This is what I think Obama's Tax Policy will end up being

I've been a CPA for almost 6 years know, and in the financial services industry on and off for the last 15. Based on those experiences, I can say I have a good understanding of both items. Well this article about Congressional changes on pension plans show that there is no limits to the obtuseness of both Democratic Congressmen and academics. A brief passage:

“With respect to the 401(k), it appears to be a plan that is not really well-devised for the changes in the market,” Rep. George Miller, D-Calif., said.

“We’ve invested $80 billion into subsidizing this activity,” he said, referring to tax breaks allowed for 401(k) contributions and savings.

With savings rates going down, “what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 billion for a policy that is not generating what we … say it should?” Mr. Miller said.

Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds, suggested Teresa Ghilarducci, an economics professor at The New School for Social Research in New York.

When workers collected Social Security, the guaranteed retirement account would pay an inflation-adjusted annuity under her plan.

“The way the government now encourages 401(k) plans is to spend $80 billion in tax breaks,” which goes to the highest-income earners, Ms. Ghilarducci said.

That simply results in transferring money from taxed savings accounts to untaxed accounts, she said.

Where do I start on this? Needless to say, this really got me riled up. How this is so wrong:

1. The idea of retirement accounts and the corresponding tax deductions was to encourage people to save. Savings means capital for economic growth. The U.S. has one of the worst savings rate in the industrialized world. This would encourage consumption and deter investment. We complain now how all these Sovereign Wealth Funds are buying up all the companies and real estate in the U.S. They will own a lot more once Americans are deterred from saving.
2. The other part of 401(k) plans is that the taxpayer gets a deduction now, all growth in the account is tax free, but the catch is that all withdrawals from the account are taxable as income. Phasing out or eliminating the deduction for 401(k) plans would result in double taxation for many taxpayers.
3. Does Representative Miller mean that only 401(k) plan deductions be taxable? What about contributions by employees to big fat unionized defined benefit plans? If we are talking about taxing contributions to retirement accounts as a subsidy, shouldn't we throw in defined benefit plans, SEPs, IRAs, SIMPLE, Keogh plans as well?
4. The individual 401(k) limit is $15,500 if under the age of 49 and $20,500 if over 50 for 2008. An individual in the top bracket would get a reduction of income tax to the amount of $5,425 - but they would have to make at least $357,700 filing joint for the maximum bang. If someone is in that bracket, they are paying roughly north of $100,000 in federal income tax. I don't think this is such a huge "loophole for the rich"
5. Teresa Ghilarducci is a retard. Period. "Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds" Hmmm.. hasn't Ghilarducci heard of social security? In case she hasn't it is essentially a guaranteed retirement account made up of government bonds (in theory, but I bet congress would raid your retirement account like it does social security). It is going insolvent in the next couple of years.
   
6. Government bonds have underperformed the stock markets historically. This plan would impoverish savers by limiting their returns to fixed income securities, even if you include this recent meltdown. Even though investors "lost" $2 trillion in the past month due to the stock market turmoil - most investors are in for the long term. They are paper losses until one sells. To reiterate - over the long run, stocks outperform bonds.

This is just wrong wrong wrong on so many levels.... cradle to grave! We're on the road to serfdom and the pedal is to the metal. Someone has to straddle this road and scream "stop"!

The End of the Beginning

With the passage of the rescue package by Congress, we have started the next phase of this contagion.   

I cannot say that this package will have any effect outside of psychological.  It might help settle the overnight LIBOR rate drop from its record highs as some confidence comes into the system.   The problem is, like a lot of things that get passed as legislation these days, is that rushed bills like this are like a condom - they let you feel good when in reality you're getting screwed.   Perhaps that is a harsh judgement, but the problem we have here is primarily about capital, not illiquid assets.

Let me put it to you this way, any institution who sells their toxic assets at a fair value to the Treasury for government bonds is only exchanging an illiquid asset for a liquid asset.  While this may help the liquidity of the institution in question, it does not address the problem that it is woefully undercapitalized.  Insufficient capital leads to bank runs, and the inability of banks to make new loans and extend credit.   In other words, we still will have a significant contraction of lending as banks still de-lever their balance sheets.

And we have not addressed how the "shadow banking system" of hedge funds and SIVs are going to get clobbered on this.  They, as it stands to the best of my knowledge, are not eligible for the rescue plan.  They will have to liquidate their positions as they lose capital to redemptions.  Hundreds, if not thousands, of hedge fund will be going bust as they face increasing redemptions, the inability to refinance on the commercial paper market, and with large illiquid toxic assets on their balance sheets.  This gradual unwinding of trillions of dollars of assets and liabilities will depress the stock markets for at least another year.

So, looking into the crystal ball, I see the following trends for the next year or two:

1. Several large banks will still fail and will be taken over by the FDIC.  Dozens, if not hundreds, of regional and local banks will be too.
2. The S&P 500 will drop below 900 points by the end of 2009.  We should expect a 25% decline in the markets as companies continue to de-lever.
3. Credit card and auto loan defaults will hit record highs over the next year.
4. Home prices, as measured in the S&P Case-Shiller index, will bottom out for most markets by Q1 2010.
5. Depressed demand will bring oil down to under $70/barrel.
6. Gold will be off its record high, but not much due to the debasing of the U.S. dollar that this rescue plan creates.
7. One of the big 3 automakers will not exist as a stand alone entity (either bought out or Chapter 11) by the end of 2010.

Updates on Financial Meltdown

Wow,

There is a lot of blame to go around for what is happening.   I found out from my reading that the SEC exempted 5 broker dealers (Merrill, Goldman, Morgan Stanley, Bear Stearns, and Lehman) from SEC leverage limits in 2004.  

To recap, let us look at the government's role in all that (notwithstanding the fact that borrowers and lenders are just as much to blame).   It is just another example of unrelated changes in government policy can cascade into financial disasters:

1. The Federal Reserve in the mid 1990's until recently - abandons all pretense price stability, continues to recklessly expand the money supply.   The result was a weak U.S. dollar and artificially low interest rates.  This encouraged financial institutions and hedge funds to significantly leverage their balance sheets to goose up returns.   If we assume short term debt is at 3%, we lever 24-1 into a trade that makes 5%, our return on invested capital is 53% for the year.   Trades with small returns highly levered in a low interest rate environment create massive returns on capital.  However, small losses wipe out capital - which eventually happened.
2. Mark-to-market accounting - accelerated this, distorting equity in these firms in upswings (thus allowing firms to take on more risk) and pushing the insolvency in downswings.  That, coupled with the fact that a lot of these assets have no real liquid market for determining fair market value.
3. Capital requirements by the Fed under BASEL II used backward looking risk models that provided a feedback loop.   Using data from the last 20 years, essentially an extended bull market distorts the effects of low-probability, model changing events.   These risk models helped exacerbate the Mexican Peso crisis .   A risk model that is looks at the "fat tail" events and is more principal based would probably be wiser.
4. Congress' enforcement of the Community Reinvestment Act under the Clinton administration (I wrote about this earlier, but the best source on this is from the City Journal, which is more thorough) essentially compelled lenders to provide loans to uncreditworthy people.   
5. The tax system - with the mortgage interest deduction and property tax deduction is a government subsidy to home ownership that doesn't help.
6. Freddie Mac and Fannie May were political entities that were told by their congressional masters to push more home ownership for people who shouldn't.

That's the short list .. 

The Economic Case for T ax Havenx

H/T:  Redstate

Strange, isn't it

• That we find out within 48 hours of Bristol Palin's out-of-wedlock pregnancy, but it takes months for the MSM to cover John Edward's lovechild?
• We hear the MSM coverage of Palin's alleged involvement in the firing of her state trooper brother-in-law and promises by the MSM to properly "vet" her, and yet, how much investigation has the MSM done regarding Obama's relationships with Tony Rezko, Jerimiah Wright, and Bill Ayers?
• Hearing the MSM talking heads stating Palin is "unqualified" to be VP based on her term as Mayor and two years as governor, yet we haven't seen similar comments about Obama's experience as a state senator or less than one term in the U.S. senate.

If this isn't the media in the tank for Obama, I don't know what is...

Obama's Tax Plan - why it won't work

You cannot cut taxes on the "middle class" much more than already.

What I mean by this, is that the bottom 50% of households don't pay any income taxes or very little.  I calculated in a prior post that a family of four making $50,000 filing joint with two children pay roughly $1,500 in federal taxes using only the standard deduction.  This would be less if they itemize.  Now mind you, $50,000 is above the median income, but is a good proxy for "middle class" for most of the country.  So the median family has an effective income tax rate of 3.5%  How can you cut it more, Barrack?  The top decile already pay the majority of income taxes.

So based on this, there is a limited amount of ways to cut taxes on the "middle class" based on this.  Second, there are not enough "rich people" to soak with massive tax increases.   Most of these people will just work less, thus depressing tax revenues.   So the only way to the Democrat's tax plan to work is to define "rich" as low as possible - probably to the point where you're rich if you're employed.

Transformative Candidates

A few days of digesting Obama's acceptance speech in Denver has brought some perspective "transformative" candidates.   Everyone talks about how X or Y is "transformative" as a candidate.   That is utter B.S.  A candidate is never transformative, only when elected do they have the ability to become that by action, not deed.

Barack Obama is NOT a transformative politician.   He is quite conventional in many ways, but he is exceptional in his ability to give prepared speeches.  His acceptance speech was quite conventional, the laundry list of liberal programs, criticisms of the current administration and candidate, and platitudes of hope and unity going forward.  

Transformative politicians change the political roadmap for generations.  They are few and far between.  Examining U.S. presidents, the truly great ones changed the political landscape for generations.  Think Lincoln, FDR, and Reagan.  Obama's record and rhetoric shows he only wants to transform America into a socialist state.

Classic Bob Hope

I almost forgot this priceless Bob Hope clip.

H/T Dirty Harry's Place.

Barack Obama = Ron Burgundy??

I'm telling you right now - Barack Obama is Ron Burgundy. He will read anything on a teleprompter like a god among men, but is useless without one. Ron Burgundy will read anything put in front of him. I'm wondering when "the one" will have his moment like poor Ron above.

Accounting gimmmickry...

For those of you who like to invest in individual stocks in the market: read the financial statements. I am a traditional Graham-Dodd value type (most of the time) who likes to dig through the financial statements and find equities that trade below "intrinsic value" so that I have a margin of safety in a down market.
In light of the downturn in financial stocks as of late, and the corresponding collapse in the housing bubble, there are buying opportunities out there to purchase solid companies at discount prices. But, not all companies are created equal.
One of my biggest negatives on a company are accounting issues. During the tech bubble, a lot of companies (i.e. Nortel) were playing fast and loose with revenue recognition rules to front load as much of it as possible. Others were playing with the valuation of officer stock options. Others just took accounting policies that were too aggressive or down right misleading.
Case in point: Wells Fargo (WFC/NYSE) came out with stronger than expected second quarter earnings (i.e. a profit) on July 16th and the stock price jumped from $20.51 at the close of the prior day to $27.23. However, upon further examination of their earnings, things were not a rosy. A little change of their accounting policy for home equity loans explains it. In prior quarters, Wells Fargo would write off any home equity loan that was in arrears for greater than 120 days. However, at the start of the second quarter, they changed this to 180 days. My changing the criteria of when a loan was to be written off, they essentially added roughly $265 million to their earnings - turning a loss to a gain in the case of Wells Fargo's second quarter.
The worse part of this is that considering how many home equity loans they had in the housing bubble epicenters of California and Nevada, where the drop of home values they loans are essentially now unsecured, that the better accounting policy would be to more aggressively write off these positions? Wouldn't you, as a shareholder or depositor, show you a "worst case" balance sheet where there is less likelihood of downward surprises rather than overly optimistic guesses that have read downside?
As I said earlier, I don't like companies that play games with their accounting, as it reflects poorly on management in terms of performing their fiduciary duty to shareholders.