Mystery Economic Theater 2010

[ewmayer]

Originally Posted by garo

I cannot think of any good reason why cap gains tax is so much lower than the marginal income tax

Same reason gambling losses are tax deductible ... the gambling industry (in all its forms, Monte-Carlo/Las-Vegas-style being one of the smaller and more honest ones in terms of being up-front that the game is tilted toward the house) has bought many friends in high places to look after their interests.

[Prime95]

Gambling losses are deductible only up to the amount of your gambling winnings. Worse still is your gambling winnings are always reported, but you can only deduct your gambling losses if you itemize your deductions.

[ewmayer]

Originally Posted by Prime95

Gambling losses are deductible only up to the amount of your gambling winnings. Worse still is your gambling winnings are always reported, but you can only deduct your gambling losses if you itemize your deductions.

And that differs from capital losses how? (Besides the specific line numbers on the 1040 and associated forms).

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Regarding the weekend's European "bazooka bailout" news (which includes the U.S. Fed reopening swap lines and basically setting up everything they need in order to buy European sovereign debt, should they decide that the trillion-plus in toxic MBS on their balance sheet needs more garbage to keep it company, all without the annoyance of actually having to ask congress for an appropriation or tell U.S. taxpayers where their money is busily being spent) - It seems today`s lesson is

"Never underestimate the zeal of the neo-Keynesian clowns running most of the world`s central banks and economic ministries to use every tool at their disposal (and quite a few that aren`t, based on any reasonable reading of applicable laws) to keep the Ponzi going."

I have a bottle of champagne set aside which I intend to crack open when this whole house of cards finally blows sky-high again. (Which I define as the major U.S. equity indices breaking through their March 2008 lows). Still deciding whether I want to buy a 2nd bottle to celebrate Bernanke getting removed as head of the Fed, or Geithner and Paulson getting criminal indictments handed down against them, whichever of those welcome developments should occur first ... suggestions for a proper vintage are welcome.

[Prime95]

Originally Posted by ewmayer

And that differs from capital losses how?

Garo's original point is that capital gains are given preferential treatment (lower tax rate than other sources of income). Gambling income is treated worse than other sources of income. For non-itemizers, they pay taxes on all their winnings and must eat all their losses -- they pay taxes even if they had no net gambling winnings for the year.

[Spherical Cow]

Originally Posted by ewmayer

"Never underestimate the zeal of the neo-Keynesian clowns running most of the world`s central banks and economic ministries to use every tool at their disposal (and quite a few that aren`t, based on any reasonable reading of applicable laws) to keep the Ponzi going."

Not a challenge, but an honest query- what should they have done instead of what they did? While I try to follow all this, I don't know what the alternative measures are.

And, I assume your "...breaking through their March 2008 lows" is a typo; should be March 2009? (The Dow Jones was up at 12,000 in March 2008, thus you can partake of the champagne anytime, if that's indeed your target.)

Norm

[cheesehead]

Originally Posted by Spherical Cow

Not a challenge, but an honest query- what should they have done instead of what they did?

Yes, what

"Alternate scenarios for post-Sept. 15 2008"
http://mersenneforum.org/showthread.php?t=12816

?

I've not yet seen described any proposed scenario other than a vague "let them go through the regular bankruptcy procedure". This could easily be because I don't hang out in the appropriate neighborhoods! I'm not claiming there's been none, just that I haven't seen any.

I want to see something that considers the practical, financial and numeric limits of the U.S. economy, bankruptcy courts and/or whatever else is proposed as a mechanism, and shows how the alternative scenario could plausibly have proceeded with less damage than actually occurred. Show us plausible fates for the big guys that got $multibillion loans from the U.S. Treasury in real history, but would've gone through bankruptcy instead in the alternative scenario. Show us how the credit freeze in September 2008 would've been thawed without the actions actually taken by the government.

There may have been something published that I haven't seen; I'd appreciate a link. Also, I'm not challenging because I don't think any alternative scenario would've worked; I'm challenging because I think it's very strange that, _if_ simply using bankruptcy would've worked, I don't see easy-to-find or hard-to-ignore substantive explanations of the alternative.

Is it just because I don't frequent the right web sites, or is it really because conservatives actually have put forth no realistic workable alternative? I'm perfectly willing to believe the former ... but the latter does, alas, fit other observations of recent conservative pseudo-economic rhetoric ... not to mention the complete absence of replies posted to my five-month-ago request thread (http://mersenneforum.org/showthread.php?t=12816) !

I really have considered the economic mess without any preconceived notion of what's best -- aside from the very specific narrow issues I've explicitly questioned. I'm not convinced that the Keynesian plan was necessarily best -- but, as I said, it seems very strange that none of the criticism I've seen from the right has been accompanied by any actual detailed alternative scenario with plausibility arguments and data.

Has that been just because I've not read the right business or conservative magazines?

Show me the alternative so I don't have to be so cynical!!

[ewmayer]

Originally Posted by Spherical Cow

Not a challenge, but an honest query- what should they have done instead of what they did? While I try to follow all this, I don't know what the alternative measures are.

And, I assume your "...breaking through their March 2008 lows" is a typo; should be March 2009? (The Dow Jones was up at 12,000 in March 2008, thus you can partake of the champagne anytime, if that's indeed your target.

I'll address the first question tomorrow, after sleeping on a rough draft, as it were.

Indeed, I meant the March 2009 lows, e.g. S&P500 hitting the beastly 666 mark.

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Well, that whole splashily-announced "defending the Euro against evil speculators by any means necessary" thing lasted all of about 12 hours of Euro-on-a-sugar-high-ness yesterday (and probably allowed the same evil speculators - especially the ones having well-placed friends at the ECB - to reload their short positions) before the currency promptly resumed its downward slide. As far as the markets` "cheerful reaction", that lasted all of about 24 hours ... it seems a trillion fiatscos just don't buy what it used to. Here is Ambrose Evans-Pritchard's take on l'option nucléaire - he notes the possibly catastrophic-for-the-ECB anti-bailout backlash brewing in Germany (where Merkel would appear to have sealed her political fate, and no, it's not one involving re-election) ... and even perma-über-Keynesianista Paul Krugman is rather skeptical, albeit along predictably "a trillion bucks is not nearly enough" neo-Weimaraner terms.


Barry Ritholtz features a very nice infographic on changes in European debt from 2000-2009, which illustrates how it was not just the Club-Med nations which were levering up during the decade:

Changes in European Debt, 2000-09

Note that Spain is right around the 60% level.at present, i.e. you can color that one yellow now, as well. And with the Spanish economy in shambles and government welfare, unemployment and econo-stimulus spending all at record high levels, without brutal austerity they too will be "in the pink" in just a few short years.

[garo]

http://www.ritholtz.com/blog/2010/05...-by-president/

[ewmayer]

Originally Posted by garo

http://www.ritholtz.com/blog/2010/05...-by-president/

I get an empty page with a "Sorry,nothing was found here" message when I follow the above link.

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Dire fears about survival of the EMU

Brief glance at Europe: Only days after heavily promoting the "bazooka bailout" of the PIIGS - no doubt unconnected to his bank`s huge exposure to Club Med sovereign debt - Deutsche Bank chief Josef Ackermann expressed extreme skepticism of whether Greece will actually be able to pull off the brutal belt-tightening needed to avoid default ... Many serious people including former Fed chair (and the last non-Keynesian-bubblehead to have held that position) Paul Volcker are expressing dire concerns about the breakup of the EMU.

What was conceived as a club for Europe’s strongest economies was expanded for political reasons, leaving the currency union with minimal powers to police deficit spending and no safety net for dealing with countries, like Greece, that veer toward default.

“There was no discussion of that at all, of a crisis mechanism,” said Niels Thygesen, a retired Copenhagen University economics professor who served on the 1989 group led by European Commission President Jacques Delors that mapped out the path to the euro. “It was believed that if countries adhered more or less to prudent budgetary policies, that would not or could not happen.”

Former German Chancellor Helmut Kohl, seeing the euro as the capstone of Europe’s economic integration and Germany’s return to the European family after two world wars, opened the door to the deficit-prone southern European countries that the Bundesbank, haunted by the memory of hyper-inflation, wanted to keep out.

Returning from the December 1991 summit in Maastricht, the Netherlands, that kicked off the euro project, Kohl told the German parliament that he wanted “the greatest possible number of countries” in the euro. That gave Italy, Spain and Portugal the encouragement to fakemeet the economic targets to join in 1999 and Greece to follow two years later.

I`m not convinced the EMU will breakup entirely,but see now way for it survive in its present form, which encourages the economic laggards and debt addicts to continue their destructive habits. Might be a good time to start taking bets on whether the Euro "achives" parity with the US$ by year`s end...

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Morgan Stanley`s Version of the Abacus CDO Scam

Morgan Stanley Shorted Doomed Baldwin CDOs Lacking `Natural' Curbs on Risk:\nIn June 2006, a year before the subprime mortgage market collapsed, Morgan Stanley created a cluster of investments doomed to fail even if default rates stayed low -- then bet against its concoction.

Known as the Baldwin deals, the $167 million of synthetic collateralized debt obligations had an unusual feature, according to sales documents. Rather than curtailing their bets on mortgage bonds as the underlying home loans paid down, the CDOs kept wagering as if the risk hadn’t changed. That left Baldwin investors facing losses on a modest rise in U.S. housing foreclosures, while Morgan Stanley was positioned to gain.

“I can’t imagine anybody would take that bet knowingly,” said Thomas Adams, a former executive at bond insurers Ambac Financial Group Inc. and FGIC Corp. who is now a partner at New York-based law firm Paykin Krieg & Adams LLP. “You’re overriding the natural process of risk-mitigation.”

Morgan Stanley and rivals remain embroiled in a Securities and Exchange Commission probe, started at least a year ago, that’s examining whether Wall Street misled investors when selling mortgage-linked securities.

The agency has been looking for abuse “across the spectrum,” enforcement chief Robert Khuzami said April 16, when the SEC sued Goldman Sachs Group Inc., accusing the firm of fraud in the sale of a CDO. While federal prosecutors are also scrutinizing the market, Morgan Stanley isn’t the subject of a formal criminal investigation, according to a person familiar with the government’s review.

My Comment: We hope that "isn’t the subject of a formal criminal investigation" changes - it will if NY AG Andrew Cuomo has his way:

Prosecutors Ask if 8 Banks Duped Rating Agencies:\nThe New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.

My Comment: "The agencies may have been duped"? Flat-out bribed is more like it. It strains credulity to suggest they were not in on the scam - anyone with access to the basic data about the mortgages being bundled into these crap-o-la and in some cases even designed-to-fail CDOs could have ascertained that mortgages were seriously problematic (or outright fraudulent) with a few phone calls and faxes of the underlying paperwork. In other words, exactly the kind of due diligence the ratings cartels purport to do by way of due diligence ... but it seems pretty clear that they were well-paid to look the other way.

[garo]

National Debt by President

[ewmayer]

Originally Posted by garo

National Debt by President

Thanks - that nicely illustrates something I mentioned last year as having long puzzled me, namely that of all the presidents under (or perhaps "over" might be more accurate, given the level of arrogance at play) whom Greenspan served as Fed chair, only Clinton did not enjoy the "benefits" of a massively expansionary debt and easy-monetary policy ... Greenspan actually played deficit-hawk during Clinton's tenure. Still can't figure that one out ... maybe Greenie managed to put down the Opium pipe for a few years coinciding with Clinton's presidency (or merely stopped inhaling ;), but then went back to sucking it hard when Dubya took office.