April 3, 2008
The Goose That Lays the Golden Eggs
Once the Democrats select a Presidential candidate and focus on running against the Republican candidate, we are going to hear a great deal about tax cuts and the efficacy of "supply side" or "trickle down" economics. The argument will focus on the effect of higher tax rates on the behavior of the wealthiest one percent of the population. Democrats will argue that a higher tax on the wealthy will raise more revenue needed to balance the budget. Republicans will argue that a higher tax on the wealthy will reduce revenue; the wealthy who are productive will invest less effort and money in American business and there will be fewer jobs (and total income to tax) as a result. Some of the productive wealthy will put the money they have in tax havens abroad (or find tax favored methods to invest at home) and reduce their efforts in American business (competitive energy will find outlets in bridge or golf). We will hear about the age old parable of the goose that lays the golden eggs. Will higher taxes on the goose kill it? or will the goose continue to lay the eggs? Democrats assume higher taxes will not kill the goose; Republicans assume that it will. There will be fights over past data on the effects of the tax cuts of Bush in 2000 and Reagan in 1986 and the Clinton tax increase in 1993, events with much noise in the data. Politicians will spin the data and people will believe who they want to believe. Both sides could be right -- it depends where on the trade-off curve (between rates and revenue) we are at the time of any given tax cut and which type of tax is in issue (investment, sales or income taxes) and haw the tax is levied (corporate versus individual). Me? I would eliminate the double tax on business earnings (with an individual tax credit for corporate taxes paid on earnings that attaches to any dividends actually paid investors) and increase the progressive tax rate on individuals in the upper brackets. Never happen.
The Uptick Rule
In July of this year the SEC finally overturned the "uptick" rule on short selling. The rule disables short sellers from shorting stock until after an uptick in the stock price. Jim Cramer has called the SEC "morons'' for repealing the rule. As usual, Cramer is wrong. The market for years has had a vested interest in stock price appreciation and the law was slanted in that direction. Penalties on short sellers are part of the legal bias. The bias proves short term comfort at a long term price -- short term prices are artificially high and major asset re-valuations, when they come, are big and painful. The same argument applies to artificially low interest rates -- we get short term asset bubbles that are very painful when they finally collapse. Cramer, of course, is also pushing very low interest rates (to allow his buddies at the investment banks to print money). Cramer is the moron.
Sovereign Wealth Funds
When the sovereign wealth funds showed up to invest in United States financial institutions, my first response was great -- we enjoyed Japan's sucker money in the 1990s and now we will enjoy this sucker money as well. Well, how are they doing. The China Investment Corp has lost gobs on its $3 billion investment in Blackstone and the $5 billion it put in Morgan Stanley. The Kuwait Investment Authority has lost big on investments in Merrill Lynch, Citigroup. Bureaucrats care bureaucrats whatever country they come from; they are not astute investment managers. Our bureaucrats do no better but it does ease the mind some to have other country's bureaucrats in our markets.
The Clear Channel Deal and the Court
This is choice. The banks financing the $19 billion privatization of Clear Channel Communications by Bain and Lee Partners want to back out. The buyout firms, sitting on a $600 million termination fee obligation, want to close. Clear Channels controlling family, sitting on a promise for cash, want to close. The result? Lawsuits. One in Texas and one in New York. The Texas judge, in a very very quick opinion, entered a temporary restraining order against the banks. A renegotiation of the price would benefit all the parties. Now the banks say they cannot renegotiate the deal without violating the Texas judge's order. The Texas Judge's order against the banks, has, in essence, helped the banks delay a solution. Delay favors those who have not yet paid the money. You gotta love judges.
James E. Cayne and the Bear Stearns Collapse
The chair of Bear Stearns, James E. Cayne, was a high flier -- brash and self-important. He held 1$ billion in Bear Stearns stock. After the collapse of Bear Stearns, his stock, which he sold, was worth $61 million. Ordinary folks will not cry for him (he still has loads of money) but he did lose $940 million dollars in less than one year. He also lost his false pride. His brashness now does not play well on the street. Recall the stories of how he refused to come off the golf course or the bridge table when problems were brewing. He has been humiliated and is ashamed and should be ashamed and others on Wall Street should note his example. Rumor has it that he is turning to religion to help himself explain his predicament. He does not need religion. He should read Fitzgerald.
Treasury's New Plan
By now most have in the financial community have digested the details of Sec. Paulson's grand plan to reorganize federal financial regulations in the country. The plan augments the power of the Federal Reserve Board to step in when there is a financial crisis. The plan establishes three agencies with different task -- one to regulate the stability of the market, another to regulate financial market competition, and yet another to protect investors. Part of the plan is, for example, a merger of the SEC and CFTC. Hidden in the plan are proposals to lighten regulation -- for example, a proposal to lighten regulation of securities exchange rules on listings. This plan has no chance of approval -- it is too complex, upsets too many apple-carts, and appears in an election year and a year in which the economy is staggering. Why propose it then? Simple. What makes the knees shake of government officials, even those that favor market based solutions over government based solutions to economic cycles, is getting condemned in the history books as having done "nothing" while the people suffer. This plan is a CYA for Paulson. He can claim to have done "something" to solve our economic problems. The proposal of the plan itself is an illustration as to why government ought not have the power the plan gives the FED. There is too much pressure on government officials in a downturn to "do something" and that pressure, more often than not, leads to counterproductive actions. It is well known that Herbert Hoover should not be criticized for doing nothing during the early days of the depression; he should be criticized for doing stupid things in response to pressure -- increasing tariffs and increasing taxes. The plan, increasing the power of the Fed in crisis times, is likely to lead to more problems than corrections.