• curiouscat.com
  • About
  • Books
  • Glossary

    Categories

    • All
    • carnival (41)
    • chart (8)
    • Cool (35)
    • Credit Cards (45)
    • economic data (62)
    • Economics (439)
    • economy (126)
    • Financial Literacy (292)
    • Investing (324)
    • Personal finance (356)
    • Popular (43)
    • quote (194)
    • Real Estate (120)
    • Retirement (65)
    • Saving (90)
    • Stocks (158)
    • Taxes (51)
    • Tips (129)
    • Travel (7)

    Tags

    Asia banking bonds capitalism chart China commentary consumer debt Credit Cards credit crisis curiouscat debt economic data Economics economy employment energy entrepreneur Europe Financial Literacy government health care housing India interest rates Investing Japan John Hunter manufacturing markets micro-finance mortgage Personal finance Popular quote Real Estate regulation Retirement save money Saving spending money Stocks Taxes Tips USA

    Recently Posts

    • New Health Care Insurance Subsidies in the USA
    • Individual Stock Portfolio Investment Planning
    • Finding Great Investments Keeps Getting Harder
    • Huge Growth in USA Corporate Debt from 2005 to 2020
    • Retirement Portfolio Allocation for 2020
    • Tencent Gaming
    • Tucows: Building 3 Businesses With Strong Positive Cash Flow
    • The 20 Most Valuable Companies in the World – Jan 2019
    • 20 Most Popular Posts on the Curious Cat Investing and Economics Blog in 2018
    • An Inverted Yield Curve Predicts Recessions in the USA
  • Blogroll

    • Curious Cat Management Improvement Blog
    • Freakonomics
    • I Will Teach You to be Rich
    • Jubak Picks
  • Links

    • Articles on Investing
    • fool.com
    • Investing Books
    • Investment Dictionary
    • Leading Investors
    • Marketplace
    • Trickle Up
  • Subscribe

    • RSS Feed

    Curious Cat Kivans

    • Making a Difference

Investing and Economics Blog

Fed Continues Wall Street Welfare

Ok the title is a bit of an misstatement but I am getting so tired of massive government transfers to the rich. Basically here is what has happened. People with tens and hundreds of millions of dollars didn’t want to be subject to pesky regulations just because capitalism requires it. So they paid their politicians to not regulate their investment activities. They paid their lawyers to evade the legal requirements that they couldn’t get their political friends to remove.

Largely what they did was take huge amounts for taking positions that risk the economy for personal gain. The investments have huge leverage and massive negative externalities to the economy. Any capitalist would know this is exactly what the government is suppose to protect the economy from. Unfortunately our politicians think capitalism is that whoever has the gold, therefore should make the rules. A sad state but not a surprise.

So then, the negative externalities begin taking effect and the government now seems to think that massive government intervention is a great thing. What a sad state of affairs.

What should happen now. That is hard to say.

But certainly with the amount of huge financial bailout the government has engaged in recently certainly they need to plan for this far in advance (it is obvious their preferred method of letting their friends take huge risks with the economy and pay themselves well while the risks work out requires huge bailouts very frequently).

You could, I suppose, decide everyone should pay to support a few thousand people being allowed take positions that have huge negative externalities (in risks to the economy) and pay themselves millions before those externalities become obvious and then bail them out when it doesn’t but that doesn’t seem like the best strategy to me. Though it is obviously the one we have chosen. This is one very non-partisan issue. They pretty much all support letting those that pay the politicians well, do whatever they want. And then support bailing them out if there are problems.

What should the government do in economic matters. Not at all hard to say. Politicians shouldn’t auction off the health of the economy to those that pay them the most money. Politicians should not allow companies to subvert the legal and tax system and be rewarded (just because those companies pay the politicians well and fly them to nice vacations…). The government should regulate negative externalities as capitalism requires to function properly.

But most of all the voters need to vote for those actions. As long as voters elect those that believe in corporate welfare this is the natural result.

Related: Why Pay Taxes or be Honest – Politicians Give Lobbyists Tax Breaks for Billion Dollar Private Equities Deals (not the politicians are given the deal makers cash loans) – Estate Tax Repeal (payoff to the rich) – Politicians Again Raising Taxes On Your Children

To me it seems fairly obvious that if you want to have government policies that encourage taking huge financial risks with huge negative externalities to the economy so a few people can pay themselves huge sums then the economic way to manage that system is to have a tax on the risky behavior that is then used to bail out when the consequences of not regulating the obvious negative externalities come home to roost. Either that is too complex for our leaders to understand: very doubtful. They don’t understand basic economics and financial markets so they think the newest high leverage financial trick isn’t going to end the same way all the rest do (and therefore are surprised each time history repeats itself): sadly possible. Add to that they get paid huge amounts of money to believe this and have maybe a couple of economists telling them that this is perfectly predictable. And then you get what I think is the most likely. They know perfectly well they are letting those that give them huge amounts of money damage the economy for their own benefit (and then those doing so pay the politicians a bit to let them keep up the game). Somewhat ironically those paying themselves many millions I actually believe are more likely to believe their own hype. They have have so little understanding of economics and financial market history that they actually believe their flawed financial models. Of course, they need to believe something that justifies paying themselves obscene amounts of money.

Fed steps into credit crisis

The central bank approved a cut in its lending rate to financial institutions to 3.25% from 3.50%, effective immediately, and created another lending facility for big investment banks to secure short-term loans. “These steps will provide financial institutions with greater assurance of access to funds,” Bernanke told reporters in a brief conference call Sunday evening.

This is to bail out investment bankers. Essentially what they have been doing recently is using massive leverage and fancy accounting and paying themselves huge amounts of money. Now others look a the massive leverage and say – jeez you are lousy credit risks, we don’t want to lend you money certainly not at these low rates pay us more. And the bankers find they can’t afford to pay more without going bankrupt.

So then the government decides to lend them money since only anyone that pays any attention to financial market history would know that massive leverage and counting on huge amounts cheap money (and relatively stable markets) forever is a certain failure of an investment strategy. But we don’t want rich people to suffer just because the inevitable happened.

You have to be a sucker like me not to play this game and not expect the government to give you cheap loans whenever your obviously flawed strategy fails. Which shows how little I know because it isn’t a flawed strategy when the government just gives you cash when the market says your strategy was a failure.

Top Iraq contractor skirts US taxes offshore

Kellogg Brown & Root, the nation’s top Iraq war contractor and until last year a subsidiary of Halliburton Corp., has avoided paying hundreds of millions of dollars in federal Medicare and Social Security taxes by hiring workers through shell companies based in this tropical tax haven.

More than 21,000 people working for KBR in Iraq – including about 10,500 Americans – are listed as employees of two companies that exist in a computer file on the fourth floor of a building on a palm-studded boulevard here in the Caribbean. Neither company has an office or phone number in the Cayman Islands.

The Defense Department has known since at least 2004 that KBR was avoiding taxes by declaring its American workers as employees of Cayman Islands shell companies, and officials said the move allowed KBR to perform the work more cheaply, saving Defense dollars.

But the use of the loophole results in a significantly greater loss of revenue to the government as a whole, particularly to the Social Security and Medicare trust funds. And the creation of shell companies in places such as the Cayman Islands to avoid taxes has long been attacked by members of Congress.

March 16th, 2008 John Hunter | 6 Comments | Tags: Economics, quote

Comments

6 Comments so far

  1. Antony on March 19, 2008 4:18 am

    I liked your first two paragraphs then got slightly lost.
    I think two things need to be separated in what is a taxpayer bail-out for a bank.
    Firstly, loans (subprime) were made to people who really might default. And many ordinary, untrained with no banking expertise people thought that the default would occur exactly at the time when those adjustable rate mortgages converted to a different higher rate. It does not seem to have entered the heads of the CEOs (paid literally 1000 times that of ordinary people) of those lending organisation that they were creating a problem for their companies. A condition of bailing out Bear Stearns has to be that every boardmember looses their job without special compensation. Frankly – they were idiots! As this hasn’t even been mentioned it suggests that the Federal Reserve may reek of corruption. My suggestion is not vindictive it is merely good financial governace.
    Secondly, mortgages were packaged into bundles. Some of those bundles were sold as only containing prime loans. It has been know for some time that some of those “prime” bundles had had subprime loans slipped in. This is straight criminal fraud. No if and buts. Until there are prosecutions, or at least attempted prosecutions, the Wall Street Welfare should be seen not merely as an act of charity to those who command million dollar bonuses, but also as hush money to cover up the true corruption at the top. Who pays? The usual – you and I.

  2. Raag Vamdatt on April 3, 2008 12:20 am

    I agree that people have eluded regulation for personal gain, and should not be bailed out. But when there is a risk to the entire system – globally, not just in US – steps need to be taken to mitigate any crisis.

    But we should note that these very same people, who were running away from regulation, would now be regulated tightly. Now that’s a positive side-effect of a bailout!

  3. Credit Crisis Continues at Curious Cat Economics Blog on April 14, 2008 8:29 am

    The world’s biggest banks have suffered losses and write-downs totalling almost $250 billion since the beginning of 2007…

  4. The Best Way to Rob a Bank is as An Executive at One at Curious Cat Investing and Economics Blog on April 8, 2009 8:38 am

    The looters are not owners, they are executives that loot from owners, taxpayers, customers… And those looters pay politicians a great deal of money to help them…

  5. Financial Transactions Tax to Pay Off Wall Street Welfare Debt at Curious Cat Investing and Economics Blog on November 11, 2009 11:14 am

    […] the treasury to those that paid the politicians? More cynical to think the politicians that created huge Wall Street Welfare payments won’t actually do anything except talk about how they think it is bad that those they paid […]

  6. Executives Again Treating Corporate Treasuries as Their Money at Curious Cat Investing and Economics Blog on April 3, 2011 9:53 am

    […] we have the senior executives at the too big to fail financial institutions that did fail and were bailed out by taxpayers. We all know the economic calamity caused by these executives, throwing millions of people out of […]

Name (required)

Email (required)

Website

Speak your mind

« Mortgage Rates Rising
How Much Worse Can the Mortgage Crisis Get? »
Copyright © Curious Cat Investing and Economics Blog

    Personal Finance

    • Credit Card Tips
    • IRAs
    • Investment Risks
    • Loan Terms
    • Saving for Retirement
  • Archives

      All Posts
    • March 2021
    • January 2021
    • August 2020
    • March 2020
    • February 2020
    • January 2020
    • May 2019
    • January 2019
    • December 2018
    • November 2018
    • October 2018
    • August 2018
    • May 2018
    • February 2018
    • January 2018
    • November 2017
    • October 2017
    • September 2017
    • August 2017
    • July 2017
    • May 2017
    • April 2017
    • March 2017
    • February 2017
    • January 2017
    • December 2016
    • November 2016
    • October 2016
    • September 2016
    • August 2016
    • July 2016
    • June 2016
    • May 2016
    • April 2016
    • March 2016
    • February 2016
    • January 2016
    • December 2015
    • November 2015
    • October 2015
    • September 2015
    • August 2015
    • July 2015
    • June 2015
    • May 2015
    • April 2015
    • March 2015
    • February 2015
    • January 2015
    • December 2014
    • November 2014
    • October 2014
    • September 2014
    • August 2014
    • June 2014
    • April 2014
    • March 2014
    • February 2014
    • January 2014
    • December 2013
    • November 2013
    • September 2013
    • August 2013
    • July 2013
    • June 2013
    • May 2013
    • April 2013
    • March 2013
    • February 2013
    • January 2013
    • December 2012
    • November 2012
    • October 2012
    • September 2012
    • August 2012
    • July 2012
    • June 2012
    • May 2012
    • April 2012
    • March 2012
    • February 2012
    • January 2012
    • December 2011
    • November 2011
    • October 2011
    • September 2011
    • August 2011
    • July 2011
    • June 2011
    • May 2011
    • April 2011
    • March 2011
    • February 2011
    • January 2011
    • December 2010
    • November 2010
    • October 2010
    • September 2010
    • August 2010
    • July 2010
    • June 2010
    • May 2010
    • April 2010
    • March 2010
    • February 2010
    • January 2010
    • December 2009
    • November 2009
    • October 2009
    • September 2009
    • August 2009
    • July 2009
    • June 2009
    • May 2009
    • April 2009
    • March 2009
    • February 2009
    • January 2009
    • December 2008
    • November 2008
    • October 2008
    • September 2008
    • August 2008
    • July 2008
    • June 2008
    • May 2008
    • April 2008
    • March 2008
    • February 2008
    • January 2008
    • December 2007
    • November 2007
    • October 2007
    • September 2007
    • August 2007
    • July 2007
    • June 2007
    • May 2007
    • April 2007
    • March 2007
    • February 2007
    • January 2007
    • December 2006
    • November 2006
    • October 2006
    • April 2006
    • March 2006
    • January 2006
    • December 2005
    • October 2005
    • July 2005
    • May 2005
    • April 2005
    • April 2004