Over at ThinkProgress, they noted that even Fox News has found McCain's campaign has gone too far beyond truthiness in its ads' tax portrayals  of Obama.  See McCain Loses Fox News: Megyn Kelly Rips McCain Flack, Sept. 15.  Yet the ads are still running.  I saw one of the ads last night targeted at Michigan voters, based entirely on misrepresentation of the Obama position.  Hopefully, American voters are wise to this tactic of stretching the truth to the point of being very close to an outright lie, and they will simply tune out these bad ads.

Update 9/30/08:  See also Rohter, Misleading Claims by McCain on Obama's Tax Plan, New York Times, Sept. 29, 2008

Financial Institution Bailout: Deal is, for now, No Deal

REVISED 2:53 pm and edited 5:23 pm

This morning, it looked as though Congress had reached accord on the terms of the financial institution bailout.  See this text of the bill (provided by the Wall Street Journal), the provisions of which are briefly summarized and discussed in the second following paragraph.

Since that first version of this post, the House has voted to scuttle the deal 228-203.  See House Rejects Bailout Plan 228-203, but New Vote is Planned; Stock Market Plunge, New York Times, Sept 29, 2008. (Note: other news reports describe the vote variously as 228-205 and 228-207.)  Even John Boehner voted for the bill, acknowledging the extent of the current financial crisis.

Regretably, some of the negative votes apparently were from representatives determined to hold to a Reagan rose-colored glasses version of reality, that governments can let markets run themselves without regulation and without intervention in times of crisis.  So Darrell Issa, a California Republican, saw this as a "nail in Ronald Reagan's coffin."   Reagan, of course, preached deregulation and supply-side economics (the widely discredited view that you can cut taxes on the rich and cause so much economic growth that the tax cuts pay for themselves and trickle good times down to everybody else), but practiced huge spending increases for the military.  Ultimately Reagan recognized the need to increase taxes (though it was payroll taxes that increased especially sharply under Reagan) and went along with the bipartisan 1986 Tax Reform Act to lower rates but compensate by broadening the base and removing loopholes (including, for those who have forgotten, eliminating the capital gains preference).

In the initial version of this post, I noted my concerns with the apparent accord reached in the House, although it was clear that some action must be taken.  In particular, one worries about the degree of discretion the bill lodges in the Secretary of the Treasury--to determine what assets to buy, what price to pay, and who to hire to handle the assets on behalf of the government.  The bill did provide, however, for a congressional oversight panel, and a "Financial Stability Oversity Board consists of the heads of Treasury, Fed Reserve, SEC, Federal Home Finance, and Housing.  I would have liked to see some people with interests outside the administration and financial institution community on the oversight group.  There is, importantly, a "special inspector general" with authority to audit and oversee the program, funded by $50 million of the program funding (initially set at $250 billion, but with mechanisms for increasing to $700 billion). Judicial review is also permitted under the difficult "aribtrary, capricious or an abuse of discretion" standard.  Equitable relief is very limited.  The bill does make some provision for Treasury benefitting from upside gains.  There is still no provision for homeowners' right to bankruptcy workouts of mortgage loans, probably the single most important provision that could help homeownersm but the Treasury is encouraged under the bill to permit modifications to loans the government purchases.  The authority expires on Dec. 31, 2009, unless the Secretary extends it to two years from enactment through a certification process.  The debt ceiling is increased to more than $11.3 trillion.  The SEC is given authority to suspect mark-to-market accounting, and ordered to undertake a study of mark-to-market accounting.  Interesting.  (What will be the consequences of this change in accounting policy, if it is undertaken by the SEC, for broker-dealers that mark to market for tax purposes and are permitted to use, under the regulations issued by the Treasury, their financial accounting mark-to-market numbers for tax?)

Joseph Stiglitz, in an article in the Nation titled "A Better Bailout", criticized the government for failing to act with a real stimulus package and noted that Paulson's original bailout plan was another wall-street-centric proposal that ignored the needs of ordinary people by not providing for bankruptcy modification of mortgages.  See this excerpt and related comments on AngryBear.

The markets reacted negatively to the House's failure to pass the bailout.  See Grynbaum, Dow Drops More than 400 Points, NY Times, Sept. 29, 2008 (before the end of the market day).  The Dow ultimately posted a decline of more than 777 points.  Jeff Claybaugh, BusinessFirst of Louisville, Dow Jones Posts Record Decline as Rescue is Rejected; Grynbaum, For Stocks, Worst Single-Day Drop in Two Decades, NY Times, Sept. 29, 2008.

Pulpit Defiance of Law Banning Tax Exempts from Campaigning

Yesterday (Sunday, September 28) various ministers around the country, organized by a tax-exempt organization called Alliance Defense Fund, joined together to defy the law.   See Slevin, 33 Pastors Flout Tax Law with Political Sermons, Washington Post, Sept. 29, 2008; Sataline et al, Partisan Sunday Sermons Test IRS Tax Laws, Wall St. Journal, Sept. 29, 2008. The law says that tax-exempt organizations cannot actively campaign on behalf of a political candidate, and that includes a ban on endorsing particular political candidates from the pulpit.  The ministers, and the group promoting their lawbreaking act, claim they have free speech rights to say whatever they want from the pulpit.  See Alliance Defense Fund's description of the "freedom Sunday" project on its website.

By the way, the Post article above notes that Rev. Johnson condemned voting for Barack Obama as evidence of "severe moral schizophrenia" but didn't explicitly endorse John McCain.  How's that for trying to have your pie and eat it, too?  If you condemn one of two candidates from the pulpit, that is effectively endorsement of the other, and should be treated as such.  Fran Pulto, of Calvary Chapel in Philadelphia, went further, saying that John McCain is the only candidate a Christian can vote for.  See Wall Street Journal article, above.  (Hasn't it ever seemed incongruous to those in the pews for these sermons that the person their pastor is so fervently supporting in the name of Christiandom has taken positions that amount to trigger-happy warmongering--singing "bomb, bomb Iran" and arguing for huge defense increases to be protected from economic woes while freezing all of the many ways that the government lends a helping hand to the poor and down-and-out?) 

Many other ministers, and groups opposed to that defiance of the law, note that churches can endorse candidates if they choose to forego the benefit of tax exemption (and it is a HUGE benefit for churches that run mini-villages on their complex with claims that all of the various shopping opportunities are in furtherance of their ministries and thus not subject to UBIT -- the tax on unrelative business income).  If they want taxpayers to subsidize their ministries (which we do now through tax exemption and deductions for charitable contributions), they have to accept taxpayers' desire not to support a tax exemption for churches that will intervene in elections  on behalf of candidates.  See, e.g., the NY Times editorial prior to the pulpit endorsements: I'm Your Paster, and I Approved This Ad, NY Times, Sept. 26, 2008;  Robert King, Indianapolis Pastor to Take Part in Pulpit Freedom Sunday, IndyStar.com, Sept. 28, 2008 (noting that Indianapolis Baptist Temple gave up its tax exemption years ago and thus has every right to say whatever it wants from the pulpit).  David Cobb, a First Christian Church pastor in Lynchburg, Virginia, noted that endorsing candidates also "undermines a church's ability to speak prophetically."  Ray Reed, Pastors Weighing Whether to Endorse Candidates or Not, Lynchburg News & Advance, Sept. 20, 2008.

The IRS and the courts should apply the law.  Churches whose pastors openly violated the ban on campaign intervention should lose their tax exemption.  If the Supreme Court, dominated now by appointees of right-wing presidents, gets this case, it should not take an activist position in support of the majority's right-wing ideologies but rather it should make a clear statement about tax exemption:  Tax exemption is a grant of Congress;  if you defy the terms, you lose the exemption.  It has nothing to do with free speech--except to the extent that ordinary American taxpayers shouldn't be forced to pay for intervention in campaigns in favor of particular candidates.  Paying for speech you don't agree with is bad, but paying for groups to campaign for candidates you oppose is terrible.

More on the Bailout.....

There is lots to read just to keep up with what Congress is considering in connection with the Paulson plan, what progress is being made and why folks think their ideas make sense.  I am still enormously worried about the implications of the Fed (backed by the Treasury) as the White Knight of banks, and what looks like a number of back-room deals regarding who gets what assets (the WaMu forced buyout by JPMorgan Chase looks particularly suspicious in that regard). But now at least it looks like responsible people in Congress on both sides of the aisle are trying to ensure that there is an adequate oversight body, that there is an equity stake for taxpayers in return for coming to the aid of the banks in this way, and that the funds aren't handed over to Paulson in a single lump sum.  I regret that they seem to have taken bankruptcy modification of mortgage loans off the table--that seemed like an essential part of the picture to ensure that there is real aid at the Main Street level as part of this liquidity flush to the banks.

What about the Republican proposal?  Far as I can tell, it hasn't got anything to recommend it. 

• Capital gains cuts for the wealthy?  Geez, what crisis doesn't lead to a  Republican offer of capital gains cuts for the investors who own most of the financial assets as the best solution? 
• More deregulation, when the deregulation frenzy of the freemarketarians is the root cause of the problem, for failure to regulate exotic financial derivatives and other products that have driven the stratospheric profits of the financial institutions and their people prior to this meltdown? 
• More credit default "Insurance" for mortgage assets (when the huge credit default swap "insurance" provided by AIG, much of which represents pure speculative betting by AIG's counterparies, is the primary reason that we now own a piece of AIG for $85 million)?  That's either a bailout disguised as something else or something that won't work to start with. 

For a discussion of some of this, see Tom Rozzo (and linked information) over on Angry Bear, The House Republican Plan: A Bailout or Worse Than No Plan.

House passes fully paid-for extenders bill. White House and Senate unhappy

The House voted today on a revenue-neutral $60.3 billion energy and tax extenders bill, H.R. 7060, passing it by a vote of 257-166.   Bush--staying true to his view that tax cuts are always okay no matter what the state of the federal fisc-- had urged the House to take up the Senate's measure (H.R. 6049), instead, even though the administration opposed the Senate revenue raisers, which included freezing the domestic manufacturing credit for oil and gas, chagning treatment of foreign income for American energy companies, and eliminate the cap on the oil spill liability trust fund. The Administration has threatened a veto of the House bill. 

Remember that with the $700 billion bailout for banks, we are looking at a debt ceiling of more than $11 trillion.

The House measure extends the research tax credit, the subpart F active financing exception, and the state and local sales tax deduction.  None of those make good sense as policy items.  Continuing the active financing exception for banks to defer taxes on their business income seems expecially nonsensical in the current situation where these banks are at the public trough asking for handouts. 

Revenue raisers include a further delay of world-wide interest allocation (i.e., revenue from not yet allowing a tax cut idea passed earlier to take effect, when in fact that idea probably should never have been enacted) and ending the perc of deferral of compensation claimed by fund managers.

The House decoupled the extenders from the AMT, as apparently both the House and Senate have decided to continue enacting AMT patches without paying for them with taxes elsewhere.  (The Senate bill, H.R. 6049, included an AMT patch without revenue offset.)  Since most of the AMT tax breaks go to those making more than $100,000, one has to wonder what concept of ordinary taxpayers the Congress has.  It should limit the AMT patches to protect those making less than $100,000 from the AMT.

From my perspective, the House should at the least insist on paying for these measures, else it shouldn't pass them.  In the long run, we are better off without most of these extenders.

For more information, see:

Bloomburg.com, Sept. 26, House Passes Tax Bill that Could Jeopardize Solar Tax Breaks

Bloomburg News, Sept. 26, House Delays Vote on Tax Measure (discussing delay until Friday)

Tax News, Sept. 23, Senate Passes Tax Extenders, AMT Legislation

National Women's Law Center, Reggie Oldak, Sept. 26, Again, A Waiting Game for Our Children (commenting on the delayed effective date for the provision in the House bill expanding the child tax credit)

ON Bailouts

Our friends at OMB Watch have a series of articles on the newest of the bailout proposals (see this New York Times entry for the text of Paulson's $700 billion bailout proposal as released on Sept 20).  OMB Watch appropriately  raises important concerns about the staggering executive authority called for in Paulson's proposal for the $700 billion bailout of toxic waste assets, the need for appropriate oversight, the necessity of coupling the downside risk with adequate upside potential for taxpayers, and--perhaps the most important for Congress to heed now as it seems on the brink of rushing to decision to satisfy petty electioneering goals--the need for Congress to examine the issue transparently and thoroughly before providing the massive contemplated bailout.

See Commentary: On Bailouts, Congress Should Move with Great Care, Sept. 23, 2008; Free Market Ends as Washington and Wall Street Merge, Sept. 23, 2008.

While all the rhetoric about the freezing up of the financial system, and the harm to the little guys on Main Street of such a freeze up is not without merit, Congress should not rush into this monumental decision without pausing to consider the bailout's full implications.  It seems to me that the bailout --which hopes to work by buying toxic assets, using private investment "experts" (the same ones that have gotten us into this mess) to manage the assets, and eventually selling the assets back into the market after it has stabilized-- will have a long term effect of primarily assisting those who own financial assets.  Those aided in the first instance will be the investors in financial institutions whose toxic waste is bought up at a premium above market price.  (It has to be a premium of some sort, else the infusion of federal dollars would not be likely to relieve the pressure of the low-valued waste products.  It is not clear that Congress will insist on commensurate stringencies equity stakes for taxpayers to realize the upside of the bailout or appropriate limitations on the usual generosity of Wall Street compensation packages.)  Those aided in the  second place would be the hedge and private equity funds and other scavaging investors with lots of dollars that would swoop in and purchase financial players cheaply once the taxpayers have assumed the risk of the worst toxic waste. Yes, businesses and individuals would presumably also benefit by the flow of credit, but would that not be able to be accomplished through other means, such as a measured bailout that does not give Paulson a carte blanche and limits the sums available during an experimental period prior to the inauguration of the new administration? 

With this proposed bailout, the credit crisis created by the decades of "free marketarian" deregulation and privatization will paradoxically result in enormous expansion of executive powers (thus complementing this administration's bold power grab through disregard of statutes and treaties, and  even spying on American citizens).  Under Paulson's proposals, he alone decides how to spend the authorized fund--for what, at what price, and with whose assistance.  This is a fund that amounts to a sizable portion of the United States' annual GDP.  One man, with that power, is unthinkable, and thankfully Congress at least seems intent on imposing some kind of oversight body, though accountability has not been a strong suit of the last eight years of the Bush Administration so I am not holding my breath that either the form or the substance of the oversight will be satisfactory.

Further, the bailout intervenes in market processes to such an extent that even those, like me, who have consistently asserted the invalidity of the free marketarian ideology find it unwise.  Sometimes it is useful to allow incompetent, badly managed institutions that take too much risk to fail. The bailout will aid Wall Street institutions whose investors and managers have enjoyed years of enormous profits and often relatively low taxes (including, for those with multinational operations,  their ability to defer taxation under the "active financing exception") and exercised enormous lobbying  influence over our laws for their own benefit and to the detriment of ordinary taxpayers (including persuading Congress not to permit homeowners to modify their mortgage loans in bankruptcy).  And without changes, the bailout will commit an amount about equal to the entire Pentagon budget; it would jump our national debt ceiling to more than $11 trillion.  See, e.g., Greg Hitt et al, Lawmakers Battle over Rescue Plan, Wall St. Journal, Sept. 22, 2008; CIA, the World Factbook: the United States.  Worst of all, we really don't know just how bad the losses will be.  (If assets are valued at 25% of face in any market sales today, they may or may not ultimately pay at 50% of face or 75% or 40%.)  This, at a time when military spending continues to balloon endlessly because of the commitments in Iraq and  Afghanistan and the long-term costs to support returned vets and when the hugely extravagant revenue reduction measures of 2001-2003 will play out in Congress in false cries of tax increases to pressure Congress not to allow the sunset provisions to operate as ostensibly intended. 

House passes another unpaid-for AMT patch

The House today passed H.R. 7005 393-30, providing a higher exemption level for the AMT (increasing the exemption levels to $46,200 for individuals and $69,950 for married couples filing jointly), as well as extending the AMT stock option relief.  The cost of the tax cut--around $70 billion for one year.  The legislation goes back to the Senate, which has already passed an AMT patch without a revenue-raiser to offset the revenue reductions.

This is perhaps to be expected in an election year, but it is nonetheless disappointing.   We are facing huge potential long-term costs from the financial bailouts that are continuing, and yet Congress continues to enact AMT patches without paying for them, even though there are reasonable and policy-sensible options for offsetting the revenue reduction represented by reasonable AMT relief for taxpayers in the lower brackets subject to the downward bracket creep of the AMT.  Those options include (i) raising the rates on the top brackets, so that taxpayers with multimillionaire incomes pay at higher rates than those with incomes in the six figures, and/or (ii) eliminating the preferential rate for capital gains and dividends that accrue primarily to the wealthiest Americans, and/or (iii) repealing the deduction for state and local taxes, at least for those in the higher income brackets.  See, e.g., Alternative Minimum Tax: 11 Key Facts and Projections, Tax Policy Center, Dec. 2006. 

The Tax Policy Center also has some interesting tables showing the projected distribution of incomes and tax cuts in 2012 if the 2001-2006 revenue reduction provisions are made permanent and the AMT patch is extended, at this link.

Rhode Island's Improved Transparency

Citizens for Tax Justice reports on a recent change in Rhode Island law that ensures that Rhode Island citizens will understand better the impact of tax incentives for businesses.  Finally, a State Where Taxpayers Know Who they are Subsidizing, Tax Justice Digest.  The law requires the state to publish the names, addresses, and amounts of tax credits received by businesses during the preceding fiscal year.  See Susan Baird, R.I. posts $54M in tax credits, Providence Business News, Sept. 11, 2008.  The state will eventually release an additional report showing "the full-time and part-time jobs created or retained by each recipient, and the employee benefits provided; the degree to which each recipient has met tax-credit requirements and goals for job creation or retention and employee benefits; and the full cost to the state of each tax-credit awarded."

Now, folks, that's information.   Some of these credits were specifically intended to create jobs in the state.  Others were for facilities, economic revitalization, or simply for jobs with big production budgets (which I assume is expected to translate to more jobs for state residents).  How will the citizens evaluate the results?  What if CVS, a national corporation that enjoyed more than $17 million in credits, created a de minimis number of new, low-paying jobs.  Would the state be better off doling the $17 million out to individual low-income jobseekers rather than to the corporations?   It's hard to know, but they will have much more information at hand for making those judgements than is the case in most states.  Good for Rhode Island.

Money Market Mutual Funds Treasury guarantee

Our friends over at Naked Capitalism have an interesting posting on the Treasury's just-issued "temporary" guarantee for money market mutual funds that pony up the appropriate fee.  See "U.S. to Implement "Temporary" Backstop to Money Market Funds (Updated)," Sept. 18, 2008.

I find myself with more and more questions, the more we see the Fed coming to the rescue of the financial system.  What should we require of those who benefited mightily from the generation of toxic waste?  Can we in any way exact a "clawback" of those benefits?  Where can we draw the line on the socialization of losses--why just financial institutions and not manufacturers?  Is this a replay of the early 20th century when Congress enacted some firewalls among financial enterprises?  What does this public rescue mean in a context where risk was allowed to proliferate without checks and balances?

 I'm not sure what the answers to these questions are, but I know that there needs to be an intensive discussion of the short-and long-term implications of the U.S. Federal Reserve, and via it the U.S. Treasury, becoming guarantor and holder of the toxic waste of the financial system and there needs to be an end. Ultimately, it seems clear that it is not a good idea to permit profit-makers to take huge risks--essentially speculating with core systems vital to an integrated economy--without having some authority (and willpower to use it) to step in and limit the impact of those risks on ordinary people.   The potential problems for the US and its people as the US debt burden mushrooms are significant.  One anonymous commenter on the Naked Capitalism site observed: "If there really is a secret desire among the leaders in the administration to bankrupt the government in order to "save" us all from terrible social programs, I believe they are putting in place the tools necessary to finally get it done."  (I assume that the commenter, like me, believes that our social programs are in fact terribly important, and that the course we are embarked on may be hazardous to our health.)

For additional recent articles on this and other financial crisis actions, see

Reuters, Treasury Aims to Bolster Money Market Confidence, Sept. 19

Market Watch, Confronting Economic Challenges Head On, Sept. 19

MSNBC, Explaining the Latest Measures to Restore Order, Sept. 19

Bangkok Post, US to Take Massive Measures to Avoid Collapse, Sept. 19

Bloomberg, Treasury, Fed Start Aid, Preceding Broad Crisis Plan, Sept. 19