Tax Code That Encourages Manufacturing and Savings

[opebo]

No luxuries involved, wonk, just house and a car or two.

Well than what are you here disagreeing with me about?

Obviously I am disagreeing with your thesis that people have amassed debt due to spending on luxuries.  To the contrary they have largely amassed debt spending on basic necessities such as houses and cars, and the problem which caused the debt to be un-repayable is their inadequate and falling incomes - falling incomes caused by capitalism (neo-liberal policy).

[Wonkish1]

No luxuries involved, wonk, just house and a car or two.

Well than what are you here disagreeing with me about?

Obviously I am disagreeing with your thesis that people have amassed debt due to spending on luxuries.  To the contrary they have largely amassed debt spending on basic necessities such as houses and cars, and the problem which caused the debt to be un-repayable is their inadequate and falling incomes - falling incomes caused by capitalism (neo-liberal policy).

First, you do realize that this is in the context of Keynesian monetary stimulus, right? That means we are talking about whether its a good idea to encourage additional spending with lower interest rates or not. If its a necessity they are going to take out the debt anyway. The only thing the lower interest rates does is to encourage people to go beyond necessity and prudent investments. So do you think its a good thing for the government to encourage people to take out debt to purchase luxuries they otherwise wouldn't have spent on.

Second, you are just simply wrong that most of the new debt was to pay for "basic necessities". Housing may be a "basic necessity", but that doesn't make all homes a necessity. A $600k home is likely at least 50% luxury spending just like a lobster is mostly a luxury(while food is a basic necessity). A 70k mile $8k car financed over 5 years may be mostly a need--for getting to work, but a brand new $40k car financed is mostly a luxury. The average American before the boom wasn't somebody earning less than $15k a year who couldn't afford to eat, have some form of housing(rent most likely), pay electricity, water, a car, and gasoline especially considering that government policy in the US pretty much makes sure you'll be able to afford those things assuming you even show up to get the benefits. Instead the average American household prior to the crash lived in a home valued at $230k, owned 2.5 cars, had a few TVs, had cable/satellite, had broadband internet of some type, spent $500 a month on food(almost half of which eating out), they likely took a vacation every year or 2, they probably were able to finance at least 2 semi expensive hobbies, likely spent more than 2 grand every year for Christmas, etc. But at the same time if you excluded their home and their 401k they likely had probably had no net worth courtesy of their high credit card debt and auto loans of which probably wouldn't have been an issue if they even cut their Christmas spending in half and lets say stopped eating out or just bought used cards. Now since the boom is over even absent them losing their job or taking a pay cut they still probably have a negative net worth even if you include the 401k because the house is so under water. But I guess we gave up on Opebo being accurate about anything long ago.

[Politico]

The deficit spending never seems to go away even after the business cycle is on the upswing again. You can look at the data of many nations, and from a strictly Keynesian, theoretical point-of-view you would think these nations have been in the midst of 30+ consecutive years of recessionary conditions!

I hear you dude...

Where's 2009-2012? Oh yeah...we would need Al Gore's forklift for those years.

FYI: I am registered Democrat. What the hell are you doing trying to turn this into a partisan issue, anyway? Both sides are guilty of deficit spending to no end. At least the Republicans do it to "starve the beast" in hopes it will lead to a smaller government down the road. Democrats in power do it because they don't care about the future. Well, at least Obama doesn't. Give him four more years, and we'll be lucky not to default by 2025.

This isn't about Democrats and Republicans.  This is about people that believe in absolutes and people like me who use logic and facts.  Like I have said multiple times before there are certain things government should be involved in and there are certain things the private sector should take the lead in.  

Whenever feasible, the free market should take the lead. I agree that there should be some fiscal spending to help counteract downturns in the business cycle with regards to spending on building/fixing highways/bridges and other basic infrastructure projects with positive spillover effects that the market will not provide adequately. That does not mean throwing $500 million of taxpayers money at a pie-in-the-sky company that nobody else will lend to, to give an obvious example.

Let's not forget that the private sector ultimately funds the public sector.

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Romney will eliminate the deficit via spending cuts, and all future spending will not occur unless it makes sense from the standpoint of contributing to economic growth rather than being parasitic waste. We do not have a taxation problem; we have a spending problem. We are not only spending too much, we are not spending funds properly.

[Link]

Whenever feasible, the free market should take the lead. I agree that there should be some fiscal spending to help counteract downturns in the business cycle with regards to spending on building/fixing highways/bridges and other basic infrastructure projects with positive spillover effects that the market will not provide adequately. That does not mean throwing $500 million of taxpayers money at a pie-in-the-sky company that nobody else will lend to, to give an obvious example.

Let's not forget that the private sector ultimately funds the public sector.

You must be logged in to read this quote.

Romney will eliminate the deficit via spending cuts, and all future spending will not occur unless it makes sense from the standpoint of contributing to economic growth rather than being parasitic waste. We do not have a taxation problem; we have a spending problem. We are not only spending too much, we are not spending funds properly.

Sorry long day.  These posts are long as well.  Haven't had time to respond.  I will say a couple of things though real quick.  First this is a very flawed statement...

That does not mean throwing $500 million of taxpayers money at a pie-in-the-sky company that nobody else will lend to, to give an obvious example.

I assume you are referring to Solyndra.  I personally don't know whether it was, at the time, a smart idea or a dumb idea to support Solyndra.  Hindsight is 20/20.  What I can say is venture capital is a tough business or else we would all be doing it.  There is a reason you don't see me denigrating Mitt Romney's activities in private equity.  I am better equipped than most to do financial analysis on companies and I honestly don't have access to all the facts regarding Bain's dealings or Solyndra's.  They should both be looked into but for 99% of the people in America making a sweeping statement about either is foolhardy.  No business has zero failures.  If you do you either haven't been in business long enough or you aren't trying hard enough.  And in light of the $1trillion+ pointless war in Iraq that Bush ginned up I really don't think investing in an American renewable energy company was the worst thing in the world.  We literally had entire palettes of one hundred dollar bills disappear in Iraq.  Now that should be something people are fired up about.

As far as investment track records the government gave us the internet and the private sector used it for complete evil and gave us the tech wreck.  Sometimes the government gets it really right and sometimes the private sector gets it really wrong.

I simply do not share your unshakable faith in the private sector...



The government and private sector have both had some gigantic blunders.  Placing all your faith in either one doesn't seem like a smart strategy to me.

[Wonkish1]

Whenever feasible, the free market should take the lead. I agree that there should be some fiscal spending to help counteract downturns in the business cycle with regards to spending on building/fixing highways/bridges and other basic infrastructure projects with positive spillover effects that the market will not provide adequately. That does not mean throwing $500 million of taxpayers money at a pie-in-the-sky company that nobody else will lend to, to give an obvious example.

Let's not forget that the private sector ultimately funds the public sector.

You must be logged in to read this quote.

Romney will eliminate the deficit via spending cuts, and all future spending will not occur unless it makes sense from the standpoint of contributing to economic growth rather than being parasitic waste. We do not have a taxation problem; we have a spending problem. We are not only spending too much, we are not spending funds properly.

Sorry long day.  These posts are long as well.  Haven't had time to respond.  I will say a couple of things though real quick.  First this is a very flawed statement...

That does not mean throwing $500 million of taxpayers money at a pie-in-the-sky company that nobody else will lend to, to give an obvious example.

I assume you are referring to Solyndra.  I personally don't know whether it was, at the time, a smart idea or a dumb idea to support Solyndra.  Hindsight is 20/20.  What I can say is venture capital is a tough business or else we would all be doing it.  There is a reason you don't see me denigrating Mitt Romney's activities in private equity.  I am better equipped than most to do financial analysis on companies and I honestly don't have access to all the facts regarding Bain's dealings or Solyndra's.  They should both be looked into but for 99% of the people in America making a sweeping statement about either is foolhardy.  No business has zero failures.  If you do you either haven't been in business long enough or you aren't trying hard enough.  And in light of the $1trillion+ pointless war in Iraq that Bush ginned up I really don't think investing in an American renewable energy company was the worst thing in the world.  We literally had entire palettes of one hundred dollar bills disappear in Iraq.  Now that should be something people are fired up about.

As far as investment track records the government gave us the internet and the private sector used it for complete evil and gave us the tech wreck.  Sometimes the government gets it really right and sometimes the private sector gets it really wrong.

I simply do not share your unshakable faith in the private sector...



The government and private sector have both had some gigantic blunders.  Placing all your faith in either one doesn't seem like a smart strategy to me.

So you follow up billions wasted in Iraq with pets.com? Seriously?

Also keep in mind that government is essentially a single entity(i.e. a single budgeting authority) the private sector isn't. Instead its made up of millions of participants. And I'm sure you time at that bank taught you something about the concept of diversification. A mistake by a few people at a company rarely has much impact beyond their own shareholders, employees, and creditors and once it goes into bankruptcy and gets liquidated the mistake stops.

In the case of the government, blunders end up being absolutely massive because of the sheer size of dollars they handle. They affect everybody. And they are ongoing because unlike the private sector there is no mechanism that immediately stops the stupidity and blundering once it begins; what I mean is that if the government screws up and starts wasting a couple billion dollars on something there is no bankruptcy that ends the spending instead they keep on wasting it year after year after year.

Now tell me again why a private business of which my contribution of money(purchasing) is voluntary making a blunder and going bankrupt is equal to a government body of which my contribution of money(taxes) is mandatory making a blunder and costing me year after year after year because they can just cover their mistakes by the treasury in perpetuity(or more likely until sovereign default)?

Because any sane person should prefer that private business going bankrupt any day of week and twice on Sunday.

[Wonkish1]

Link, allow me to point a few reasons why the private sector and capitalism will always have a huge advantage over the public sector in the allocation of capital in an economy, and I'll even avoid the much cliche'ed rationale of incentives(most liberal teachers/professors will say the failure of the Soviet Union was because people didn't have an incentive to do a good job while true it goes much further than that):

1) Decision making in the private sector is much more diversified. I.E. of course stupid decisions get made, but there are also much more correct decisions made in the millions of participants that more than compensate for the ones that make stupid decisions. In the public sector decisions are made by a handful that can make smart ones, but more likely because they are few in number to be far from ideal decisions causing missed opportunities and outright losses.

2) Putting your own money at stake invites substantially more caution than putting other peoples money at stake. While the private sector frequently involves the investing of other peoples money, key decision makers(boards, CEOs, owners, investors, portfolio managers, etc.) almost always have substantial portions of their wealth at stake as well. That is a huge improvement to state operatives who 100% of the time have 0 of their own money at stake so they don't have any sense of caution and careful risk taking/spending because they aren't footing really any of the bill if they are wrong

3) Profit is actually a very efficient mover of capital allocation. If someone makes oversized profits then (with the rare exception of key government or natural barriers to entry) other participants are quick to move in and price them down benefiting the consumers that wanted that good or service. Profit is derived from high demand so allocating capital based on what people *actually* want is huge improvement to either a) what a central planner wants it to be allocated to or b) what a central planner thinks people want(but he lacks the most straightforward indicator of them all--what is profiting the most).

4) The private sector has a self correcting mechanisms unlike the public sector. So even if you believe the majority of people will make stupid decisions in a society it still functions perfectly. The reason being of course is that lets say a lot of blind squirrels make a bad decision, they go out of business, fail, etc. The few blind squirrels that find the nut even if by complete accident succeed and the key point is that their business stays around year after year after year. So even if I were to take the absolutely most grotesque assumptions(of which I'm not agreeing to, but will use for the sake of example) involving everybody in the private sector being idiots and everybody in the public sector being geniuses the private sector will still out perform. Lets give a math example to illustrate the point self correction with many bad decisions is superior to many good decisions with no self correction.

We have to groups here we'll call public and private that have two different bags of marbles. Private has a bag with 5 marbles only 1 of which equals success and 4 of which equal failure. Public has 5 marbles with 3 successes and 2 failures. If a a success is pulled out of the bag you get $1,000 of monopoly money annually in cash flow. But if a bad marble is chosen out of a bag there is a difference between the two bags. In public they pick up $1,000 of negative cash flow(they have to give up $1,000 a year). In private since its self correcting they just have to give up a one time payment of $1,000 for each negative marble marble they draw, but its not ongoing like in public(this is to represent the self correcting function). Both groups start out with $500,000 of monopoly money. Lets say 50 draws in each represent a year. Now I dare you to run that simulation once and look at lets say year 50.

In that small simulation I just demonstrated to you that even if the public sector was far superior in capability than the private sector(which its not instead the opposite is true) the lack of even a self correcting mechanism makes it still far, far, far, far worse than the private sector just on that basis alone.

**5) *My personal favorite* The one thing the private sector is amazingly good at is allowing the people that are closest to what is going on in a particular area of the economy and who have the most expertise in that particular area to be the ones that handle it and make decisions in regards to it. Capitalism is amazingly decentralized. The public sector has to appropriate everything so decisions have to be passed down from central planners all the way down to the average person like a military chain of command on practically everything and there is absolutely no mechanism for fixing a persistent mismatch of information between people an authority and on the ground. What I mean by that is lets say someone on the ground who has all of the information pertaining to that particular issue, but little of the authority isn't able to filter the appropriate information back to people higher up to allow him to change course address the problem more appropriately with what he or she sees because they are closest to the issue. In the public sector that just continues to go on and can go on forever or at least for a very long time. In the private sector, even with a large corporation with  a several levels of management(keep in mind most business in the private sector is conducted only a couple degrees or less away from management because of how much small and medium sized businesses dominate the American economy. Also keep in mind that even a CEO of automaker is closer to addressing the need that a bureaucrat central planner in Washington is) if the people that are closest to the customer are getting information that would point to doing things differently(and they don't have that authority) there is the ability of other competitors that are more agile and have a better idea of that information to come in and better fill that need.

The reason why this is important is because it so clearly demonstrates that private sector under a capitalist system is the only system in existence that allows for enough decentralization to make the trillions of small corrections everywhere all of the time because customers, the need, information, and expertise are so close together which is so far away from central planners. To give you an idea the knowledge that a particular unit has a major defect in a small tiny industry probably only takes anywhere from a few hours to a couple months(in the worst of companies) to get to decision makers at a decent sized company. For that same information to get back to a central planner it would probably take customers shouting as hard as they could for years before maybe some central planner with budgetary power and decision authority takes notice.

Idk, I thought you may enjoy some of these and be some food for thought.

[Politico]

Excellent post, Wonk. Easily the best post of 2012 so far.

I would also throw in Milton Friedman's "four ways to spend money" to complement your second point:

http://www.youtube.com/watch?v=5RDMdc5r5z8

[Link]

As far as investment track records the government gave us the internet and the private sector used it for complete evil and gave us the tech wreck.  Sometimes the government gets it really right and sometimes the private sector gets it really wrong.

I simply do not share your unshakable faith in the private sector...



The government and private sector have both had some gigantic blunders.  Placing all your faith in either one doesn't seem like a smart strategy to me.

So you follow up billions wasted in Iraq with pets.com? Seriously?

In my post I mentioned the gigantic pallets of hard currency that dissappeared in Iraq.  That was by no means the only way money was wasted in Iraq.  The dissappearing pallets of hundered dollar bills was just a symbol of what went on during Bush's fake war.  I do not have the time to detail the cost and ultimate fate of every bullet that was sent over there.  Like wise I do not have the time nor inclination to detail the ultimate fate of every dumb private sector "investment" during the turn of the century.  Pets.com was just an easily recognizable symbol of the massive private sector incompitence.  And just to be clear it wasn't billions that were wasted in Iraq.  The final cost of the war will be over a TRILLION.  To further clarify Pets.com's bankruptcy wasn't the only one.  There were others...



My posts assume a certain amount of general knowledge from the reader.  When I mention Pets.com I assume the reader is aware of JDSU, Nortel, Toys.com, Enron, MCI/Worldcom, etc.

[Link]

Now tell me again why a private business of which my contribution of money(purchasing) is voluntary making a blunder and going bankrupt is equal to a government body of which my contribution of money(taxes) is mandatory making a blunder...

Moody's and S&P.

'nuff said.

[Link]

1) Decision making in the private sector is much more diversified...

Again, Moody's and S&P.

Capitalism is amazingly decentralized.

And again... Moody's and S&P.

[Link]

4) The private sector has a self correcting mechanisms unlike the public sector.

The example of Moody's and S&P would seem to indicate otherwise.  They are still in business and seem to have emerged from the devastation they caused unscathed.

[Wonkish1]

As far as investment track records the government gave us the internet and the private sector used it for complete evil and gave us the tech wreck.  Sometimes the government gets it really right and sometimes the private sector gets it really wrong.

I simply do not share your unshakable faith in the private sector...



The government and private sector have both had some gigantic blunders.  Placing all your faith in either one doesn't seem like a smart strategy to me.

So you follow up billions wasted in Iraq with pets.com? Seriously?

In my post I mentioned the gigantic pallets of hard currency that dissappeared in Iraq.  That was by no means the only way money was wasted in Iraq.  The dissappearing pallets of hundered dollar bills was just a symbol of what went on during Bush's fake war.  I do not have the time to detail the cost and ultimate fate of every bullet that was sent over there.  Like wise I do not have the time nor inclination to detail the ultimate fate of every dumb private sector "investment" during the turn of the century.  Pets.com was just an easily recognizable symbol of the massive private sector incompitence.  And just to be clear it wasn't billions that were wasted in Iraq.  The final cost of the war will be over a TRILLION.  To further clarify Pets.com's bankruptcy wasn't the only one.  There were others...



My posts assume a certain amount of general knowledge from the reader.  When I mention Pets.com I assume the reader is aware of JDSU, Nortel, Toys.com, Enron, MCI/Worldcom, etc.

No individual company produces losses like the Federal government does and its not even close. And if they even produce a loss that is a fraction of 1% of many of the ones the Federal government takes after a couple years they would be bankrupt. As your two examples point out the disparity in the size of the money we are talking about between the Federal government and a company is staggeringly large.

Your quote from the dot com bubble just shows you don't understand how capital markets work. Equities may have lost $5 trillion in market value between 2000 and 2002, but the economy didn't. What you don't get is that the vast majority of those losses were dollar holders and fixed income owners gains. So the net loss was much, much, much smaller. I can guarantee you that if I added up all of the losing industries stock losses even in a boom year and posted it as a singular number it would look big too, but it wouldn't take into account all of the winning equities that more than compensated for it. There are other assets, holdings, etc. in capital markets not just equities and some of those do well during down turns(like cash which suddenly is able to buy a lot more) so the real capital market losses were much smaller. Look at the GDP losses for a much more useful metric.

[Link]

Capitalism is amazingly decentralized.

Not if you look at the banking sector...

You must be logged in to read this quote.

All these right wing statements sound nice until you actually look at real world data.  The real world is not a simple model from Econ 101.  In the real world power in certain areas of the private sector is concentrated in the hands of a few players who answer to a comparitavely small number of share holders.  Further compounding the problem is most share holders are comatose.  I do not attend the meetings of the thousands of companies I own in my index funds and I'm going to go out on a limb and guess neither do most people.  On the other hand over one hundred million people turned out in 2008 and ultimately elected Obama.

[Link]

As far as investment track records the government gave us the internet and the private sector used it for complete evil and gave us the tech wreck.  Sometimes the government gets it really right and sometimes the private sector gets it really wrong.

I simply do not share your unshakable faith in the private sector...



The government and private sector have both had some gigantic blunders.  Placing all your faith in either one doesn't seem like a smart strategy to me.

So you follow up billions wasted in Iraq with pets.com? Seriously?

In my post I mentioned the gigantic pallets of hard currency that dissappeared in Iraq.  That was by no means the only way money was wasted in Iraq.  The dissappearing pallets of hundered dollar bills was just a symbol of what went on during Bush's fake war.  I do not have the time to detail the cost and ultimate fate of every bullet that was sent over there.  Like wise I do not have the time nor inclination to detail the ultimate fate of every dumb private sector "investment" during the turn of the century.  Pets.com was just an easily recognizable symbol of the massive private sector incompitence.  And just to be clear it wasn't billions that were wasted in Iraq.  The final cost of the war will be over a TRILLION.  To further clarify Pets.com's bankruptcy wasn't the only one.  There were others...



My posts assume a certain amount of general knowledge from the reader.  When I mention Pets.com I assume the reader is aware of JDSU, Nortel, Toys.com, Enron, MCI/Worldcom, etc.

No individual company produces losses like the Federal government does and its not even close.

Well two companies working in tandum caused global devistation through one simple decision, Moody's and S&P.  The only governmental semi-equivalent in recent history was Bush's war.  Well actually he made two decisions.  First the tax cuts and then the war.

[Wonkish1]

1) Decision making in the private sector is much more diversified...

Again, Moody's and S&P.

Capitalism is amazingly decentralized.

And again... Moody's and S&P.

Would you rather have a government body that is responsible for everything from payday loans to derivatives setting the ratings for securities and determining investment grade or companies that specialize in it. (also there are more ratings agencies than the big 3 including a couple up and comers).


Market prices are set by millions upon millions of market participants and not by credit rating agencies.

[Wonkish1]

Now tell me again why a private business of which my contribution of money(purchasing) is voluntary making a blunder and going bankrupt is equal to a government body of which my contribution of money(taxes) is mandatory making a blunder...

Moody's and S&P.

'nuff said.

You do know that both of those companies have limited impact on market prices right? Like the typical European sovereign bond or CDS trades at a price that is implicitly 2-8 notches below the current S&P or Moody's rating.

They aren't God's of markets. The only real power that has been given to them is by the government; many pensions, insurance companies, etc. have regulations based on the concept of "investment grade" and the government has granted these companies exclusive power to determine what is investment grade or not. So that is just one cutoff and that doesn't affect most fixed income products because they are either clearly in one category or clearly in the other, but that issue does come up when its more difficult to assess.

Moody's and S&P are not the cause of the crisis. It would have happened even if these assets were given junk status.

[Wonkish1]

4) The private sector has a self correcting mechanisms unlike the public sector.

The example of Moody's and S&P would seem to indicate otherwise.  They are still in business and seem to have emerged from the devastation they caused unscathed.

Well first of all in terms of self correction if creates large losses *for your company* you go out of business. If it hurts *your customers* you change. CRA's are in the latter category. I can guarantee you that they aren't rating mezzanine tranches of CDO's AAA today.

[Wonkish1]

Capitalism is amazingly decentralized.

Not if you look at the banking sector...

You must be logged in to read this quote.

All these right wing statements sound nice until you actually look at real world data.  The real world is not a simple model from Econ 101.  In the real world power in certain areas of the private sector is concentrated in the hands of a few players who answer to a comparitavely small number of share holders.  Further compounding the problem is most share holders are comatose.  I do not attend the meetings of the thousands of companies I own in my index funds and I'm going to go out on a limb and guess neither do most people.  On the other hand over one hundred million people turned out in 2008 and ultimately elected Obama.

I guess you don't understand much about even the concept of decentralization. First, once you actually are decentralized to the point where a company is in a one or only a handful of industries its already very decentralized. If we were talking about the federal government they are involved in thousands of industries. So on that mark alone its public sector 0, private sector 1,000,000.

Furthermore, even JP Morgan itself is very decentralized. There are several divisions within JP that act very autonomous from the overall company. JP Morgan I-Banking, JP Morgan C-Banking, JP Morgan Mortgage Division, JP Morgan Wealth Management, etc. and when you get down to JP Chase branches they are very autonomous entities as well where the bank manager has substantial authority. But this is just a minor point.

Lastly, lets just point out that if it wasn't for the Federal government...Paulson, E-Harmony(Geitner's nick name), etc. many of these banks would never be this big. And that goes for both the aftermath of the crash and the run up because they got preferential treatment through the NY Fed on their capital requirements.

When you are a customer of a company you have anywhere between 100 to 1,000,000 times the voting power you do when you cast a vote for President. Lets face it when you vote for President (while its a good civic thing to vote) your vote really doesn't matter. It has little impact. When you vote with your money for a company by being a customer your 'voting power' could be significant enough to be the difference of that small company surviving or dying. The distinction isn't even close.

[Wonkish1]

As far as investment track records the government gave us the internet and the private sector used it for complete evil and gave us the tech wreck.  Sometimes the government gets it really right and sometimes the private sector gets it really wrong.

I simply do not share your unshakable faith in the private sector...



The government and private sector have both had some gigantic blunders.  Placing all your faith in either one doesn't seem like a smart strategy to me.

So you follow up billions wasted in Iraq with pets.com? Seriously?

In my post I mentioned the gigantic pallets of hard currency that dissappeared in Iraq.  That was by no means the only way money was wasted in Iraq.  The dissappearing pallets of hundered dollar bills was just a symbol of what went on during Bush's fake war.  I do not have the time to detail the cost and ultimate fate of every bullet that was sent over there.  Like wise I do not have the time nor inclination to detail the ultimate fate of every dumb private sector "investment" during the turn of the century.  Pets.com was just an easily recognizable symbol of the massive private sector incompitence.  And just to be clear it wasn't billions that were wasted in Iraq.  The final cost of the war will be over a TRILLION.  To further clarify Pets.com's bankruptcy wasn't the only one.  There were others...



My posts assume a certain amount of general knowledge from the reader.  When I mention Pets.com I assume the reader is aware of JDSU, Nortel, Toys.com, Enron, MCI/Worldcom, etc.

No individual company produces losses like the Federal government does and its not even close.

Well two companies working in tandum caused global devistation through one simple decision, Moody's and S&P.  The only governmental semi-equivalent in recent history was Bush's war.  Well actually he made two decisions.  First the tax cuts and then the war.

They didn't cause it the Fed was 90% of the problem.

Something is seriously wrong with you think that the only money the government has ever wasted was during the Iraq War. Why am I even talking to you if you are that out of it?

[Link]

Now tell me again why a private business of which my contribution of money(purchasing) is voluntary making a blunder and going bankrupt is equal to a government body of which my contribution of money(taxes) is mandatory making a blunder...

Moody's and S&P.

'nuff said.

You do know that both of those companies have limited impact on market prices right?

If Moody's and S&P had simply done their jobs and called junk, junk we wouldn't be in the mess we are in.  End of story.  They were taking what amounted to bribes to place AAA ratings on complete garbage.  It's amazing to me that this discussion continues till this day.  When the government has a comparatively small hiccup Republicans come apart at the seams and want investigations and entire departments shut down.  When the private sector royally screws up there is every excuse in the book why it's not their fault or it's really not that bad.  I just don't think this is balanced.

I've done credit work.  And I can tell you that what Moody's and S&P did was a dereliction of duty of the first order.  It had nothing to do with the government.  And a simply refusal to slap AAA ratings on garbage and a report highlighting the seamy underworld of CDOs for all their clients would have stopped this business cold.  But they didn't do that.  They just collected their 8 figure payoffs and skipped off into the sunset and let the rest of the planet deal with the aftermath.

Anyone that says S&P and Moody's didn't have an impact on the mortgage backed market is being willfully ignorant.

[Wonkish1]

Now tell me again why a private business of which my contribution of money(purchasing) is voluntary making a blunder and going bankrupt is equal to a government body of which my contribution of money(taxes) is mandatory making a blunder...

Moody's and S&P.

'nuff said.

You do know that both of those companies have limited impact on market prices right?

If Moody's and S&P had simply done their jobs and called junk, junk we wouldn't be in the mess we are in.  End of story.  They were taking what amounted to bribes to place AAA ratings on complete garbage.  It's amazing to me that this discussion continues till this day.  When the government has a comparatively small hiccup Republicans come apart at the seams and want investigations and entire departments shut down.  When the private sector royally screws up there is every excuse in the book why it's not their fault or it's really not that bad.  I just don't think this is balanced.

I've done credit work.  And I can tell you that what Moody's and S&P did was a dereliction of duty of the first order.  It had nothing to do with the government.  And a simply refusal to slap AAA ratings on garbage and a report highlighting the seamy underworld of CDOs for all their clients would have stopped this business cold.  But they didn't do that.  They just collected their 8 figure payoffs and skipped off into the sunset and let the rest of the planet deal with the aftermath.

Anyone that says S&P and Moody's didn't have an impact on the mortgage backed market is being willfully ignorant.

That is just absolutely wrong. I can explain to you step by step why this crisis was going to happen one way or another even if the CRA's rated this stuff junk. It still would have happened.

You say you worked in credit so I'll explain this in a way that hopefully you can particularly relate to with background.

First, to establish a base of understanding lets take a look at a bank that made the smart call in the 2000s. Beal Bank based in Plano Texas and 100% owned by billionaire Andy Beal. In the lead up to the boom he stopped acquiring(he is loan acquisition not origination) loans in their entirety. He laid off most of his staff because of he didn't see any deals that looked attractive to him. He started accumulating cash reserves and when the crash happened the majority of money people had deposited at the bank were in reserves not loaned out. And he lowered his deposit and cd rates to try to get depositors to leave so that his liabilities(and therefore interest on that money) would fall. In a few occasions regulators started harassing him about the fact that he wasn't really engaging in banking.

Now a second tidbit that was 100% true and any high level banker would readily say about the boom years was that all of them, **and I mean all of them** were "deposit rich and asset poor". What that means is that they had tons of deposits coming in, but that there were only a low supply of assets to invest in(and the mismatch caused prices to rise). So like you buying stocks when things are booming you try to find the best values relative to the others, but in general all of them left are overpriced. The super senior is safe, but its yield crap so when interest rates rise you take a bath. The Mezzanine or junk has nice yield, but if defaults spike you get hit. But these deposits have to be put to use or you do what Beal did and you turn depositors away and on down to the next institution. The next institution that has this influx of deposits maybe they realize it isn't a good time to lend as well and keep on passing off these depositors to someone else or they take them in and issue or buy either $hitty or way overpriced credit.

So why was the depository base so much larger than the amount of worthwhile assets you may ask? Because the Fed increased the money supply in response to the dot com crash and that manifests itself in deposits, MMAs, repo's, etc. and if you refuse the cheap depositors because there is more of that money than there is in attractive fixed income than someone down the line will take those depositors and issue or buy.

The fact is that a huge credit bubble in one industry or another was baked into the situation as soon as the Fed lowered their base interest rates in the early 2000s and kept them there. There is no way you could have avoided it because if you shut down one industry the banker still has excess deposit money that they need to find a home for. And if its not sub prime housing, fine junk bond LBO deals. Oh you closed down , fine sub prime auto. Oh you shut that down, fine sub prime factoring. Oh you shut that down, fine I'll lend international. You can't win. The only solution is to raise the FFR and force losses so that the money supply can shrink and deposit base can shrink to the amount and value of real credit assets.


So yeah blaming the CRA's doesn't cut it. I mean its bad that they input 8% property appreciation assumption in perpetuity in their models which basically guarantees an investment grade output, but it still didn't cause the problem. There have been bubbles in fixed income with junk ratings before and I have no doubt in my mind there would have been one in sub prime mortgage in the 2000s even if they got the junk label attached to them.

[Link]

Well two companies working in tandem caused global devastation through one simple decision, Moody's and S&P.  The only governmental semi-equivalent in recent history was Bush's war.  Well actually he made two decisions.  First the tax cuts and then the war.

Something is seriously wrong with you think that the only money the government has ever wasted was during the Iraq War. Why am I even talking to you if you are that out of it?

Mmmm... again I am giving an example.  I don't think Moody's and S&P are the only two companies to royally screw up.  They were two of the most egregious examples in my lifetime.  Likewise the Iraq War was not the only totally fiscally stupid thing the government has done.  In fact if you read the post you quoted I also mentioned the unpaid for Bush tax cuts.  They were two of the most amazing governmental screw ups in my lifetime.  As I said in my other post I do not have the time to list every single mistake in the private or public sector.  I can only give you examples of some of most egregious activity.

To me there seems ample evidence that the government and the private sector do some things very right and there is ample evidence that they both can screw things up on an epic scale.

[Link]

Capitalism is amazingly decentralized.

Not if you look at the banking sector...

You must be logged in to read this quote.

All these right wing statements sound nice until you actually look at real world data.  The real world is not a simple model from Econ 101.  In the real world power in certain areas of the private sector is concentrated in the hands of a few players who answer to a comparatively small number of share holders.  Further compounding the problem is most share holders are comatose.  I do not attend the meetings of the thousands of companies I own in my index funds and I'm going to go out on a limb and guess neither do most people.  On the other hand over one hundred million people turned out in 2008 and ultimately elected Obama.

I guess you don't understand much about even the concept of decentralization. First, once you actually are decentralized to the point where a company is in a one or only a handful of industries its already very decentralized. If we were talking about the federal government they are involved in thousands of industries. So on that mark alone its public sector 0, private sector 1,000,000.

Furthermore, even JP Morgan itself is very decentralized. There are several divisions within JP that act very autonomous from the overall company. JP Morgan I-Banking, JP Morgan C-Banking, JP Morgan Mortgage Division, JP Morgan Wealth Management, etc. and when you get down to JP Chase branches they are very autonomous entities as well where the bank manager has substantial authority. But this is just a minor point.

Lastly, lets just point out that if it wasn't for the Federal government...Paulson, E-Harmony(Geitner's nick name), etc. many of these banks would never be this big. And that goes for both the aftermath of the crash and the run up because they got preferential treatment through the NY Fed on their capital requirements.

When you are a customer of a company you have anywhere between 100 to 1,000,000 times the voting power you do when you cast a vote for President. Lets face it when you vote for President (while its a good civic thing to vote) your vote really doesn't matter. It has little impact. When you vote with your money for a company by being a customer your 'voting power' could be significant enough to be the difference of that small company surviving or dying. The distinction isn't even close.

If you honestly believe what you just wrote here then it is obvious to me that even if hell freezes over you are never going to even consider some of the premises I've put forward.  To be honest my purpose here is not to convince you.  It is to provide the counter argument.  Well, perhaps not.  I suppose the counter argument would be the private sector is bad and government should take over.  I don't believe that and I don't believe government is infallible.  We need government and we need the private sector.  And I don't believe that there has been any definitive published study that illustrates the government screws up more than the private sector or vice versa.  Any statements of that sort are pure conjecture.  A lot of times a smooth running government is a government we don't even notice.  We don't send thank you cards for nice roads.  We don't recommend the post office online because a birthday card makes it halfway across the country in 48hr for a few pennies.  We just see the Iraq war or hear about The Bridge to Nowhere or my favorite boogieman stories about voter ids and welfare queens.  No one is running ad campaigns about the river that is not on fire in your town thanks to the EPA preventing private sector pollution.  We as Americans have an infinite capacity to take things for granted.

I would love to see a model that took the good stuff and the bad stuff and told us once and for all if the government is worth it or if it sucks compared to the private sector.  Too complex of a thing to do I guess.  But to just assume the government sucks and go from there is pretty reckless.

[Politico]

Link,

Can you at least admit that the federal government is generally less accountable and efficient than state/local governments? To take it a step further, and maybe this is a bridge too far for you, can you admit that centralized governments, given their ability to effectively raise more and more revenue via coercion, are able to consistently continue performing activities that the "consumers" (i.e., taxpayers) of the government would rather not pay for?

By the way, you quite frequently speak of the post office. There was once a time, not too long ago, when USPS insisted that only they should deliver expedited mail because they believed that only USPS could properly serve consumers. Well, guess what: UPS, FedEx and many other companies can do it more efficiently than USPS does today, never mind decades ago. It's better for the American consumer that private companies were able to enter that market, creating a competitive atmosphere that benefits consumers, as opposed to leaving the market as a government-protected/controlled monopoly (which inevitably leads to higher prices and usually lower quality service).

[Wonkish1]

Capitalism is amazingly decentralized.

Not if you look at the banking sector...

You must be logged in to read this quote.

All these right wing statements sound nice until you actually look at real world data.  The real world is not a simple model from Econ 101.  In the real world power in certain areas of the private sector is concentrated in the hands of a few players who answer to a comparatively small number of share holders.  Further compounding the problem is most share holders are comatose.  I do not attend the meetings of the thousands of companies I own in my index funds and I'm going to go out on a limb and guess neither do most people.  On the other hand over one hundred million people turned out in 2008 and ultimately elected Obama.

I guess you don't understand much about even the concept of decentralization. First, once you actually are decentralized to the point where a company is in a one or only a handful of industries its already very decentralized. If we were talking about the federal government they are involved in thousands of industries. So on that mark alone its public sector 0, private sector 1,000,000.

Furthermore, even JP Morgan itself is very decentralized. There are several divisions within JP that act very autonomous from the overall company. JP Morgan I-Banking, JP Morgan C-Banking, JP Morgan Mortgage Division, JP Morgan Wealth Management, etc. and when you get down to JP Chase branches they are very autonomous entities as well where the bank manager has substantial authority. But this is just a minor point.

Lastly, lets just point out that if it wasn't for the Federal government...Paulson, E-Harmony(Geitner's nick name), etc. many of these banks would never be this big. And that goes for both the aftermath of the crash and the run up because they got preferential treatment through the NY Fed on their capital requirements.

When you are a customer of a company you have anywhere between 100 to 1,000,000 times the voting power you do when you cast a vote for President. Lets face it when you vote for President (while its a good civic thing to vote) your vote really doesn't matter. It has little impact. When you vote with your money for a company by being a customer your 'voting power' could be significant enough to be the difference of that small company surviving or dying. The distinction isn't even close.

If you honestly believe what you just wrote here then it is obvious to me that even if hell freezes over you are never going to even consider some of the premises I've put forward.  To be honest my purpose here is not to convince you.  It is to provide the counter argument.  Well, perhaps not.  I suppose the counter argument would be the private sector is bad and government should take over.  I don't believe that and I don't believe government is infallible.  We need government and we need the private sector.  And I don't believe that there has been any definitive published study that illustrates the government screws up more than the private sector or vice versa.  Any statements of that sort are pure conjecture.  A lot of times a smooth running government is a government we don't even notice.  We don't send thank you cards for nice roads.  We don't recommend the post office online because a birthday card makes it halfway across the country in 48hr for a few pennies.  We just see the Iraq war or hear about The Bridge to Nowhere or my favorite boogieman stories about voter ids and welfare queens.  No one is running ad campaigns about the river that is not on fire in your town thanks to the EPA preventing private sector pollution.  We as Americans have an infinite capacity to take things for granted.

I would love to see a model that took the good stuff and the bad stuff and told us once and for all if the government is worth it or if it sucks compared to the private sector.  Too complex of a thing to do I guess.  But to just assume the government sucks and go from there is pretty reckless.

Link I've always addressed each of your comments directly and fully to the best of my ability unlike many people that try to shoot off on a tangent every time they can't specifically address something.

To say that I don't take seriously the premises that other people(including you) put forward is patently absurd. Point me to a question I've dodged, or an answer I haven't been willing to explain in detail, or a comment I wasn't willing to address. You can fault me for sometimes being harsh to some posters, but one thing I don't think you could ever fault me for on here is not being thorough in considering and addressing the premises and points of others on here.

Link do you actually believe that the difference between success of the USA and the failure of the Soviet Union was chance? Because if you don't think their are inherent advantages built into one vs the other and that failure/success between one or the other is luck then you would have to answer that question in the affirmative.

And if you want to talk about taking things for granted the private sector provides products, services, etc. for about 20,000 things in your life before you even get into your car to work. And the number is so high because as something as simple as your toothbrush has about dozens of component industries and companies and thousands of workers that contribute to it. The fact that you could be blind to things that surround you all day is a much greater example of taking things for granted and in general being blind than any of the stuff you mentioned possibly could.

And I've got a perfect model for you Soviet Union, North Korea, Cuba, Red China, etc. So to assume government is great and does no harm is in my mind much more reckless.

And by the way I can go to town on government waste that has been ongoing for decades and there is no way you could ever possibly come close to comparing against it. I've been avoiding it because of the book sized comment it would produce, but if you're going to make me go there I will.