Rank the following taxes from best to worst: individual income taxes; payroll taxes, corporate income taxes, sales or consumption taxes, and residential property taxes. The vast majority of economists would rank the corporate income tax as being worst and the sales tax and residential property tax as the best.
Unfortunately, the corporate income tax is often the favorite tax of fiscally irresponsible politicians because it is not easily seen. In fact, the corporate tax is paid by workers in lower wages and fewer new jobs, by consumers in higher prices and by savers and investors in lower rates of return. The Organization for Economic Cooperation and Development (OECD), based in Paris and not known for favoring lower taxes, published a new study last month, "Tax and Economic Growth," which provides more evidence that the corporate income tax interferes most (as compared with other taxes) with proper resource allocation, productivity growth, and economic efficiency.
Aug. 20 (Bloomberg) -- Everything will be all right if we just fix the housing problem. That was the hope investors clung to as they watched Fannie Mae and Freddie Mac crumble this week.
The presidential campaigns reflect a similar faith in housing's curative power. Senator John McCain recently suggested that not merely mortgage-loan defaults but also anxiety about those mortgages was our worst problem: ``Americans are uncertain about this crisis.''
``Three-Bedroom Ranch,'' a Barack Obama campaign commercial, suggests that America needs a ``plan to build'' for the middle-class rather than subsidize corporate interests. The candidates seem to believe that recovery is something with French doors and a new roof.
But what if houses aren't a haven but a prison? What if even a booming real estate market itself is a problem? That's the theory of a winning Phelps -- not Michael Phelps, the Olympic swimmer, but Nobel Prize economics laureate Edmund Phelps of Columbia University. Phelps deplores the collective energy Americans spend on family housing.
``It used to be said that the business of America was business,'' Phelps says. ``Now the business of America is homeownership.'' To grow optimally, he says, America needs to get beyond its house passion.
NEW YORK (MarketWatch) -- After reaching deals with many of the top Wall Street banks over the auction-rate-securities mess, regulators are now turning their focus on brokerage firms not covered by those agreements.
Massachusetts Secretary of the Commonwealth William Galvin has written to Edward "Ned" Johnson, CEO of Fidelity Investments, asking that Boston-based Fidelity buy back the auction-rate securities that it sold to its clients.
"It is my hope that Fidelity will follow the industry trend and promptly repurchase these securities that it has sold to it customers, many of whom now find themselves unable to access money that they thought was as liquid as cash," wrote Galvin.
"Therefore, I request that Fidelity take immediate steps to resolve this matter on behalf of those customers."
Fidelity obviously does not agree:
Fidelity, though, stood firm in the face of Galvin's letter. "Fidelity is [not] the issuer, underwriter or sponsor of auction-rate securities," said Vin Loporchio, a spokesman for Fidelity. "We do not proactively market auction-rate securities. We believe the underwriters should stand by their securities."
IT MAY BE CURTAINS SOON FOR THE MANAGEMENTS and shareholders of beleaguered housing giants Fannie Mae and Freddie Mac . It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses. Barron's first raised the possibility of a government takeover of Fannie and Freddie in a March 10 cover story, "Is Fannie Mae Toast?"
Giving in to protectionism - In Herbert Hoover's time, Sen. Reed Smoot and Rep. W.C. Hawley proposed a tariff that was to raise effective duties by as much as half. More than a thousand economists signed an open letter warning that the duties would "raise the cost of living and injure the great majority of our citizens."
Blaming the messenger - Punishing the stock market for the 1929 crash was popular in Washington in the early 1930s. Lawmakers attacked the practice of short selling; Senate Banking Committee counsel Ferdinand Pecora hauled J.P. Morgan and other Wall Streeters in for hearings. By 1934, Congress was creating the Securities and Exchange Commission. The Roosevelt administration also prosecuted business leaders, including former Treasury secretary Andrew Mellon and utilities magnate Samuel Insull. The new regulatory culture cut crime and protected investors. But the arbitrary nature of the assault petrified Wall Streeters.
Increasing taxes in a downturn - Hoover more than doubled income tax rates, taking the top marginal rate to 63 percent from 25 percent. FDR hiked the top rate to 90 percent. Perhaps worse, Roosevelt's Treasury crafted taxes to punish business, including an undistributed profits tax and an excess profits tax, that ultimately sucked cash from a capital-starved economy.
Assuming bigger government will bring back growth. There's a sense today that Washington has retreated too much from daily lives. Wall Streeters mutter that "the system" (the financial markets) doesn't work anymore. In the 1930s, people didn't just mutter that -- they believed it. Public-sector expansion seemed the only way to sustain America's promise. New Deal programs did much to alleviate the pain month to month -- many found dignity in six months of work at the Works Progress Administration, the Public Works Administration or the Civilian Conservation Corps. But economics is a competition for scarce capital. Such state solutions tended to suppress the creation of long-term private-sector jobs, as did the aggressive Wagner Act for organized labor.
Ignoring the cost of inconsistency. FDR spoke of "bold persistent experimentation." Obama speaks of "change." Both can do damage. What's more, the list of experiments is always finite. Our bailouts look reassuring, but even Washington cannot rescue the entire economy. And foreign investors wonder where Washington will stop. Already concerned about the inconsistent dollar policy, China is now troubled by the inconsistent rescues.
The Fed's "dual mandate" -- to keep the economy strong and prices stable -- serves to support this mistake. In contrast, the European Central Bank has a single mandate: price stability. No wonder the dollar has been so weak relative to the euro. Imagine two football teams. One with a single mandate: win. The other with a dual mandate: win and keep your uniforms clean. It's clear that the one with the single mandate will have more success in achieving its goals over time.
It is this combination of denial of actual inflation, bad economic models and the political expediency of keeping interest rates low that makes a repeat of past policy mistakes likely. In the end, inflation can be controlled -- the Volcker-Reagan strategy of tight monetary policy and tax cuts still holds the key -- but only if policy makers find the courage.
The problem then and the problem now is the supply and demand for US dollars. Soon after Reagan’s inauguration in 1980, the dollar started a rise that continued until the Plaza Accord of 1985. The trade weighted dollar rose roughly 50% and the price of oil fell by a similar amount. That rise was no accident. It happened because of the tight monetary policy of Paul Volcker and the growth promoting tax policies of Ronald Reagan.
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The fist step should be to clarify the Fed’s mandate. Now, the Fed is tasked with maintaining growth and minimizing inflation. The only way for the Fed to truly accomplish the first goal is to concentrate exclusively on the second. It should also be made clear that inflation is defined as an expansion of the money supply and not a rise in price of an arbitrary basket of goods. The best way to accomplish currency and price stability is to adopt a gold standard but in the absence of political will for such a policy, a single mandate is a good first step.
He did offer one suggestion: "The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.
He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."
In less than one month, oil prices have fallen nearly 22%. That drop happened during a period when our leaders in Washington accomplished exactly nothing of importance that could account for the fall. Sure, President Bush lifted the moratorium on offshore drilling, but that action will have no effect unless Congress follows suit.
Most likely the fall had nothing to do with the impending expiration of the drilling moratorium, but rather is a reaction to the recent strengthening of the US dollar. There has been a lot of discussion over whether the dollar has risen because oil has fallen or if the reverse is true, but based on history, it seems obvious to me that it is the dollar driving oil prices and not the other way around.
The new international tax rankings are out for 2008, and congratulations to Washington, D.C., are again in order. Our political class has managed to maintain America's rank with the second highest corporate tax rate in the world at 39.3% (average combined federal and state).
Only Japan is slightly higher overall, though if you are silly enough to base a corporation in California, Iowa, New Jersey, Pennsylvania, or other states with high corporate levies, your tax rate on business income is even higher than in Tokyo. For the first time, the U.S. statutory rate is now 50% higher than the average of our international competitors, continuing a long-term trend as the rest of the world keeps reducing corporate tax rates. (See nearby chart).
A new OECD study, "Taxes and Economic Growth," examines national tax burdens and their impact on growth and incomes in member countries. It concludes that "corporate taxes are most harmful for growth, followed by personal income taxes, and then consumption taxes." The study adds that "investment is adversely affected by corporate taxation," and that the most profitable and rapidly growing companies tend to be the most sensitive to high business tax rates.
The average European nation has tax rates on corporate income 10 percentage points lower than the U.S., but those countries on average raise 50% more as a share of GDP in corporate taxes than does the U.S., according to a 2007 study by the Treasury Department. Ireland with its 12.5% rate captures a higher share of its GDP (3.4%) in corporate taxes than the U.S. does (2.5%) with its 39.3% rate.
Chinese authoritarian capitalism, on display this week in Beijing, has me thinking about America’s democratic capitalism and how we practice it.
Start with the U.S. economy’s most powerful government agency: The Fed, of course. Its decision this week to hold short-term interest rates steady was wrong, in my view; it should have lowered them because recessionary forces continue to increase while wage-price inflation doesn't exist. Wages are dropping in real terms. But my opinion and your opinion count for nothing. The Fed is not directly accountable to American voters, or even to Congress or the President.
Sales at furniture stores rose 1%, the biggest gain in 18 months.
Sales at electronics and appliance stores rose 0.8%.
Sales at hardware and garden stores rose 0.3%.
The higher cost of gasoline was evident not only in the 0.8% rise in sales at gas stations, but also in the 1.1% increase at non-store retailers, such as catalogs and online stores.
Sales at the malls were soft in July. Sales at general merchandise stores rose 0.3%, including a 0.1% increase at department stores. Sales at clothing stores rose 0.2%.
Sales at bars and restaurants fell 0.2%. Sales at food stores rose 0.4%. Sales at health and personal care stores were flat.
A large portion of [the recent gains] is due to the extension of unemployment insurance benefits, and thus does not necessarily suggest a severe loosening in the labor market.
Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
Around the world, the press has portrayed the 2008 US presidential election as a choice between freer trader John McCain and “protectionist” Barack Obama. That traditional paradigm has helped the media simplify the differences between the two men. However, such these labels do not accurately describe either candidate. And it does not fully portray the candidate, Mr Obama, who has the more optimistic vision of trade.
The impact of the tax rebates on personal incomes was reduced in June: After getting $48.1 billion from the government in May, individuals received $27.9 billion.
Forcing big oil companies to take a reasonable share of their record breaking windfall profits and use it to help struggling families with direct relief worth $500 for an individual and $1,000 for a married couple. The relief would be delivered as quickly as possible to help families cope with the rising price of gasoline, food and other necessities.
The rebates would be fully paid for with five years of a windfall profits tax on record oil company profits. This relief would be a down payment on Obama’s long-term plan to provide middle-class families with at least $1000 per year in permanent tax relief.
First, Congress rejected a proposal that Fannie and Freddie be barred from paying dividends if they are receiving injections of capital from the federal government. This idea would seem to be the first lesson in a course on Government Bailout 101. The government shouldn't be shoveling taxpayer money in the front door while the company is shoveling dividends to shareholders out the back door.
Freddie Mac paid $1.6 billion in dividends last year while Fannie Mae paid $2.5 billion. Both have dividend yields that are many times higher than the norm. Congress chose to protect the shareholders at the expense of the taxpayer.
Does Pelosi imagine that with so much of America declared off-limits, the planet is less injured as drilling shifts to Kazakhstan and Venezuela and Equatorial Guinea? That Russia will be more environmentally scrupulous than we in drilling in its Arctic?
The net environmental effect of Pelosi's no-drilling willfulness is negative. Outsourcing U.S. oil production does nothing to lessen worldwide environmental despoliation. It simply exports it to more corrupt, less efficient, more unstable parts of the world -- thereby increasing net planetary damage.
Manufacturing employment fell by 35,000 in July, bringing losses over the past 12 months to 383,000. Over the month, job losses were widespread with notable declines in transportation equipment (-8,000), wood products (-4,000), and textile mills (-3,000). Machinery added 6,000 jobs over the month.
Employment in construction was down by 22,000 in July. Construction has shed 57,000 jobs since its September 2006 employment peak, with nearly three-quarters of the decline occurring since October 2007. Nearly all of the July employment
decrease came among specialty trade contractors (-20,000), with both the residential and nonresidential components contributing to the decline.
Within professional and business services, employment services lost 34,000 jobs in July, with nearly all of the decline in temporary help services (-29,000). Since January 2008, employment in temporary help services has declined by 185,000. Computer systems design and related services added 7,000 jobs in July.
Wholesale trade employment decreased by 17,000 over the month, with declines in both the durable and nondurable components. Since its peak in November 2007, wholesale trade has lost 57,000 jobs.
The increase in real GDP in the second quarter primarily reflected positive contributions from exports, personal consumption expenditures, nonresidential structures, federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment, residential fixed investment, and equipment and software. Imports, which are a subtraction in the calculation of GDP, decreased.
Real personal consumption expenditures increased 1.5 percent in the second quarter, compared with an increase of 0.9 percent in the first. Durable goods decreased 3.0 percent, compared with a decrease of 4.3 percent. Nondurable goods increased 4.0 percent, in contrast to a decrease of 0.4 percent. Services increased 1.1 percent, compared with an increase of 2.4 percent.
Now what happens if we are at an initial equilibrium, and then all of a sudden the US government relaxes the prohibitions on ANWR drilling? If oil traders really believe the policy shift is permanent, and that up to a million extra barrels will be hitting the market in a decade, then this will obviously reduce the expected world price of oil starting at that time. Consequently, any oil producers who had previously settled on a production rate with "excess capacity" — i.e., where they could have produced and sold more barrels today, but decided not to for reasons of profit — will re-evaluate their decision.
Without specifics we have no idea how much the new information will change their output plans, but surely they will pump more in the present than they had previously decided.
If we step back and survey the big picture, what would happen is that the market in a sense would be transferring some of those future ANWR barrels to the present. It's true, the market doesn't have recourse to time machines. But physical barrels of oil that would have otherwise sat underground in 2008, 2009, and so on, will now be brought to the surface and sold, because they have been displaced by the barrels currently buried in Alaska that will be brought to the surface and sold in 2018, 2019, and so on.
If this seems too theoretical and farfetched, consider this: In May, the Saudis officially rebuffed President Bush's request for them to increase their output. Yet one month later, they reversed their position. What changed in the interim?
Obviously I don't know for sure what motivates oil barons, but the political mood in the United States shifted in between those two announcements. All of a sudden, opening up ANWR and offshore areas for drilling was "on the table." The mere possibility of an extra million or more competing barrels per day may have been enough to reverse the Saudis' stance.
I DEVOTED six years to carbon accounting, building models for the Australian Greenhouse Office. I am the rocket scientist who wrote the carbon accounting model (FullCAM) that measures Australia's compliance with the Kyoto Protocol, in the land use change and forestry sector.
FullCAM models carbon flows in plants, mulch, debris, soils and agricultural products, using inputs such as climate data, plant physiology and satellite data. I've been following the global warming debate closely for years.
When I started that job in 1999 the evidence that carbon emissions caused global warming seemed pretty good: CO2 is a greenhouse gas, the old ice core data, no other suspects.
The evidence was not conclusive, but why wait until we were certain when it appeared we needed to act quickly? Soon government and the scientific community were working together and lots of science research jobs were created. We scientists had political support, the ear of government, big budgets, and we felt fairly important and useful (well, I did anyway). It was great. We were working to save the planet.
But since 1999 new evidence has seriously weakened the case that carbon emissions are the main cause of global warming, and by 2007 the evidence was pretty conclusive that carbon played only a minor role and was not the main cause of the recent global warming. As Lord Keynes famously said, "When the facts change, I change my mind. What do you do, sir?"
There has not been a public debate about the causes of global warming and most of the public and our decision makers are not aware of the most basic salient facts:
1. The greenhouse signature is missing. We have been looking and measuring for years, and cannot find it.
2. There is no evidence to support the idea that carbon emissions cause significant global warming. None. There is plenty of evidence that global warming has occurred, and theory suggests that carbon emissions should raise temperatures (though by how much is hotly disputed) but there are no observations by anyone that implicate carbon emissions as a significant cause of the recent global warming.
3. The satellites that measure the world's temperature all say that the warming trend ended in 2001, and that the temperature has dropped about 0.6C in the past year (to the temperature of 1980).
4. The new ice cores show that in the past six global warmings over the past half a million years, the temperature rises occurred on average 800 years before the accompanying rise in atmospheric carbon. Which says something important about which was cause and which was effect.
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The world has spent $50 billion on global warming since 1990, and we have not found any actual evidence that carbon emissions cause global warming. Evidence consists of observations made by someone at some time that supports the idea that carbon emissions cause global warming. Computer models and theoretical calculations are not evidence, they are just theory.
Late next week the government will release initial estimates of real economic activity in the second quarter. Not long ago, in early April, when the quarter was just beginning, the consensus forecast for Q2 2008 real GDP growth was 0.0%, with as many economists predicting contraction as were predicting growth.
Now, three months later, the consensus is up to 2.2%. And no surprise - we are forecasting a 3% growth rate, more bullish than almost any other economist. Yes, it is true that the home building and autos sectors have been hammered. But, it is not true that this weakness has spread. Outside those sectors, the economy is not just healthy but downright strong, reflecting relatively low tax rates and loose monetary policy......
Many say it feels like a recession and predict negative growth. Then the data arrive, and show growth. The pessimists then say it doesn’t matter because it’s “old” news. After all, the quarter is already over and the evidence of recession will be clear by next quarter, they say.
Eventually, those forecasting recession are going to run out of time. The clock is already ticking and the economy remains resilient. Construction and auto related layoffs account for more than all the job losses in the past year. Initial unemployment claims remain below 400,000 and the financial sector appears to be bottoming.
"Wall Street got drunk -- that's one of the reasons I asked you to turn off the TV cameras -- it got drunk and now it's got a hangover," Bush said Friday, according to a video obtained by Houston's ABC affiliate KTRK. "The question is how long will it sober up and not try to do all these fancy financial instruments."
Reports from the twelve Federal Reserve Districts suggest that the pace of economic activity slowed somewhat since the last report. Five eastern Districts noted a weakening or softening in their overall economies, while Chicago characterized its economy as sluggish and Kansas City noted a moderation in growth. St. Louis said activity was stable and San Francisco reported little or no growth. Cleveland and Minneapolis reported slight increases in economic activity, while Dallas described growth as steady and moderate.
Consumer spending was reported as sluggish or slowing in nearly all Districts, although tax rebate checks boosted sales for some items. Tourist activity was mixed, with residents in several Districts choosing to vacation closer to home due to high gasoline prices. The demand for services was also mixed across Districts, with strength in the IT and health care industries offsetting some weakness in other service sectors. Manufacturing activity declined in many Districts, although demand for exports remained generally high. Residential real estate markets declined or were still weak across most of the country. Commercial real estate activity also slowed or remained sluggish in a majority of Districts, although a few Districts noted slight improvement. In banking, loan growth was generally reported to be restrained, with residential real estate lending and consumer lending showing more weakness than commercial lending. Districts reporting on agricultural activity said conditions were mixed, based largely on how June precipitation affected them. Districts reporting on the energy sector said it continued to strengthen.
The committee hosting the Democratic National Convention is using the city's gas pumps to fill up on fuel, avoiding state and federal highway taxes, officials said today.
"There's something there that just doesn't seem right to me because, in a sense, you're saying then that the officials who pass the laws are not willing to live by them, and that concerns me," Councilwoman Jeanne Faatz said.
The issue came up during the council's weekly meeting with Mayor John Hickenlooper when the Public Works Department requested authorization to be reimbursed by the Denver 2008 Convention Host Committee for use of "fueling facilities, fuel and car washes."
"By doing it this way, by running it through our Fleet Maintenance, that means that that fuel does not pay state or federal highway taxes," Faatz said.
Christine Downs, a public works spokeswoman, said the host committee is not paying the city's locked-in fuel rate but one that's based on the weekly cost of gas. Downs was unable to provide council members an example.
Faatz asked if it was customary to have "fleets for dignitaries" not pay for highway taxes if they're using government fuel facilities.
Hickenlooper said it was.
"I believe this is only for elected officials, government dignitaries," Hickenlooper told Faatz.
"My understanding is in Washington or wherever where this happens on a regular basis, that it's standard operating procedure. I do know for a fact that they're doing the same exact thing in Minneapolis," which is hosting the Republican National Convention, the mayor said.
Teresa McFarland, a spokeswoman for the Minneapolis-St. Paul host committee, said they're getting their gas at the pump.
"We're not getting a tax break on fuel," she said. "That's not the set-up at this end."
"The DNC is not government. The RNC is not government," said Faatz, who, at the time, had been told that the "same exact thing" was happening in Minneapolis-St. Paul. "They are political parties and they are putting on a huge party, and that is not providing services to each and every citizen each day."
In Colorado, consumers pay 40.4 cents in taxes on every gallon of gasoline. That includes the federal gasoline tax of 18.4 cents per gallon and the Colorado gasoline tax of 22 cents per gallon.
"If you've got a 14-gallon tank, on the average, that's about $5.66 that they don't have to pay for fill up," Councilman Charlie Brown said.
"Raise less corn and more hell," Mary Elizabeth Lease harangued Kansas farmers during America's Populist era, but no such voice cries out today. America's 21st-century financial victims make no protest against the Federal Reserve's policy of showering dollars on the people who would seem to need them least.
Long ago and far away, a brilliant man of letters floated an idea. To stop a financial panic cold, he proposed, a central bank should lend freely, though at a high rate of interest. Nonsense, countered a certain hard-headed commercial banker. Such a policy would only instigate more crises by egging on lenders and borrowers to take more risks. The commercial banker wrote clumsily, the man of letters fluently. It was no contest.
The doctrine of activist central banking owes much to its progenitor, the Victorian genius Walter Bagehot. But Bagehot might not recognize his own idea in practice today. Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed's crash program of interest-rate therapy. Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn't the nation's small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as "triple-A." Yet it's the savers who took a pay cut -- and the savers who, today, in the heat of a presidential election year, are holding their tongues.
Hayek was right. The cause of business cycles and market turbulence is – governments.
In the latest New Scientist, a bunch of 'econophysicists', using sophisticated computer analysis, suggest that crashes might well have something to do with the euphoric levels of credit that precede them. In other words, the cause of your hangover is the binge you went on the night before.
The geeks used some pretty impressive technology – not just looking at portfolios, but programming virtual hedge funds and brokers to see how they react to market conditions. In stable times, they conclude, these agents all work pretty well, spotting under-priced stock and borrowing to invest in it. But when credit is cheap and they borrow and buy more is when they can get into difficulties. Some single chance event can send waves through the entire market: because when everyone's borrowing, one person's failure becomes everyone else's problem.
So that's it. Politicians and monetary authorities love it when we're all borrowing to spend wildly. It's boom-time, everything succeeds, employment rises, production soars, house prices rocket, we all feel rich. And then pop! – the first person who can't pay the bills leaves a second short of cash, which knocks on to a third, a fourth, a fifth... Pretty soon the economy's in a tailspin. All those people the banks and building societies lent to suddenly can't pay it back.
You could mitigate this by regulating the gearing of financial institutions. Much better to do it through a sensible monetary policy that doesn't make credit too easy and keeps a close and concerned watch on the monetary aggregates. The quasi-independence of the Bank of England has probably helped: but it evidently needs tougher targets if boom and bust is truly to be eliminated for the future.
The credit crunch has hit home in Hollywood after Paramount Pictures, which has released a string of hit movies this year, was forced to suspend plans for a $450m film financing.
The studio has been working with Deutsche Bank on financing that would have provided funds for up to 30 films, including possible blockbusters such as the sequel to Transformers and a new version of Star Trek.
Thank you, Mr. Chairman. I know we have a lot of ground to cover today, but I want to say a few things on the topic of this hearing and of the next.
First, on monetary policy, I am deeply concerned about what the Fed has done in the last year and in the last decade. Chairman Greenspan’s easy money the late nineties and then following the tech bust inflated the housing bubble and created the mess we are in today. Chairman Bernanke’s easy money in the last year has undermined the dollar and sent oil to new record highs every few days, and almost doubling since the rate cuts started. Inflation is here and it is hurting average Americans.
Second, the Fed is asking for more power. But the Fed has proven they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go. As I said a moment ago, their monetary policy is a leading cause of the mess we are in. As regulators, it took them until yesterday to use power we gave them in 1994 to regulate all mortgage lenders. And they stretched their authority to buy 29 billion dollars of Bear Stearns assets so J.P. Morgan could buy Bear at a steep discount.
Now the Fed wants to be the systemic risk regulator. But the Fed is the systemic risk. Giving the Fed more power is like giving the neighborhood kid who broke your window playing baseball in the street a bigger bat and thinking that will fix the problem. I am not going to go along with that and will use all my powers as a Senator to stop any new powers going to the Fed. Instead, we should give them less to do so they can do it right, either by taking away their monetary policy responsibility or by requiring them to focus only on inflation.
Third and finally, since I expect we will try to get right to questions in the next hearing, let me say a few words about the G.S.E. bailout plan. When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America. The Treasury Secretary is asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed’s purchase of Bear Stearns’ assets was amateur socialism compared to this.
And for this unprecedented intervention in the markets what assurances do we get that it will not happen again? None. We are in the process of passing a stronger regulator for the G.S.E.s, and that is important, but it allows them to continue in the current form. If they really do fail, should we let them go back to what they were doing before?
I will close with this question Mr. Chairman. Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next government intervention in private enterprise will be. More importantly, where does it stop?
I'm deeply concerned about what the Fed has done in the last year and in the last decade. Chairman Greenspan's easy money in the late 90s and then following the tech bust inflated the housing bubble and created the mess we are in today. Chairman Bernanke's easy money in the last year has undermined the dollar and sent oil to a new high every day and an almost doubling since the rate cuts started.
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The Fed is asking for more power but the Fed has proven that they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it farther than it was supposed to go in the first place. As I said a moment ago, their monetary policy is the leading cause of the mess we are in. As regulators, it took until yesterday to use the power we gave them in 1994 to regulate all mortgage lenders and then they stretched their authority by buying $29 billion worth of Bear Stearns assets so J.P. Morgan could buy Bear Stearns at a deep discount.
Now the Fed wants to be a systemic risk regulator, but the Fed is a systemic risk. Giving the Fed more power is like giving a neighborhood kid who broke a window playing baseball on the street a bigger bat and thinking that will fix the problem.
WASHINGTON (Reuters) - The Federal Deposit Insurance Corp has temporarily halted any foreclosures on the $15 billion of bank-owned mortgage loans found in IndyMac's portfolio, FDIC Chairman Sheila Bair said on Monday.
Bair has scolded mortgage lenders for being too slow to help distressed borrowers restructure their home loans.
The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application, and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse. In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about. (Human Action, p. 576)
Auto sales dropped 3.3%, the biggest drop since February 2006.
Sales at furniture stores dropped 1.4%.
Sales at electronics stores fell 0.6%.
Sales at building materials stores fell 0.9%.
Sales of essentials were brisk, in part because of higher food and gas prices. Gas station sales rose 4.6%.
Food and beverage store sales rose 0.7%.
Sales at restaurants and bars dropped 0.2%.
Sales at drug stores and personal care stores rose 0.6%.
Sales at nonstore retailers, such as catalogs and online stores, rose 0.8%.
Sales at clothing stores rose 0.6%. Sales at general merchandise stores rose 0.4%.
Sales at sporting goods, book and hobby stores rose 0.7%.
WASHINGTON—A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.
"What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future," said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. "We are in a crisis, and that crisis demands an unviable short-term solution."
WASHINGTON -- The biggest political story of 2008 is getting little coverage. It involves the collapse of assumptions that have dominated our economic debate for three decades.
Since the Reagan years, free market cliches have passed for sophisticated economic analysis. But in the current crisis, these ideas are falling, one by one, as even conservatives recognize that capitalism is ailing.
You know the talking points: Regulation is the problem and deregulation is the solution. The distribution of income and wealth doesn't matter. Providing incentives for the investors of capital to "grow the pie" is the only policy that counts. Free trade produces well-distributed economic growth, and any dissent from this orthodoxy is "protectionism."
This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled. The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era. Stagflation in the 1970s and early '80s undermined New Deal ideas and called forth a rebirth of radical free market notions. What's becoming the Panic of 2008 will mean an end to the latest Capital Rules era.
