Thursday, August 6, 2009


An interesting article on taxes. The money quote:
European powers collapsed from overtaxing their people for wealth they no longer had. The United States is headed for collapse for refusing to fairly tax existing concentrations of wealth.

Remember that companies, large and small only pay taxes on profits. No profit, no taxes. Payroll is tax deductible, so taking on an additional employee reduces tax burden. So don't let anyone ever tell you that reducing taxes will be an incentive for companies to hire more employees.

Thursday, July 16, 2009

The Great Vampire Squid Feeding on Society's Cash

From Matt Taibbi's article, "The Great American Bubble Machine".
The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who's Who of Goldman Sachs graduates.

The bank's unprecedented reach and power have enabled it to turn all of America into a giant pumpanddump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumercredit rates, halfeaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you're losing, it's going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it's going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals.

It's a fascinating look into a, if not the, major player in the lead up to our current financial debacle. Michael Lewis traces the root cause back even further. In an article called "The End" he takes us through the mortgage meltdown. But deep into the article, right at the end of it he talks about his lunch with John Gutfreund, the CEO of Salomon Brothers who turned it from a private partnership into Wall Street’s first public corporation. By doing this Gutfreund:
...and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

...[Gutfreund] agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

And the taxpayers were left, paying for it.

If you're not ready to read the entire article, Matt Taibbi did an excellent series of interviews with Sam Seder which covers the basics very well.

Cenk Uygur wonders what would happen if Goldman Sachs went under?

Here is what I mean. Goldman Sachs knows that they are too big too fail. And they already know what the government does when a financial company is too big to fail. They bail them out -- no matter what.

What if Goldman took too many risks in making the absurd amount of money they're making now (while we're told that the banks don't have any money to lend)? What if they crashed right now? What do you think would happen?

Everyone in the world knows that we would bail them out. The idea that Tim Geithner would let Goldman go under is so laughable that it makes me sick. Does anyone trust that guy's impartiality (other than Obama)? Does anyone believe there is even a 1% chance that Geithner and Summers would let Goldman go down?

So, if you knew that no matter what level risk you took the government would always come riding to the rescue -- and that more risk equals more money in the short term -- wouldn't you take more risk? Of course you would.

One way forward is to fix the economy by prosecuting Lloyd Blankfein. If may not make things better right now, but at least they won't get away with it. At least, not entirely.

Monday, July 6, 2009

A Concise Statement of the Problem - Health Care

In this brief blog post, Mark Kleiman makes the following concise, profound statement of why we are where we are today in the health care debate.
"The biggest miscalculation made by the Clinton health care team was their bet that corporate executives would act out of corporate self-interest rather than class solidarity. If GM and Chrysler execs, and the execs of the other rustbelt companies with big legacy health-care costs, had acted in the interest of their shareholders and employees rather than in the interests of their business-school classmates and fellow high-bracket taxpayers, those two firms might not be bankrupt today, and we'd have a halfway-civilized health care finance system."

Single payer, national heatlh care makes our industries (or what's left of them) more competitive. It's good for the workers and it's good for the employers. Why is this so hard to understand?

Thursday, June 18, 2009

We are %0.0507 Socialist

As the US takes stock in GM and AIG and some very large banks, we hear cries of "We are becoming a Socialist country" throughout the cable news land. But are we really? Do these large events skew our perceptions in the right or wrong way?

The Atlantic has one answer.

Thursday, May 28, 2009

This Problem's Going To Be With Us For a While

From the NY Times today:

About 12.07 percent of all mortgages were delinquent or in foreclosure, up from 11.93 percent at the end of 2008.

Housing specialists said the number of foreclosures would probably keep rising as more people lose their jobs or are forced to trade full-time work for part-time. Nearly six million jobs have been lost since the recession began a year and a half ago, and many economists expect the unemployment rate to rise to 10 percent from its current 8.9 percent.

“More than anything else, this points to the impact of the recession and drops in employment on mortgage defaults,” Jay Brinkmann, chief economist of the Mortgage Bankers Association, said in a statement. “It does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve.”

We need a much stronger social safety net in this country to ease the pain of economic downturns so they don't become crises like this. If the price of such a safety net is a reduction in the height of economic booms then that is 1) a cost we should be willing to pay and (or) 2) probably a good thing.

Tuesday, May 26, 2009

No One Knows Nothing. Personal Finance Edition Part 2

Exhibit 3: New York Times Economics Reporter, Edmund Andrews, buys a house he clearly can't afford using a "Don’t Ask, Don’t Tell" loan. This is a guy who should have known better who was paying "over $4,000 a month in alimony and child-support payments" which left him with a "take-home pay of $2,777" and he was still able to buy a house for $460,000, financing $414,000 of it. Would it surprise you that his mortgage company was American Home Mortgage Corporation? In the past, this would be the time where a loan officer says that they are sorry, you just can't afford this house. Instead, The mortgage broker "simply move[d] down another step on the ladder of credibility."

Let's let Edmund tell us how this works:
"Instead of “stating” my income without documenting it, I would take out a “no ratio” mortgage and not state my income at all. For the price of a slightly higher interest rate, American Home would verify my assets, but that was it. Because I wasn’t stating my income, I couldn’t have a debt-to-income ratio, and therefore, I couldn’t have too much debt. I could have had four other mortgages, and it wouldn’t have mattered. American Home was practically begging me to take the money.

"Despite the obvious red flag of applying for a Don’t Ask, Don’t Tell loan, I wasn’t paying that much for the money. The rate on my primary mortgage of $333,700 was a remarkably low 5.625 percent for the first five years, though my monthly payments would probably jump substantially after the fifth year. On top of that, I was paying a much higher rate of 8.5 percent on my “piggyback” loan for $80,300. Even so, I would be paying slightly more than $2,500 a month for the first five years. It would get expensive eventually, but I could worry about that later."

Bubbles do that to people. Bubbles make smart people do stupid things.

Our Government is Broken

Exhibit 1. Our Senators do not represent us, The People. This is a first hand (brief) account of what happens when The People try to offer another alternative to a Senate committee that is clearly beholden to health insurance companies.

Tuesday, April 21, 2009

No One Knows Nothing. Personal Finance Edition.

Exhibit 1.
Professor Stephen Greenspan wrote Annals of Gullibility: Why We are Duped and How to Avoid it. In his book, he analyzes the topic of financial scams and a great number of other forms of human gullibility. Why do so many people behave in a manner which exposes them to severe and predictable risks? The book was released right around the time of the Madoff scandal. And, it turns out, Professor Greenspan lost a good chunk of his retirement savings to Mr. Madoff. This becomes the starting point in his article on Ponzi schemes.

Exhibit 2.
New York Times personal finance columnist, Ron Lieber discovered that his family's financial planner was being investigated for fraud, because millions of dollars had been transferred out of clients' accounts without authorization.

If the experts get taken, what chance does that leave for us amateurs?

On the Wrong Track

The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

Rather than continually buying small stakes in banks, the government should put weaker banks through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.

The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, "is a really bad program," Stiglitz said. It won’t accomplish the administration’s goal of establishing a price for illiquid assets clogging banks’ balance sheets, and instead will enrich investors while sticking taxpayers with huge losses, he said.

"You’re really bailing out the shareholders and the bondholders."

It's worth reading the entire article.

And now a word or two about those announced bank earnings:
The banksters who have emptied the US Treasury of its money continue the same games of accounting sleight of hand, financial engineering, and other tricks of the trade that helped cause the meltdown in the first place.

Instead of recievership and liquidation, we rewarded these cretins with your grandchildren’s lunch money. It is idiocy on a grand scale, beyond my feeble imagination.

Wednesday, April 15, 2009

Other Ways We Are Wasting Money

Brave New Films has put together a documentary called "Rethink Afghanistan". Part three is the "Cost of War", which delves into the financial costs of this military conflict which will reach over $1 trillion and could last a decade or more. This is the trailer:

Monday, April 13, 2009

Tax Policy

This doesn't have quite as much to do with The Meltdown as it does with how our government raises money via the income tax. Warren Buffett noted in a speech he made in 2007 that "he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent". A truly progressive income tax policy is a vital component of a healthy economy. As it is now, our income tax policy contributes to the formation of bubble economies, huge disparities in wealth and income, underfunding of vital government services and infrastructure maintenance, and, by extension our current economic mess (I guess it does relate to The Meltdown after all).

Nate Silver at has an excellent post on marginal tax rates over the last 95 years. It's worth reading to put our administration's current proposals on tax policy into perspective.

One more quote from Mr. Buffett: "If class warfare is being waged in America, my class is clearly winning."

How's your class doing?

Friday, March 27, 2009

Follow the Money

Certainly the fact that AIG paid bonuses with bailout money make us angry and not without good reason. Focusing our attention on this has the benefit of being easy to understand and puts a human target on our anger. However, it fails to take into account the fact that the $165,000,000 spent on bonuses pales in comparison to the $125,000,000,000 in "loans" AIG has taken from us. As Robert Scheer writes:
"But the $165 million in taxpayer funds used to reward them is but a sideshow in a far larger drama of moral decay swirling around the banking bailout. It should not distract from the many billions, not paltry millions, of our dollars being diverted to reward the very folks who brought us such misery. Consider the $12.8 billion of the $170 billion that taxpayers gave AIG in bailout funds that AIG then secretly diverted to Goldman Sachs, a company that evidently has a lock on both the Treasury Department and the Federal Reserve no matter which political party is in power. It was the biggest payoff among those that AIG made to a score of foreign and domestic financial giants."

That doesn't mean we should ignore the bonuses, but it does mean that we should be spending far more time on making sure AIG spends the rest of the money it received in a way that maximizes the benefits to the taxpayers, not the executives or the counterparties who are getting "paid back in full".

And there's something else missing here. Joe Conason writes that we should also be looking into the "quaint islands and mountainous principalities" where:
"the same banks, hedge funds and private equity firms responsible for the world financial meltdown keep their profits in those "secrecy spaces" -- alongside the ill-gotten gains of numerous drug dealers, dictators and delinquents of every description."

"According to the Government Accountability Office, nearly all of America's top 100 corporations maintain subsidiaries in countries identified as tax havens. As the GAO notes, there could be reasons other than avoiding the IRS to set up branches in places such as Singapore, Luxembourg and Switzerland, where taxes are light or nonexistent and keeping clients' illicit secrets is considered a matter of national pride."


"When the cost of these shenanigans was last estimated two years ago, the U.S. government's annual loss in revenue due to tax avoidance by major corporations and super-rich individuals was pegged at about $100 billion -- considerably more than a rounding error, even today. But of course that is only a rough assessment, as is the estimate of $12 trillion in untaxed assets hidden around the world. Nobody will know for certain until the books are opened and transparency is established."

Populist rage can be used to get something done. Let's hope it's the right thing.

Tuesday, March 24, 2009

The Plan

Seems that Paul Krugman and Joseph Stiglitz don't like Geithner's plan. Krugman continues with:

"So now we have a bank crisis. Is it the result of fundamentally bad investment, or is it because of a self-fulfilling panic?

If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.

But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money."

Stiglitz said:

"U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives," Stiglitz said.

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said."

And Atrios says:
"The issue isn't that they're worthless, the issue is that they aren't worth nearly as much as the financial institutions are pretending they're worth. Sellers have a huge incentive to not sell at lower prices because lower prices will potentially reveal that they're insolvent/essentially bankrupt. ...[T]he reason that the big players can make money while the gov't loses money is because of the no recourse loans, and the asymmetric upside/downside of the Geithner plan. They're buying shitpile mostly with gov't loans, and if there's money to be made they and the gov't benefit. But if the asset is shit, they don't have to pay back the loan, just hand over the asset. All this encourages institutions to overpay, so we get to pretend shitpile isn't so shitty until the gov't eats the losses."

If these guys hate the plan, then I hate the plan.

I think the situation we find ourselves in is this. We bought a new car. We drove it, maintained it and were happy with it. Then the dealer came over and destroyed it with a baseball bat. And now you have to pay him to repair it with no guarantee the work will actually get done in the foreseeable future. And you have to pay him before he starts the work and you have to pay him a bonus if he does a competent job.

And the politicians wonder why we're pissed.

More on the Cause

This American Life has had several episodes that did an excellent job of explaining the housing crisis, the mortgage crisis, what it has to do with the turmoil on Wall Street, why banks did stupid things like make half-million dollar loans to people without jobs or income and what credit default swaps are and what they have to do with anything. You can listen to these in streaming audio online for free or download each episode for $0.95. Transcripts are also free.

1. The Giant Pool of Money (transcript).

2. Another Frightening Show About the Economy (transcript).

3. Bad Bank (transcript).

Monday, March 23, 2009


A pretty good description of how leverage made what may have just been a problem into a crisis.

And this doesn't even touch the subject of derivatives which Warren Buffet referred to as "financial weapons of mass destruction" way back in 2003. In that article he said: "The profits and losses from derivates deals are booked straight away, even though no actual money changes hand. In many cases the real costs hit companies only many years later."

In this case, many = 4.

The Crisis of Credit Visualized

A nice simple explanation, with visuals.

Part 1:

Part 2:

Too Big To Fail

"If we bail out this one, bad as it is, if we take Continental Illinois and the rest of them off the hook and they don't have to pay a thing, then the markets will know that, no matter what risks they take, the government will bail them out. Eventually, it's going to lead down the road to the nationalization of the banking system."
- William M. Isaac, Chairman of FDIC, 1982

Read this for an excellent summary of the "Original Sin" of the current banking crisis.