from Commentaries:
Banking? Keep it simple stupid
In 1873, Walter Bagehot wrote that "the business of banking ought to be simple; if it is hard it is wrong." He would have struggled to recognize today's banking system.
It is not just ever more ornate derivatives that bend the mind. Financial firms themselves have become fabulously complicated. Citigroup lists 2,061 subsidiaries and affiliates while the institutional chart of JPMorgan Chase is 267 pages long.
Complexity -- as Bagehot predicted -- has become a curse. If nobody can understand financial firms, they will become ever more accident prone.
The crisis that exploded a year ago offered a salutary lesson in the dangers of complexity. Many shareholders and creditors simply did not fully comprehend their investments. Instead they were forced to trust managers and the rating agencies.
Regulators too could be forgiven for scratching their heads.
"Supervisors are at a decided disadvantage in understanding risk-taking and compliance for firms that might involve dozens of jurisdictions, hundreds of legal entities and thousands of contractual relationships," former Fed official Vincent Reinhart has written.
Indeed Basel II -- the international capital code -- was an admission of defeat by regulators. The message from the banking accord was that institutions had become so convoluted that only they were able to understand the risks they were taking.
from Commentaries:
Why the U.S. needs a Value Added Tax
Swelling deficits and an aging population leave few palatable options when it comes to taxes.
The best choice by far would be the creation of a new value added tax -- a "money machine" that can bring in huge sums with relatively little effort. America is alone among rich nations in not charging a VAT, and its continued unwillingness to do so will make it harder to cope with the fiscal challenges ahead.
Giving birth to a new tax will certainly not be an easy sell. The stunning 1980 reelection defeat of Al Ullman, the powerful chairman of the House Ways and Means Committee who had advocated a VAT, is still a warning to American politicians.
The timing of a new tax on consumption may also seem suspect. Aren't we supposed to be getting Americans back into the malls?
VAT, however, is worth the risk. It could yield enough money to pay for healthcare reform, as well as a meaty cut in income tax and a reduction in the deficit. It could also be done without destroying Obama or the Democrats.
Unlike taxing the rich -- which has emerged as a favorite strategy of many Democrats -- a VAT is extremely easy to collect. This is partly because it is gathered from each producer in a chain.
Take bread. The farmer, miller, baker and grocer all pay their share of the tax. If the grocer cheats, the government loses only a quarter of its tax. Furthermore, each producer has incentive to make sure its suppliers have paid VAT. The miller becomes liable for the farmer's share of VAT unless he can prove the tax has already been paid. VAT collection polices itself to a large extent. The sums of money that could be raised are immense, making it easier to strike a political compromise. Exactly how lucrative VAT would be depends largely on which goods are exempt.
If the US issues a VAT then it also needs to do away with income tax. It also needs to do away with all of it’s very poorly run programs and instead take a position of referee.
That is to say that rather than actually running programs like education and medical programs, and housing programs etc.. It needs to institute a financial social safety net which distributes assistance payments to the citizenry. It would be much like continuously receiving stimulus payments. They wouldn’t amount to very much for each household, but it would serve to smooth things over during difficult times.
Then the government simply needs to uphold standards of ethical business practices, and the rule of law. And in all law it is the citizen that must come first. No more special interest groups. EVERYONE has the same rights. Gay, straight, man, or woman, it doesn’t matter. All citizens have the same rights to life liberty and pursuit of happiness.
On the surface this may seem like it would be very expensive. But in actuality it would cost much less than what the government currently pays for corporate welfare and the administration of its entitlement programs. With what our war is costing us alone this plan could be easily carried out for decades.
The advantage of putting money directly into the hands of the citizenry is that they will be encouraged to consume, pay bills, choose their own medical care, schools, etc.
Our money is backed by faith alone. If one is going to have faith in something, then that something actually has to come through in a positive way. Otherwise why would anyone have faith?
If you want the forest of American business to grow strong then the roots of that forest must have the water they need. The citizenry are the roots of American business. Capitalize the citizenry. Then even if all they do is buy cheetos with their money they will still be supporting the economy. And as long as they are capitalized they will continue to support the economy.
from Commentaries:
Where the job seekers aren’t
Even in weak employment markets, the United States has typically had a trump card to play. The nation's workers are legendary for their willingness to travel across the country for new opportunities.
The result has been a speedier recovery of job growth than in Europe and possibly a higher productivity rate, since skilled workers are better matched to openings.
With the August employment report on Friday expected to show little improvement in the job market, America has never needed this flexibility more. Yet, at the risk of adding to the gloom, this advantage appears to be fading fast. The good news is that the United States still boasts one of the most dynamic labor markets of any rich nation. OECD rankings of its 30 wealthy member nations put the U.S. far ahead of other large countries. (It comes second only to Denmark, which has unmatched programs to help the unemployed back to work.)
On average, around a quarter of American workers change jobs each year, compared with 15 percent in Italy and 13 percent in Greece, says Stefano Scarpetta, head of employment research at the OECD.
Yet there has been a striking decline in U.S. mobility in recent years. Since 2000, the movement of Americans across state lines has halved to just 1.6 percent of the population this year -- the lowest rate since records began in 1948. Even movement between counties is at historic lows.
(Click chart to enlarge in new window)
Americans may be becoming less adventurous because they are getting older. During the recession of the early 1980s the median age in the labor force was 35, according to the Bureau of Labor Statistics. Now it is 41.
We would move, no problem! To where? No one is hiring in South Carolina, where we moved a year ago not knowing the bottom would fall out. We have a small mortgage, so we could relocate, but jobs at my age of 53 years are not there. I applied for TSA job, and never got an appointment to take the test. I managed in communications for 30 years, yet no one seems to respect my experience. What is America coming to? I continue to apply for jobs over a year now with no prospect ahead.
from Commentaries:
Japan takes a kinder approach to growth
The victorious Democratic Party of Japan did not put economic growth at the heart of its electoral sales pitch. The party's manifesto mentions "growth" only once. The word "support", by contrast, appears 19 times.
Even so, there are reasons for optimism that the DPJ's softer and more nurturing policies are just what the economy needs.
The global slump provided a painful reminder of the dangers of Japan's export-oriented growth strategy. Output has fallen even faster than in other rich countries, leaving national income at roughly the same level as in the early 1990s.
After two decades of stumbling between recessions, policy makers need to convince their citizens to spend some of their vast cash savings, which are now equal to 1.5 times GDP. Making the Japanese feel more secure may be the best way of doing this.
There is plenty in the DPJ's platform that looks encouraging. If Japan's new government can enact election pledges, Japanese citizens would have fewer reasons to hoard cash.
Parents would benefit from a generous child allowance. High-school education would be made free and university scholarships more plentiful. For the elderly, there would be a minimum guaranteed pension of at least 70,000 yen (about $750) a month. The unemployed would get 100,000 yen (about $1,100) a month during job training.
There are two problems, however. The first is how to pay for this largess. The party's belief that its $180 billion social agenda can be financed by cutting wasteful spending has left some economists unconvinced. A good deal of the fat in the budget was cut out when Junichiro Koizumi was prime minister from 2001 to 2006.
Japan, a nation ten times as densely populated as the U.S., is so badly over-crowded that they are incapable of consuming products at a rate necessary to gainfully employ their labor force, thus making them utterly dependent on manufacturing for export. (It’s a fact that over-crowding reduces per capita consumption, simply due to a lack of space for using and storing products, beginning with housing.)
The DPJ is faced with an impossible situation. Japan is doomed to rising unemployment and poverty as nations like China and India begin to muscle in on their export markets.
Pete Murphy
Author, “Five Short Blasts”
from Commentaries:
Debt on autopilot
At first glance this week's budget projections paint President Obama as a spendthrift. The White House itself offered a grim glimpse of a future in which U.S. debt more than doubles to $17.5 trillion in a decade -- an increase of nearly $10 trillion.
Merely servicing the U.S. debt will cost more than America currently spends on either defense or social security.
But the yawning deficit can't be blamed on Obama -- or for that matter, on Bush or on the financial crisis. Instead the government's finances are locked on autopilot, with entitlement programs driving the country towards a fiscal crisis.
Spending on three giant programs -- Social Security, Medicare and Medicaid -- will account for three quarters of the extra borrowing over the coming decade. By 2019, it will more than double to $2.5 trillion -- more than the U.S. government expects in total tax revenues for next year.
Washington needs to address the deficit soon. To avoid pointless political wrangling, it is first important to make clear what is not causing the fiscal meltdown -- including the economic stimulus.
Even if you add in interest payments from the $789 billion recovery bill, the stimulus accounts for only a tenth of the rise in debt up to 2019, according to calculations by Chris Edwards at the Cato Institute.
Three years of weak tax receipts, courtesy of the recession, will cost the country about $1.3 trillion if interest costs are included. This represents just 15 percent of the borrowing binge.
The first step to healthcare is to develop healthy lifestyle among the population.
If you look at what people are eating today, you can estimate the cost of healthcare ten years later. They are walking time bombs to blast the budget of national healthcare funds.
from Commentaries:
The mirage of U.S. healthcare
On healthcare, the White House is struggling with a political riptide that threatens to drag it into deep water.
Americans, as they contemplate change, have suffered a weakness of nerve. The main reason is that nearly two thirds of Americans are apparently happy with their healthcare coverage, for all its deficiencies. Repeated reassurances from President Obama that those who like the existing set-up will not be forced to change, have had little effect.
A change of tactics may be in order. The administration must do a better job of underlining the glaring defects of the existing system. The genius of the U.S. healthcare is in providing the illusion of value and security. For their own sake, Americans must be encouraged to set aside jingoistic claims about having the best care system in the world and look more honestly at its short-comings. Let's start with value. Most Americans are blissfully unaware that their healthcare system provides appallingly little value for their money. This is because when it comes to costs, they see only the tip of the iceberg. While companies typically pay about three-quarters of an employee's family premium -- on average $12,680 a year -- individuals ultimately bear the burden. In a free market, companies do not hand over to their workers more than they absolutely have to. Money spent on healthcare is carved out of take-home pay or other benefits.
"We pay for healthcare in considerably lower salaries," Uwe Reinhardt, a Princeton University economics professor, said in a telephone interview. "The system seduces people into thinking care is pretty cheap. We are kidding ourselves if we think that the shareholder pays."
One measure of this financial sacrifice is that employer premiums are now 17 percent of median household income -- up from 15 percent in 2003. From 1999 to 2008, family health insurance premiums rose by 119 percent.
With healthcare costs rising fast, it is small wonder that middle-class Americans have failed to wring real pay increases out of employers. The drag on pay will increase further, according to research by the Commonwealth Fund. The foundation estimates that without reform, the cost of premiums could double again by 2020 -- gobbling up still more take home pay.
The second big healthcare mirage is security. If the current downturn has demonstrated one thing, it is the fragility of an employer-based healthcare system. Lose your job -- as more than 6.5 million have in this downturn -- and your insurance can disappear with it. (COBRA provides only a temporary patch and can be expensive.)
This commentary is dead on.
We have a lousy healthcare system today. It is designed to deny you coverage so that insurance companies can maximize their profits.
The problem with trying to fix it is that most people are healthy and aren’t really using their insurance. You can’t possibly know how bad something is if you aren’t using it.
The people that know how bad the system is are in the minority simply because only a fraction of the population is sick and seeking healthcare. Many aren’t getting the care they need. This is wrong.
from Commentaries:
Who’s afraid of deflation?
For most policymakers, deflation is the stuff of nightmares -- scarier even than bank failures and stock market collapses. As the economy stumbled, deflation became Lords Voldemort and Sauron rolled into one.
In recent months, however, this economic supervillain seems to have lost its power to intimidate.
With growth reviving, many economists now believe that deflation is highly unlikely to materialize.
Another group suggests that deflation is not nearly as nefarious as often portrayed. Since falling prices are not generally associated with depression, we were wrong to be frightened in the first place.
Sadly, both of these reassuring premises are wrong. We should still be afraid of deflation.
First, the notion that deflation is a misunderstood and potentially benevolent economic force is only partially true. Supporters of this theory often cite research from the Federal Reserve Bank of Minneapolis, which showed that falling prices seldom coincide with depression.
Looking at data for 17 countries over more than a century, the Minneapolis Fed concluded that "nearly 90 percent of the episodes with deflation did not have depression."
You say deflation – but have you paid your real estate taxes lately, or may be you happen to pay admission to mary-go-round in a local park?
In my experience, everything that is not goods – taxes, admissions, surcharges, co-payments go up.
Here, in tri-state, rents are not falling either.
How does this not constitute inflation – if about 80% of my expenses are not goods, I can not understand.
May be Mr Swann will explain?
from Commentaries:
FOMC: Dull by design?
The FOMC is determined not to make waves, either in the markets or in Congress. Today's decision looks to be a compromise between these two goals. Lawmakers such as Jim DeMint are yearning for an end to the credit easing policies. But going cold turkey might unsettle the Treasury market. Allowing the program to taper off gently is a good middle ground. With the Fed's regulatory role hanging in the balance in Congress over the coming months, this is no time to attract adverse attention.
Even so, I think it's a shame that the Fed didn't follow the Bank of England's lead in extending asset purchases. If the Fed is so confident that it can quickly suck back any liquidity then why not try to make sure the recovery gets off to a stronger start?
The economic revival will soon start to look quite statistically impressive, with growth rates of up to 3 percent. Beneath this there will be climbing unemployment and surging foreclosures. The Fed itself is forecasting tepid growth and mounting joblessness. They could still help ease this pain by striving to shave more off the cost of borrowing for consumers and businesses.
They have done a great job at helping save America from depression. But this is a limp end to a historic policy.
Sorry, did you just call Jim Demint “a Lawmaker”? Don’t, please.
I’ll tell you where I mainly got to know Jim Demint from, and what I know him as. He’s one of the prime contributors behind the 4,000lbs or so of garishly-written overwrought hot-button predatory junk mail cash-solicitation garbage I’ve recently had to spend time clearing out of an elderly, now-deceased relative’s home in San Francisco. No exaggeration – one (U.S., not metric) ton just of Jim’s sleazy rubbish, accumulated in one place in just the past two years.
Never mind how much Jim Demint leeched out of my elderly, now-deceased relative, (“Hey Jim, we got a live one!”) now it’s costing me a fortune to take the residual deluge of Demint’s incessantly turgid pleas for old folks to finance his lousy shenanigans, and have it shredded.
And this would be just one addressee out of however many thousands of elderly and infirm people into whom Jim Demint’s gang of relentless cash-milkers regularly sink their fangs to subsidize his toxic presence on the planet.
The guy’s not only a nasty piece of work as exemplified by every stupid, paranoid-obsessive position he ostensibly endorses – which is just plain wrong – he’s got a carbon footprint the size of Greenland to boot.
Everything’s fever pitch with Jim Demint – his powers of differentiation, political credibility and subtlety, on the other hand: zero. So let’s not start by quoting him on anything, if you don’t mind.
And yes, it’s so bad, I’m now writing a book about him. Jim Demint’s a blight on the American political landscape, no doubt about it. But in the end, weirder than a carnival clown, as the tale unfolds.
By deduction, Jim Demint’s motivation would seem to derive from collusion with the rottenest elements bleeding the Fed and thereby the American people for as much as possible in exchange for as little as possible by way of secured assets which should then by definition and by rights be owned by the American taxpayer – but if Demint prevails, never will be.
In that sense, it’s not only a shame – it’s another grand larceny scandal in the making, if Jim Demint were to get his way.
Demint’s no genuine “Lawmaker”, not of any repute. He’s just a crooked Manchurian hairspray Fundamentalist sucking all the personal bailouts he can out of the elderly and infirm on his inevitable way to Hell. Meanwhile, what he’s in favor of doing to America is insufferablly immoral and legally questionable, to say the least.
If the taxpayer were ever to get a fair shake out of the FOMC, well, that just wouldn’t be the world according to Jim, would it?
And so it goes.
Recession at half time?
– Christopher Swann is a Reuters columnist. The views expressed are his own –
Recession historians on Wall Street often consider a downturn over when job declines fall to half their peak.
The July employment report, with its revisions, takes us past this milestone. The numbers were better than expected in almost every respect. There was even a tick up in hours worked, especially in manufacturing. The output component of the recession has probably already ended.
Even so, the labor market is likely to remain grim for a very long time. That a decline in payrolls of 247,000 should be taken as good news is an indication of how bad things have become. Such falls were close to the average in most postwar recessions, not an indication that the worst was over.
In the recession of the early 1980s, the peak job loss was 389,000. In this recession it has been around 740,000. So we are still on a different trajectory. The United States may continue to bleed jobs at a fast pace for some time to come.
There has seldom been more slack in the labor market. Businesses have plenty of room to increase the working hours of existing employees — which have declined far faster than in previous downturns.
Part-time workers can be brought fully on board. Only then might companies add to payrolls.
Mr Swann – go back to school and this time stay awake. You said;
“Under an optimistic scenario, in which job creation rebounds to about 100,000 a month, it will still take five years to recover the more than 6.6 million jobs lost during the recession.”
Ummm are you aware of the fact that 150,000 to 175,000 NEW WORKERS enter the labor market EVERY MONTH? So adding only 100,000 jobs a month means you’re STILL going further in the hole EVERY MONTH and so you regain NO jobs.
This recession/depression is far from over. Since it’s not an economic recession, but a financial recession, there will be NO improvement until the broken financial system is fixed. There needs to be appropriate regulation enacted and enforced, the Criminal Enterprise Banks holding class 3 “assets” need to be shut down so the market can be cleared, and the Fed needs to mop up all that excess US Dollar liquidity that the world is now awash in.
Until these things happen, you won’t see a recovery – we’ll just hobble along, getting by and waiting for the next two elections.
The rich are not an easy quarry
– Christopher Swann is a Reuters columnist. The views expressed are his own –
Cash-strapped politicians are more willing to play Robin Hood than at any time in a generation. Tax rates on the rich may soon hit levels not seen since the 1980s. The wealthy, alas, are not easy prey. Backed by highly paid lawyers and accountants, no other group is better able to run circles around the taxman. As a result, America’s politicians may get less cash than they bargained for and more economic distortions.
There are many easier and less disruptive ways to get the cash.
Of course, the temptation to launch a direct strike on the rich is understandable. The past three decades have been very good to the affluent. The top 1 percent of earners now account for 19 percent of America’s income, up from 9 percent in 1980. This elite group has also been quiescent, dutifully paying 40 percent of all income tax, according to the non-partisan Congressional Budget Office.
It has been many years since the rich had a powerful incentive to test the limits of the tax code. The top rate of income tax has fallen with only minor interruptions since its vertiginous peak of 92 percent in 1953. But a foretaste of what might be expected was offered by Maryland’s ill-fated creation of a millionaires-tax bracket in 2008.
A year later 1,000 millionaires had disappeared — a third of the total — and revenues from this group had fallen by $100 million. Some may have left the state while others may have found ingenious ways to reduce their reported income.
The U.S. tax code is replete with legal dodges for the wealthy, whether you are a top executive, independent business owner or the lucky recipient of inherited wealth.
Dear author,
very good article on American riches thoughts to their tax systems.
On running governments,taxes are other sources of revenues.
Now a days ,many !New rich! segments are created in all countries,because of double or thrice income by working,on line trade,part time jobs are not covered by any notable tax deductions by concerned authorities.
For example,a man or woman educated can work as a teacher in pay system,at the same time,they will be getting considerable unaccounted tuition fees from students.
Many part time works income will not be noticeable by many
In order to bring a good tax revenues for further nation building,she has to get more money from top riches,growing rich brackets, and increasing usercharges for sustaining, and for further growth.
Amen to community banks. Credit unions are generally cool too. Accidents are not the same as wrecks and crashes. Banks can only be prone to crashes and wrecks. Accidents are beyond the operators control, therefore rare as hens teeth.