American Taxpayers In the Crosshairs Again

We Canadians sometimes like to believe American taxpayers have it great thanks to vastly lower tax bites. Well, not so much as you might imagine.

America’s taxpaying public are a prey species at the moment, stuck smack in the crosshairs of a government that has trimmed their ranks, an economic elite that has been set free, and a predatory economic nightmare that may soon be added to their “to do” list.

The George w. Bush regime has been a faithful friend to America’s rich. It began with exempting the “investment class” from much of their traditional tax liability, shifting that burden instead to the remainder, the wage-earners. That was followed up with tax cuts for the wealthiest of those wage-earners, who also happened to be the nobility of the investment class. The burden they slipped also shifted to the middle- and working-class stiffs who were, as the nutjobs say “left behind.”

Now with America teetering on the brink of a massive recession those tax cuts for the rich have shown themselves to be anything but “manna from heaven” bringing wealth and prosperity to all but John McCain and the Republicans remain insistent on making them permanent.

But wait, there’s more. In the name of defunding government, Bush has been running massive deficits propped up by borrowed, foreign money. The money goes out the door just as fast as it comes in, the IOU’s get deposited in a special room reserved for the kids and grandkids of the working- and middle-classes. That’s business as usual.

But wait, there’s more. Every decade or so, a group of prominent American rentiers go on a fiscal raid on the scale of a Genghis Kahn. They rape and pillage the countryside and then disappear as quickly as they arrived leaving nothing but disaster to show where they had been. That’s when the government has to step in with emergency relief, typically borne on the backs of taxpayers, to settle things down, punch the reset button, and await the arrival of the next wave of Huns.

Think “savings and loan scandal” or the “dot.com bubble” or today’s “subprime mortgage scandal.” Enormous wealth is supposedly created, entered on the books, backed by millions of little people and then, in an instant, wiped out. Think Charles Keating, Bernie Ebbers, “Kenny Boy” Lay, Jeffrey Skilling and then put their faces on all those ancient, terra cotta warriors unearthed in China.

The Savings & Loan scandal of the late 80s, early 90s was, for it’s day, “the largest and costliest venture in public misfeasance, malfeasance and larceny of all time.” $160-billion of depositors’ and investors’ wealth was wiped out of which $124 was made good in bail outs by the government, i.e. the America taxpayer. A few, like Charles Keating, went to jail but many more just walked away with a lot of loot. Enron/Worldcom are more recent but they ended up much the same although not with similar bailouts. By then it was good enough that employees and small-time investors just had their financial integrity shattered. Now we’re into the subprime mortgage and associated fiascos and hold on to your hat, if, as an American taxpayer, you’re lucky enough to still have one.

Paul Krugman, writing in today’s New York Times, warns that America’s mortgage meltdown could massively dwarf the Saving & Loan or Enron/Worldcom collapses. Think of a cross-section of an old grenade. It has a fuse that is stuck right in the middle, surrounded by a sphere of high-explosive, all of it held in place with a metal casing. When the pin is pulled, the fuse explodes, detonating the surrounding explosive that causes the metal casing to break into lethal shards that fly out in all directions in search of victims.

In today’s America, warns Krugman, the subprime market of $200-billion is the fuse planted in the midst of an $11-trillion, potentially volatile, mortgage market main charge.

“One consequence of the crisis is that while the Fed has been cutting the interest rate it controls – the so-called Fed funds rate – the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that’s sure to worsen the economic downturn.

What’s going on? Mr. Geithner described a vicious circle in which banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing “significant collateral damage to market functioning.”

A report released last Friday by JPMorgan Chase was even blunter. It described what’s happening as a “systemic margin call,” in which the whole financial system is facing demands to come up with cash it doesn’t have. (A financial joke making the rounds, via the blog Calculated Risk: “Who is this guy Margin that keeps calling me?”)

The Fed’s latest plan to break this vicious circle is – as the financial Web site interfluidity.com cruelly but accurately describes it – to turn itself into Wall Street’s pawnbroker. Banks that might have raised cash by selling assets will be encouraged, instead, to borrow money from the Fed, using the assets as collateral. In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities.

Some observers worry that the Fed is taking over the banks’ financial risk. But what worries me more is that the move seems trivial compared with the size of the problem: $200 billion may sound like a lot of money, but when you compare it with the size of the markets that are melting down – there are $11 trillion in U.S. mortgages outstanding – it’s a drop in the bucket.”

Will American taxpayers, at the end of the day, find themselves saddled with this one too? Are they going to be used to bail out America’s banks and financial institutions? By the way, just what happened to their Social Security contributions over the past three decades? Oh yeah, their government, that’s now conveniently broke, wrote them IOUs for that. What a relief!

 

Catch A Wave

Surfers know you have to catch a wave before it breaks. Yet American legislators are now tossing around policies to surf out of the subprime mortgage collapse long after the wave has broken.

Banks in the US are howling and, when that happens, Congress responds. Unfortunately the current economic minefield isn’t as neat and tidy as the Savings & Loan collapse of the early ’90s. This time no one’s really sure just how bad the problem is, much less what might work. From the New York Times:

“Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody’s Economy.com.

The housing slumps of the mid-1970s and late 1980s were confined to the coasts. The current bust, while leaving some cities relatively unscathed, has cut a far wider path and it comes just when home debt is at its highest level since World War II.

In Washington, it will be difficult to engineer a bailout similar to the one for savings and loan companies in the early 1990s, because Democrats and Republicans alike cringe at the very word bailout and fear a backlash by people who never became overextended.

But with millions of homeowners already underwater and the prospect that millions more may face the same situation, Democrats and Republicans alike are scrambling for ideas to keep people from simply walking away from their homes and to help those struggling to pay their bills.

John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies [has a] plan, still in rough form, that would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home.

It would take the remainder of the mortgage as a “negative amortization certificate,” a lien that the investor could recoup if the house were later sold for its original mortgage value or higher.”

The collapse in housing prices is having a variety of negative effects. One is mobility. An underwater homeowner is tied to his unsaleable property and that makes it very hard to move to secure better employment.

Then there is the phenomenon of people unwilling to sell at a loss in a steadily declining market. Rather than cut their losses, they hope against hope and hang on while the market declines and their losses soar. I know from my experience in my former bankrutpcy practice how common and powerful that emotional inertia can be.

The worst part, however, may be a matter of timing. This is 2008 and it’s turning out to be the biggest election year America has faced in decades. Eventually the presidential nominees from both parties will have to lock horns on this issue and you can bet it’ll be their political fortunes, not the plight of imprudent homeowners, that will shape their policies.

 

The Bubble-Up Economy – Part One

Forget “trickle down/supply side” economics. That’s so 80’s, a means to get government off the backs of the most advantaged so they can really go to town. Sure it creates enormous debt and undermines social programmes but the rich don’t give a dump about their Medicare benefits or Social Security cheques, do they, and you can always pawn the debt off on the working classes by deftly tweaking the tax code to shift the burden off the rich, the investment class, the rentiers, by cutting tax from investment income and shifting that burden over onto wages, earned income. But you can only take that so far, or can you?

Here’s an idea! What about getting the taxpayers, i.e. the working folk, to bail out the investor classes? Take subprime mortgages. The investor class made a killing selling and shuffling bad paper. If it wasn’t legal (more or less) it’d be criminal. But all good things must end and, right now, those investors are scared to death of massive defaults on those dodgy mortgages they spent the Bush years flogging to everyone who could sign their name. So, what do you do?

How ’bout the Fed maybe coming up with a $20-billion relief package? Better yet, why doesn’t the White House and Congress come up with a $150-billion “stimulus” bill, sending tax rebates to the workers? Put a few hundred bucks in their pockets and hope that lets some of them pay their mortgages. The best part? It’s all done with borrowed money. We’ll pay the workers with money we borrowed on their behalf that they or their kids will wind up having to repay, with interest! We’ll just tell’em we’re giving them the money. They’ll never know the difference.

See, the idea isn’t “trickle down” any more. It’s bubble-up. The investor class has long since invested their tax cuts into Asia but the working guy, he has to spend that money, and so it bubbles up right back to the tax-haven accounts of the most deserving or, as I like to call’em, the “Haves and the Have-Mores.” Abe was wrong. You can fool all of the people all of the time.