Adam Smith critiques the Deficit Reduction Commission
by ilene - December 7th, 2010 3:55 am
Courtesy of Michael Hudson
What would Adam Smith have said about the Bowles-Simpson economic report last week?
What a pity the great free marketer was not around to serve on the Deficit Reduction Commission. He not only would have rolled over in his grave, he would have risen up wielding an ax to the fiscal proposals that are diametrically opposite to the fiscal principles that he and his original free market contemporaries urged.
Writing in the wake of the French Physiocrats with their Impôt Unique to collect the revenues that France’s landed aristocracy drained from the countryside and towns, Smith endorsed the idea that the least burdensome tax was one that fell on land rent:
A more equal land-tax, a more equal tax upon the rent of houses, and such alterations in the present system of customs and excise as those which have been mentioned in the foregoing chapter might, perhaps, without increasing the burden of the greater part of the people, but only distributing the weight of it more equally upon the whole, produce a considerable augmentation of revenue.
(Wealth of Nations, Book V.3.68)
If Britain were to become a dominant economic power, Smith argued, its industrial capitalism would have to shed the vestiges of feudalism. Groundrent charged by its landed aristocracy should be taxed away, on the logic that it was the prototypical “free lunch” revenue with no counterpart cost of production. He noted at the outset (Book I, ch. xi) that there were “some parts of the produce of land for which the demand must always be such as to afford a greater price than what is sufficient to bring them to market.”
In 1814, David Buchanan published an edition of The Wealth of Nations with a volume of his own notes and commentary, attributing rent to monopoly (III:272n), and concluding that it represented a mere transfer payment, not actually reimbursing the production of value. High rents enriched landlords at the expense of food consumers – what economists call a zero-sum game at another’s expense.
The 19th century elaborated the concept of economic rent as that element of price which found no counterpart in actual cost of production. and hence was “unearned.” It was a form of economic overhead that added unnecessarily to prices. In 1817, David Ricardo’s Principles of Political Economy and Taxation elaborated the concept of economic rent. Under conditions of
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DiggCookies for Susie and Obama’s “Temporary” Tax Compromise
by ilene - December 6th, 2010 10:28 pm
Courtesy of Mish
President Obama has agreed to a tax deal that’s bound to please deficit-hawk hypocrites on both sides of the aisle. The cost is a mere $30 billion spread over 10 years. Spreading the cost over 10 years is an interesting concept given that the extensions are "temporary" for only 2 years.
Of course the last extension was "temporary" and the next extension will be "temporary" as well which makes me wonder about that $30 billion cost.
I have a better idea, why don’t we just "temporarily" extend these deals until 2020 and be done with it? We might be in a genuine recovery by then.
Of course we will then have to factor in the idea that we may need to "temporarily" extend the benefits "one" more time lest we sink the nascent 2020 recovery.
Obama’s Proposed "Compromise"
Inquiring minds may be asking "Just how compromising is the compromise, and more importantly, what’s in it for Susie?" Those are very good questions. The answers can be found in the article Obama Agrees to Extend Tax Cuts for Everyone for Two Years.
President Barack Obama said he’ll agree to a two-year extension of all Bush-era tax cuts in exchange for extending federal unemployment insurance. The plan also would cut the payroll tax by 2 percentage points.
Obama said he would accept a lower rate for the estate tax than Democrats wanted in order to break a stalemate over extending the Bush tax cuts before Congress adjourns. The current tax rates, enacted in 2001 and 2003, are set to expire Dec. 31.
Without the compromise, middle-income families would become “collateral damage for political warfare here in Washington,” Obama said in televised remarks. He said he still believes the nation can’t afford to permanently extend the top tax rates.
“This compromise is an essential step on the road to recovery,” Obama said.
In addition to keeping the current tax rates for all Americans, the plan outlined by Obama would extend aid for the long-term unemployed for another 13 months. The payroll tax — which funds Social Security and Medicare — would be cut by 2 percentage points during 2011 to help spur hiring.
Obama also endorsed allowing a full deduction for equipment purchases that currently must be deducted over time. The proposal would accelerate $200 billion in tax savings for companies in the first
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How the Fed and the Treasury Stonewalled Mark Pittman to His Dying Breath
by ilene - November 18th, 2010 7:11 pm
How the Fed and the Treasury Stonewalled Mark Pittman to His Dying Breath
Courtesy of PAM MARTENS
Originally published at CounterPunch
On the President’s first day in office on January 21, 2009, he issued an Open Government memo promising the American people a new era of transparency. On March 19, 2009, under the President’s orders, the Attorney General’s office issued detailed guidelines on how Federal agencies were to respond going forward to Freedom of Information Act (FOIA) requests. The guidelines instructed the agencies as follows:
“The key frame of reference for this new mind set is the purpose behind the FOIA. The statute is designed to open agency activity to the light of day. As the Supreme Court has declared: ‘FOIA is often explained as a means for citizens to know what their Government is up to.’ NARA v. Favish, 541 U.S. 157, 171 (2004) (quoting U.S. Dep’t of Justice v. Reporters Comm. for Freedom of the Press, 489 U.S. 749, 773 (1989)…The President’s FOIA Memoranda directly links transparency with accountability which, in turn, is a requirement of a democracy. The President recognized the FOIA as ‘the most prominent expression of a profound national commitment to ensuring open Government.’ Agency personnel, therefore, should keep the purpose of the FOIA — ensuring an open Government — foremost in their mind.”
It pains me to inform you, Mr. President, but the Treasury Department, Board of Governors of the Federal Reserve, and Securities and Exchange Commission (the trio that has been variously distracted minting trillions in currency, trading cash for trash with Wall Street, surfing for porn, or mishandling multiple voluminous tips on Bernie Madoff’s Ponzi scheme) have misplaced your memo or, as many suspect, take their marching orders not from you but from Wall Street — perhaps because they perceive that this is where you take your orders too.
On October 6, 2010, I filed three FOIA requests with the Securities and Exchange Commission (SEC). I had come by information that the official government report on the stock market’s “Flash Crash” of May 6, 2010 was materially wrong and I wanted to buttress my investigative report to the public with documents the SEC had obtained or compiled in conducting its investigation.
I followed the SEC’s FOIA instructions and emailed the requests to foiapa@sec.gov as instructed by the web site, asking for a small amount of very…
Banzai7 Periodic Table of Wall St. Criminal Elements
by ilene - November 17th, 2010 3:12 am
Here’s another hilarious piece of artwork by William Banzai7. It was previously reprinted at Zero Hedge, but I somehow missed it. Click on the table to enlarge. – Ilene
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CARNAGE
by ilene - November 16th, 2010 9:51 pm
CARNAGE
Courtesy of The Pragmatic Capitalist
The QE trade is unwinding in dramatic fashion as the market slowly realizes that QE is not in any way inflationary. As I mentioned last week the smart money markets (fixed income and FX) were foreshadowing this as early as last week. The air pocket created by Ben Bernanke created an incredible trading opportunity for investors who weren’t blinded by confidence in the Federal Reserve. Just two weeks ago I said:
“Would add (to shorts) into any move over 1200. Would LOVE to see 1220″
My position is that the market is misinterpreting the economic impact of QE in the long-term. My market position has always been that we could rally to these levels and that at these levels the market has become overly optimistic. If I am wrong I will lose some money and move on. It’s part of the business.
Like clockwork the market touched 1220, bounced and sold-off. The carnage across markets is broad. The only things rallying are volatility, USD and US treasuries. In essence, the leveraged QE inflation trade is collapsing. You can thank Ben Bernanke for this. When you create distortions in the market you get volatility, uncertainty and ultimately a collapse in prices. Keeping market prices “higher than they otherwise would be” is not a recipe for economic growth.
The most worrisome development is dissension inside the EMU. Austria is now threatening to withhold their contribution to the Greek bailout unless Greece can prove that they have fulfilled their requirements for aid:
“The cost of insuring against default by Greece and the premium investors demand to hold the country’ bonds rather than lower-risk German Bunds jumped on Tuesday after Austria said Athens had not met aid commitments.
Five-year credit default swaps were 100 bps wider on the day at 950 bps, according to monitor Markit, while the 10-year yield spread between Greek and German government bonds was 15 bps wider at 923 bps.
Greece has not fulfilled commitments for its European Union-backed aid package, Austrian finance minister Josef Proell said on Tuesday, adding that Vienna had not yet submitted its contribution for December.”
That’s not the only concern in the markets. Municipal bonds in the US continue to crash as a market that was priced for perfection now begins to price in some risk. Commodity markets are…
WHALEN: HOW TO PREPARE FOR THE NEXT BANKING CRISIS
by ilene - November 13th, 2010 10:43 pm
WHALEN: HOW TO PREPARE FOR THE NEXT BANKING CRISIS
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Courtesy of The Pragmatic Capitalist
- Many on Wall Street believe that net interest margin or NIM among U.S. banks is at record levels. They are right, but not in the way that many investors and analysts expect.
- Unfortunately, measured in dollars, gross interest revenue of the banking industry has been cut by a third over the past three years due to the Fed’s zero interest rate policy. Banks, savers are literally dying from lack of yield on assets due to QE/ZIRP.
- In the post WWII period, Fed interest rate cuts resulted in significant reduction in average mortgage borrowing costs for households — until 2008, when mortgage rates implied by the bond market fell significantly but households were not able to refinance.
- Fees charged by Fannie Mae and Freddie Mac, and a mortgage origination cartel led by the big four
banks (BAC, WFC, JPM, C), are now 4-5 points on new origination loans vs less than 1 point during housing boom. Huge subsidy for largest zombie banks effectively blocks refinancing by millions of households.- These fees, which can add up to 7 to 10% of the face value of the loan, raise mortgage rates to borrowers by hundreds of basis points. Banks and the housing GSEs, however, saw significant benefits in declines in funding costs thanks to low fed funds rates.
Opportunities:
- For banks and investors, one of the biggest opportunities for gain is to invest in the stronger regional banks that are acquiring troubled or failed institutions. Resolution results in losses, but also creates value for investors andsociety.
- Acquiring failed banks from
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BERNANKE CONFIRMS THAT QE2 IS NOT FOCUSED ON MAIN STREET
by ilene - November 3rd, 2010 7:41 pm
BERNANKE CONFIRMS THAT QE2 IS NOT FOCUSED ON MAIN STREET
Courtesy of The Pragmatic Capitalist
The most interesting development in today’s FOMC announcement came from the details released by the NY Fed. Specifically, they noted that they will focus on shorter duration bonds via the new QE program. The ten year yield is surging on this news to 2.62%. The five year is tanking to 1.12%. This is very odd because short rates are already very low. There’s really no need to focus on shorter bonds if the Fed is truly trying to stimulate loan growth. If the Fed is intending to reduce borrowing costs and really generate an economic impact they should be targeting long bonds – the bonds that home loans and most auto loans are based on. If the Fed were trying to target households via this program they would have targeted the 7-10′s and 10-17′s. But their focus is in the 5-6 range.
Of course, one of the unintended consequences of QE is that recent expectations of long dated maturities purchases is driving down the yield curve and negatively influencing net interest margin at banks. Unless I am missing something (which could very well be the case) it appears to me as though Mr. Bernanke is trying to keep the curve steep. In doing so, he is directly communicating to us all that he is not worried about reducing our borrowing costs, but is instead worried about keeping the bank net interest margins intact. QE2 was never intended to boost Main Street. It is entirely focused on helping the banks. Mr. Bernanke continues to believe that he can generate economic recovery if he gets the banks back to full strength.
ELECTION RESULTS: BIG WIN FOR THE GOP, POTENTIAL BIG LOSS FOR THE ECONOMY
by ilene - November 3rd, 2010 4:31 pm
ELECTION RESULTS: BIG WIN FOR THE GOP, POTENTIAL BIG LOSS FOR THE ECONOMY
Courtesy of The Pragmatic Capitalist
The country has spoken and they are not happy with the Obama economy. And rightfully so. It has been a remarkable disappointment thus far. President Obama’s biggest mistakes were often highlighted by me in real time:
- He should have chosen to bailout Main Street over Wall Street.
- He never should have appointed Geithner or Summers. They were merely attempts to rehash the Clinton economic team and unfortunately, due to his ignorance of the economic environment, President Obama had no idea that these men played a significant role in causing the crisis.
- He absolutely never should have reappointed Ben Bernanke. Mr. Bernanke has rehashed all of Alan Greenspan’s “flawed” policies and has chosen to focus on the banking sector at every twist and turn of this crisis.
- He should have saved his health care plan for term two and focused on helping Americans get the jobs they so badly needed.
- He should have dropped the hammer on Wall Street with harsh regulation. We have become a nation by the banks and for the banks and the de-regulation of the 90′s is largely to blame. We need to end the financialization of this country and get back to 3-6-3 banking as opposed to relying on our bankers to generate economic growth while also mis-allocating resources.
- He has had every opportunity to become the champion of Main Street. Instead, he appears no different than his many predecessors who have been slaves to bank lobbyists.
This election is largely a referendum on the Obama economy. Unfortunately, I am concerned that the change is not necessarily any better. Specifically, I am most concerned about a return to the ways that got us into this mess in the first place:
- I am concerned that we are moving back towards a belief that business is efficient and rational and therefore does not need to be regulated.
- I am concerned that gridlock will lead to severe budget constraints. Like it or not, we are in a balance sheet recession. And when you’re in a balance sheet recession someone must run a surplus or economic growth will decline. That is simply an accounting identity. With the private sector paying down
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QEII Announced, Fed Set to Buy $600 Billion in Bonds, Reinvest $250 Billion More; Fed Micromanaged Economy to Oblivion; No Miracles Coming
by ilene - November 3rd, 2010 3:35 pm
QEII Announced, Fed Set to Buy $600 Billion in Bonds, Reinvest $250 Billion More; Fed Micromanaged Economy to Oblivion; No Miracles Coming
As expected, the Fed announced a "modest" $600 billion second round of Quantitative Easing. Estimates rated as high as $2 trillion.
Please consider the Fed’s Statement Regarding Purchases of Treasury Securities
On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.
The FOMC also directed the Desk to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities. Based on current estimates, the Desk expects to reinvest $250 to $300 billion over the same period, though the realized amount of reinvestment will depend on the evolution of actual principal payments.
Taken together, the Desk anticipates conducting $850 to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.
QEII Duration
The Fed is going to be stuck with this garbage on its balance sheet for a long time as the following table shows.
That table explains the Fed’s exit plan: None.
The Fed will hold 29% of the garbage it buys for at least 7 years. The Fed may hold all of it to duration. Don’t worry, the Fed does not have to mark-to-market any of these holdings, regardless of what happens to interest rates.
Doubts Persist
MarketWatch reports Fed to buy $600 billion in bonds
The Federal Reserve pledged on Wednesday to start a controversial new billion bond-buying spree to rescue the economy from its current doldrums.
The Fed said it would buy up to $600 billion in long-term Treasurys until the end of June 2011, about $75 billion this month, in a strategy called quantitative
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The Calm Before The Storm
by ilene - November 3rd, 2010 12:51 pm
Note: Michael wrote this prior to the elections. – Ilene
The Calm Before The Storm
Courtesy of Michael Snyder at Economic Collapse
An eerie calm has descended upon world financial markets as they await perhaps the two most important financial events of the year this week. On Tuesday, investors will be eagerly awaiting the results of one of the most anticipated midterm elections in U.S. history. On Wednesday, the Federal Reserve is expected to end months of speculation by formally announcing the details of a new round of quantitative easing. If either the election or the meeting of the Federal Reserve open market committee delivers a highly unexpected result, it could have a dramatic impact on world financial markets. In fact, many are looking at this week as a potential turning point for the U.S. economy. The decisions that are made or not made this week could set us down a road from which the U.S. economy may never recover.
At this point, it looks like the Republicans will take control of the U.S. House of Representatives and will pick up a number of U.S. Senate seats as well.
There are many in the financial world who already consider Barack Obama to be the most "anti-business" president in U.S. history, so a defeat for the Democrats on Tuesday would be greatly welcomed by many on Wall Street. Barack Obama’s decline in popularity since he was elected has been absolutely stunning. According to Gallup, Barack Obama had an average approval rating of just 44.7% during the seventh quarter of his presidency, which was a brand new low. In fact, Obama’s average approval rating has fallen during every single quarter since he took office. Things have gotten so bad for Obama that one new poll has found that 47% of Democrats now think that Barack Obama should be challenged for the 2012 Democratic presidential nomination.
However, if the Democrats were able to do surprisingly well on Tuesday, it would not only shock the political pundits, but it would also likely put world financial markets in a very bad mood.
If the Republicans do very well on Tuesday, it will likely mean that there will be no more extensions for those receiving long-term unemployment…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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