How the War, Tax Cuts, and the Swaps Market Debased the U.S. Financial System

[leftupnorth]

Entire article:

http://www.hussmanfunds.com/wmc/wmc080721.htm

excerpt:

John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy

Just a note: The Strategic Growth Fund approached its 8-year anniversary by closing Friday at a fresh all-time high, including reinvested distributions. Meanwhile, the S&P 500 has achieved a negative total return since the inception of the Fund on July 24, 2000 (the latest performance chart shows the record through 6/30/08).

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To understand the origins of the current U.S. financial crisis and soaring credit defaults (which will ultimately be borne in large part by U.S. taxpayers), we have to go back not just to the housing bubble, but to two destabilizing decisions made even earlier: the Iraq war, and the 2001-2003 tax cuts. We'll then examine the way that fiscal policy interacted with the swaps market to put a mountain of bad credit on the balance sheets of financial institutions that are partially backed by the U.S. government.

I've previously written about the imprudence of the Iraq war from the standpoint of national security (the end of the May 19 comment includes those pre-war sentiments), but what is relevant here is the effect that the fiscal policy of the past 8 years has exerted.

In 2001, the U.S. initiated a series of major tax cuts amounting to about $500 billion, benefiting primarily individuals with a high marginal propensity to save, despite an already large fiscal deficit. (As an investor, my only defense to the inherent hypocrisy of criticizing this is that all of my own benefit has gone to charity). In addition, the Iraq war heaped on further direct costs of $500 billion. Nobel economist Joseph Stiglitz recently estimated the long-term total of direct and indirect costs of the war to the U.S. economy at $3 trillion.

It is widely believed that the enormous fiscal deficit created by these policies has been “stimulative.” The key question is, “stimulative to what?” Surely, not much of the answer can be found in stock valuations. Stock prices reflect the discounted present value of future cash flows. Even if the entire $500 billion was the present value of long-term cuts in dividend taxation, the “fair” present value of the U.S. stock market would increase by exactly the amount of the reduced tax burden. On a total stock market capitalization of about $15 trillion, $500 billion in tax cuts work out to a gain in value of about 3.3%. Clearly, the Bush tax cuts provided little impetus for anything but a short-term bounce in stock prices.

[leftupnorth]

1. More good links debunking "Bush tax cuts worked" BS

http://www.jobwatch.org/

The state of jobs and wages

Lee Price and Jared Bernstein

Economy up, wages down
The year 2005 was a solid economic year by some indicators, as the economy expanded for the fourth consecutive year. Real hourly wages, however, fell for most workers.

Each bar in Figure A and Figure B represents the percent change in the buying power of the wage for different groups of workers. Figure A shows the real wage changes of low-, middle-, and high-wage workers, corresponding to wages at the tenth, fiftieth, and ninety-fifth percentile of the wage scale. Figure B shows the change in average real wages by education level for high-school and college graduates (four-year degrees).

For low- and middle-wage workers, as well as those with a high school degree, real wages fell last year by 1%-2%. Those at the top of the wage scale experienced marginal gains, and real wages were essentially unchanged for college graduates.

The decline in real wages for these groups of workers was the result of a variety of factors. As shown in an earlier analysis, nominal wage growth slowed over the past few years as the slack in the job market ultimately slowed the momentum coming out of the full-employment job market of the latter 1990s. Inflation was also a factor last year, as energy costs drove prices higher (on average for the year, inflation was up 2.7% in 2004 and 3.4% in 2005). Thus, nominal wages needed to grow that much faster to beat price growth.

Other factors contributing to the decline in real wages are those that reduce the bargaining leverage of many in the workforce, including: the erosion of union power, the fall in the real value of the minimum wage, the growing imbalance in international trade, and the offshoring of white-collar jobs. As long as these forces are in play, the headwinds pushing against real wage gains for many in the workforce will remain strong.



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Sluggish private job growth indicates failure of tax cuts
Changes in tax law since 2001 reduced federal government revenue by $870 billion through September 2005. Supporters of these tax cuts have touted them as great contributors to growth in jobs and pay. But, in reality, private-sector job growth since 2001 has been disappointing, and a closer look at the new jobs created shows that federal spending—not tax cuts—are responsible for the jobs created in the past five years.

If tax cuts have created jobs at all since 2001, it will have happened in the private sector. Assuming that job growth in 2006 matches the Bush Administration's projections, the economy will have added about 2.0 million jobs to the private sector from FY2001 through FY2006. But how many of these two million jobs actually can be attributed to tax cuts and how many to increased government spending—particularly increased defense spending—in this period?

More good stuff here:

http://krugman.blogs.nytimes.com/2008/01/14/bush-tax-cut-mythology/

http://ashby2008.com/Assets/docs/pressreleases/PR_SubPrime_081607_v1.pdf

http://www.reuters.com/article/topNews/idUSL2719096320080427

[slipslidingaway]

2. Kick for tomorrow..

thanks.


I was just reading this
http://www.hussmanfunds.com/wmc/wmc090209.htm

"February 9, 2009
There is No Substitute for Mortgage Debt Restructuring

John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy

"On Tuesday, the Treasury will announce how it plans to use the remaining $350 billion in TARP funds. Last week's market advance was largely based on Wall Street's hope that current mark-to-market rules will be abandoned or modified. This is like someone taking huge losses in their investment portfolio, and believing that not looking at the brokerage statement will improve their financial situation. Look, if the underlying assets are likely to regain value over a reasonable amount of time, then it might be appropriate to modify the capital accounting rules so temporary fluctuations don't drive banks into failure. But if you've got securities that are marked down to 20 or 30 cents on the dollar, and the underlying borrowers are likely to default because you haven't changed their payment obligations, failing to mark the portfolio to market simply allows banks to go quietly insolvent without the knowledge of the public. Providing federal insurance for those securities would amount to an open-ended, unlegislated, future bailout. Let's hope that isn't part of the plan.

The heart of this problem continues to be the need to restructure the payment obligations of borrowers. For the better part of a year now, I have repeatedly (and increasingly urgently) advocated the restructuring of mortgage obligations by a variety of methods (collecting the pieces of securitized mortgages through “all or nothing” auctions, writing down principal in return for “property appreciation rights”, etc). Frankly, I had expected more progress on this from both Congress and the Treasury, considering the obvious urgency. But evidently, only perhaps $50 billion of TARP funds will be directed toward foreclosure abatement. On Tuesday, we'll find out to what extent they've got it right..."