Chart of the Day

Thomas Oatley is an is an associate professor of political science at the University of North Carolina, Chapel Hill. He wrote an article in the Washington Post. Oatley made this chart that shows the flow of American investment money heading to the tax haven of the Cayman Islands.

President Barack Obama signed the Foreign Account Tax Compliance Act (FATCA) into law in 2010. The United States and the Cayman Islands reached an agreement. Cayman banks must notify the IRA of any U.S. account with more than $50,000. The law won't officially take effect until 2014.

Banks, funds and other financial institutions that fail to comply with FATCA face a 30-percent withholding tax on their U.S. source income, a penalty that could effectively freeze them out of U.S. financial markets.

Investment bankers have an army of tax attorneys. I'm sure they will find a way around FATCA.

The Investors Strike Back

One of the paradoxes of the Great Recession (I do not recognize this "double dip" phrase because I never saw the first recession end) was that corporations were swimming in profits -- and stock prices were sky high. We almost grew used to seeing the Dow Jones index above 12,000 points. All of that changed in the past few days, since the debt ceiling was raised -- the Wall Street ceiling has fallen. Nobody knows when it will land.

Despite investors placing money in corporations by purchasing their stock, American employment has been stagnant -- companies didn't want to hire, despite having the cash to expand. Companies argued that markets for new goods didn't exist since, well, none of them were hiring new people.

That negative feedback loop perpetuated itself until Obama was elected, passed a historic stimulus bill that spent a few hundred billion on needed infrastructure repairs around the country, put people back to work, created markets of employed workers who would purchase more goods, and prompted private companies to start hiring again to cash in on the new prosperity.

Hah! Just kidding. Obama's "stimulus" bill spent $26 billion on highway infrastructure projects, while allotting $116 billion for a tax credit. Fat lot of fucking good that did -- Obama added that to get Republicans to vote for the stimulus deal, which none of them did. Corporations awash in investors money still didn't hire, and now investors finally realized that corporations tied to their stock portfolios weren't going to expand, so they fled.

Lesson to corporations: If you don't spend the money when you have it, then you lose it.

Lesson to Obama: Stop fucking around with Republicans on useless bullshit like deficit cutting when, right now, we need deficit spending like crazy -- and that doesn't mean spending on tax cuts. Raise those. And if you can't sell this policy to the American people, sit aside and let a candidate who will do the right thing run for president.

The Debt Ceiling reflects on GOP's complete lack of economic or world view

Right now, the euro currency is in deep shit. As if debt problems in Greece, Ireland, and Portugal weren't enough, this week's Economist reports on the newest candidate in the Euro Zone's game of "Which country will default first?!", Italy:

Consider the stakes. Italy has the biggest sovereign-debt market in Europe and the third-biggest in the world. It has €1.9 trillion ($2.6 trillion) of sovereign debt outstanding, 120% of its GDP, three times as much as Greece, Ireland and Portugal combined—and far more than the €250 billion or so left in the European Financial Stability Facility (EFSF), the currency club’s rescue kitty. Default would have calamitous consequences for the euro and the world economy.

Indeed, if Italy helped caused the euro currency to crash, the world economy would reel. But what countries would have a leg up in amassing capital from such a mess? There are trillions of dollars out there that investors want to use to purchase safe bonds with, and if the fates of strong European economies like Germany and France are tied into Greece and Italy, do you think investors will say "Oh yeah, those German government bonds are an awesome deal right now"? Fuck no.

In other words, investment in American bonds stands to benefit from the woes of Europe's actual debt crisis ... Except the Republicans are insistent upon manufacturing a default here.

Meanwhile in the background [in Italy] is the absurd pantomime of Barack Obama and congressional Republicans feuding over how to raise the federal government’s debt ceiling to stave off an American “default”.

I'm glad The Economist described our current budget battles with the words "absurd pantomime", because I can't think of anything else to describe it without various creative uses of the f-word. Here's a couple other f-words to describe the debt ceiling battle: It's a fallacy, the premise is downright false, and America defaulting on its debt should be a fantasy.

Europe is going through an actual debt crisis right now -- nobody wants to invest their money in European bonds. If the Republicans had any modicum of intelligence on world economic issues, they would understand that Europe's actual debt crisis means that America can cash in by selling low interest bonds. Which means we don't have a "debt crisis" since investors want to lend us money.

But don't expect our media to report this fact, they are hoodwinked by Republican talking points. It would be nice if our president told us we weren't facing a debt crisis, but he's apparently hoodwinked as well.

Fiscal Illness

"That Wall Street view of itself as a victim has prompted much of the private murmurings and the unfortunate — or worse — outburst from Stephen A. Schwarzman, who likened the administration’s plan for taxes on private equity to “when Hitler invaded Poland in 1939.” Mr. Schwarzman later apologized for the “inappropriate analogy.”

Now Mr. Loeb, who manages about $3.4 billion at his firm, Third Point Partners, has articulated in a more thoughtful way what a lot of others in finance and business are saying.

“We have given a great deal of thought about the impact that public policy has on individual companies, industries and the economy generally,” he said. Third Point has sold its investments in big banks as a result of “regulatory headwinds”; got rid of its stake in Wellpoint, which Mr. Loeb described as “a statistically cheap stock owned by several hedge funds, but which we saw as being overly exposed to unpredictable government regulation”; and taken a short position against for-profit education companies as a result of “the government’s increased willingness to use its regulatory muscle.”

Mr. Loeb’s views, irrespective of their validity, point to a bigger problem for the economy: If business leaders have a such a distrust of government, they won’t invest in the country. And perception is becoming reality."

- "Why Wall Street Donors Are Deserting Obama", New York Times

Translation into English: Wall Street investors were perfectly OK with holding equities in banks that over-leveraged themselves to the point where they almost brought down the entire American economic system. If the government hadn't stepped in to remove debt from balance sheets of the banks, their financial house of cards would have collapsed. But when that very same government wants to regulate the banks so unstable situations like this never happen again, then Wall Street investors step back and say, "Woah! It's too risky to invest in banks, and it's all Obama's fault!

Of those who think this makes sense, exactly what mental illness do they suffer from?

While my political stances remained on the left, as I've progressed through adulthood, my notions for taking action in politics have shifted from the hard left to more moderate positions. In early adulthood, I took the easy way out: If everyone just believed what I believed, then society would be great! But as I grew up, I realized many people were never going to harbor the same positions I have. That's just the way it is.

Many of those people, it turns out, have lots of money.

For a society to function properly, everyone must play nice with each other. I may not agree with the lifestyles of those who think they need to make multi-millions of dollars per year to be happy, but my personal biases against them shouldn't infringe upon their rights. And this is a good thing.

Under the capitalist system we teach school children that we purportedly live under, those who want to be millionaires create jobs for the rest of us. They get to be super rich because we work for them, and in turn, I get a house, car, 3.4 kids, and big ass TV with one zillion cable channels out of the deal. (This deal hasn't shaken out well for me. So far, I got the car, but people keep hitting it.) This is the unwritten social contract of the American dream. It's certainly not the deal that Marx wanted, but hey -- fuck him and his cat. I'll take the deal. And I'm willing to play nice with those I disagree with if they keep up their end of the deal.

Society risks breaking down, though, when the rich choose not to keep up their end of the deal. The rich have every right to make as much money as they want. But what happens when the investment behavior of the rich becomes reckless? Well, we all should know what happens because we're living through it right now.

The passage I quoted from the New York Times is only quotable because of its surreal quality. Read it over a couple more times. Swish it around in your brain for a couple minutes. Ask yourself if the comedic ethics of Monty Python took over American society when our backs were turned?

Remind yourself that the previous sentence I wrote is a serious question.

If the New York Times has summarized the mindset of Wall Street investors -- and I'm afraid they have -- then Wall Street is certifiably nuts. But the Street holds the money; hence the power. For any economic legislation to be effective, it must address Wall Street greed encroaching into the right of employment for willing working class Americans. In short, legislation must combat Wall Street's attempt to erode the social contract which insures the American dream. Why? Because, despite what the investors on Wall Street think, they can't make as much money as the middle class is employed and happy.

One day, maybe Wall Street will realize that they need us as much as we need them.

The Plan for what, exactly?

[Since this post is rather critical of the president, let me preface this with "Speaking only for myself" - tas]

From the Treasury Department:

To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – is announcing the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.

The italics are mine. Let me translate this: Nobody in their right mind will invest in banks with their own money right now because the banks are broke. But the country needs banks to start lending again if we expect our economy to get better.

With that in mind, here's the jist of Geithner's plan: The Government begs private investors to front a minimal amount of capital to bid on toxic mortgage assets by saying, "Hey, we'll pay you $6 for every $1 you spend on mortgage debt." This takes bad debt off bank balance sheets, investors are then willing to place more money in banks again because they'll be able to start making loans again.

Theoretically. Unfortunately, this plan raises a lot more questions than it answers.

Wall Street loves it, as evidenced by stocks shooting up today. And why shouldn't they? The Obama administration just told them, "Hey guys, great news! We don't intend to break apart the huge mega banks that got us into this mess, and we're going to give you billions -- possibly a trillion -- in taxpayer dollars!" This people are all for preserving status quo since it makes them rich, and no matter how hard they fuck us they won't be reprimanded.

But the plan might not even work. Currently, it's slated to purchase $500 billion in toxic assets; possibly rising to $1 trillion. This is supposed to clear bad debt off banks' balance sheets, thus allowing investors to place money in banks again since they'll be solvent, thus allowing banks to make loans, etc. But as I've mentioned here before, just with Fannie Mae and Freddie Mac we see, at most, $5.4 trillion in bad mortgage debt. So does the plan address this debt or just the debt from banks that the government didn't have to gobble up, like Citibank and Bank of America? If the plan doesn't address the Fannie/Freddie debt, what will? Additionally, discounting the Fannie/Freddie debt, just how much toxic mortgage debt are we looking at with Citibank and Bank of America?

To give you an idea of the scope of that last question, as of December 2008, Bank of America's total liabilities were over $1.6 trillion; and Citibank's liabilities are almost $1.8 trillion. Will $1 trillion from the Fed/FDIC -- much less $500 billion -- be enough to convince investors to place money in these institutions again? It would certainly be great to know just how much of that $3.4 trillion in liabilities is bad.

The part of this plan that I really find galling, though, is that the government is willing to fork over hundreds of billions to Wall Street to get them to purchase mortgage debt. This is our money, and essentially our money is being used to pay off mortgages -- but by giving it to investors who can afford to put up a few million to pay for them. These investors can then turn around and ask home owners to pay up on mortgages that their tax dollars just bought.

If this is the case (and I could be reading the plan wrong, but...), what's with the middle man? If the government intends to pay for these mortgages, why not just forgive them? Why not just give banks 85% of what the mortgages are worth -- which they should very well be happy with -- and everyone goes on their merry way?

While some will rightly point out that people would get free houses under such a scenario, which they certainly don't deserve, under this plan the business school rejects who placed the economy in hot water are now being rewarded by having the government give money to banks to pay off these mortgages, and turning around to give these mortgages to the business school rejects with instructions to squeeze as much profit out of it as they can. In short, the business school rejects have the potential to reap huge profits off home owners since they paid $1 for every $6 the Obama administration would give them to buy their mortgage.

And you know, I don't think these assholes deserve the money.

The more I think about it, the more unsure I am of exactly what this plan is supposed to accomplish. Do Obama and Geithner (shamefully) intend to give Wall Street what's maybe the biggest bonus in history? But if so, how can this plan deliver such when it may not accurately address all the bad debt that exists? In the former scenario, normal Americans -- you and I -- bend over and take it; but in the latter the plan just doesn't work.

Here's an idea for a plan that could work: restructure the mortgages so their value reflects the median value of a home based on its value from 2005 to the present; adjust interest rates so they are lower; then spend enough money on job creation (like infrastructure repairs) which give people jobs, kickstarting the economy and giving everyone money to pay down their debt. But that plan doesn't give Wall Street a big fat check, now does it?

Makes me wonder what's really important to the Obama administration right now.