| The term red pill and its opposite, blue pill, are pop culture terms that have become a common symbol for the choice between the blissful ignorance of illusion (blue) and embracing the sometimes painful truth of reality (red). |
| Take The Journey |
|
|
The “Corzine-Dimon Syndrome”
On its best days, the American judicial process is a blindfolded Lady Justice — prosecuting the truly guilty and exonerating the truly innocent. On its worst days, it is a Water Wiggle — whirling around unpredictably, without any apparent connection to guilt, innocence, Constitutionality or the proportionality of alleged crimes to one another.
On good days, guilty parties go to prison; innocent parties do not. On very good days, innocent parties do not even have to go to the trouble of hiring a lawyer and showing up in court. Law enforcement agencies correctly decide to spare them the burden (and potential agony) of proving their innocence before a judge or jury.
On bad days, the exact opposite occurs. Innocent parties go to prison, while guilty parties do not. On very bad days, guilty parties do not even have to go to the trouble of hiring a lawyer and showing up in court. Law enforcement agencies incorrectly decide to withhold charges and spare guilty parties the burden (and potential agony) of defending their guilt before a judge or jury.
Once you string enough bad days together, you get a Water Wiggle — a “system” of law enforcement that investigates and prosecutes alleged crimes capriciously, unfairly and disproportionately. You get a system, for example, that:
1) Prosecutes Hall of Fame pitcher, Roger Clemens, for injecting performance-enhancing drugs into his own body, but does not prosecute a single investment banking executive for fraudulently injecting mortgage-backed securities into the US financial system.
2) Tasers-to-death a Mexican national for sneaking into the US to find work, but provides billion-dollar bailouts to finance company executives whose extreme incompetence causes thousands of individuals to lose their jobs. (Bring us your tired, huddled masses so that we can beat them to death).
3) Threatens to shut down porn film studios for failure to comply with “condom laws,” but turns a blind eye to Wall Street’s serial financial rape of the US taxpayer.
4) Fires a 5-year employee of Wells Fargo for shoplifting when she was a teenager, but does not bother to prosecute M.F. Global’s former CEO, Jon Corzine, for allowing (or causing) $1.6 billion of client funds to disappear from the firm he controlled.
In other words, once you string enough bad days together, you get a “system” that punishes minor crimes and rewards major crimes…consistently. You get a system that punishes entrepreneurial initiative by rewarding cronyism.
Continue reading
How ‘Buffett Rule’ could still be escaped by highest-earning households
April 13 (Bloomberg) — The highest-earning U.S. households have ways to escape President Barack Obama’s Buffett rule with tax-planning techniques that would limit their liability and undermine the proposal’s purpose.
Those affected taxpayers — the fewer than 0.5 percent of Americans with annual incomes exceeding $1 million and tax rates of less than 30 percent — could take advantage of tax-free investments such as municipal bonds to escape the Buffett rule’s bite. They also could time asset sales for maximum tax benefits, engage in transactions that don’t result in taxable income and make charitable contributions that yield deductions.
The Buffett rule, named for billionaire investor Warren Buffett, would require that taxpayers with at least $2 million in adjusted gross income pay a minimum rate of 30 percent and would impose the increase on a sliding scale for those with income between $1 million and $2 million.
Continue reading
A Look at the Top 1% Shows Shift to Finance, Stability Within its Ranks and High Political Engagement
The Economist took a look at the top one percent and “the changing complexion of America’s rich.” It highlighted Mitt Romney as a reflection of this change, because “the wealthiest 1% of Americans not only get more of the pie,” but also because “they are increasingly creatures of finance.” There have been wealthy presidential candidates before, but Romney represents “the first candidate from the world of high-octane finance.”
The Economist writes of the shift to finance, “According to an analysis of tax returns by Jon Bakija of Williams College and two others, 16% of the top 1% were in medical professions and 8% were lawyers: shares that have changed little between 1979 and 2005, the latest year the authors examined (see chart). The most striking shift has been the growth of financial occupations, from just under 8% of the wealthy in 1979 to 13.9% in 2005. Their representation within the top 0.1% is even more pronounced: 18%, up from 11% in 1979.” A graphic from the New York Times also focuses on the occupational distribution of the top one percent.
Also indicative of the shift to finance, it appears that the wealthiest of the wealthy are now employed in financial occupations, a change from years past. “[Steve] Kaplan [of the University of Chicago] and Joshua Rauh of Northwestern University note that investment bankers, corporate lawyers, hedge-fund and private-equity managers have displaced corporate executives at the top of the income ladder. In 2009 the richest 25 hedge-fund investors earned more than $25 billion, roughly six times as much as all the chief executives of companies in the S&P 500 stock index combined.”
What does a household in the top one percent make? “The average household income of the 1% was $1.2m in 2008, according to federal tax data.” But The Economist notes, “The ultra-rich skew that average upwards: admission to the 1% began at $380,000 in 2008.” Of course, income is not the only measurement of wealth: “Measured by net worth, rather than income, the top 1% started at $6.9m in 2009, according to the Federal Reserve, down 23% from 2007.”
The Economist cites Mr. Kaplan, who argues that the move to finance largely accounts for the growth in the wealth gap. “Updating a series developed by Thomas Piketty and Emmanuel Saez, Mr Kaplan notes that the share of income going to the 1% reached an 80-year high of 23.5% in 2007, only to sink to 17.6% in 2009 as the financial markets deflated (see chart). The trend is even more pronounced for the top 0.1%, whose share of total income rose to 12.3% in 2007 but sank to a still disproportionate 8.1% in 2009.”
Continue reading
What If Housing Is Done for a Generation?
What if housing valuations are in a structural, multi-decade decline?
A strong case can be made that the fundamental supports of the housing market– demographics, employment, creditworthiness and income–will not recover for a generation. It can even be argued that housing has lost its status as the foundation of middle class wealth, not for a generation, but for the long term.
Let’s begin by noting that despite the many tax breaks lavished on housing–the mortgage interest deduction, etc.–there is nothing magical about housing as an asset. That is, its price responds in an open, transparent market to supply and demand and the cost of money and risk.
There are a number of quantifiable inputs that feed into supply and demand–new housing starts, mortgage rates and income, to name three–but there are other less quantifiable inputs as well, notably the belief (or faith) that housing will return to being a “good investment,” i.e. rising in price roughly 1% above the rate of inflation.
If this faith erodes, then the other factors of demand face an insurmountable headwind, for the most fundamental support of housing is the belief that buying a house is the first step to securing middle class wealth.
Rising rates of homeownership require five conditions:
1. Favorable demographics: a cohort of potential buyers that is larger than the cohort of potential sellers.
2. Rising household formation rates: an expanding population does not necessarily translate into rising rates of household formation. If the number of people per household goes up, then the number of households can plummet even as population expands.
3. A large cohort of creditworthy potential buyers: that means buyers with savings, buyers with sufficient income to pay the mortgage and buyers with low debt loads.
4. An economy that generates rising incomes to support homeownership.
5. An unshakable belief that owning a house is a favorable and secure investment that will rise in value in the decades ahead.
If the first four conditions have eroded, then the belief in the permanence of a rising housing market will also erode.
Continue reading
How the Servant Became a Predator: Finance’s Five Fatal Flaws
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He is a white-collar criminologist who has spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Originally published at New Deal 2.0
~~~
What exactly is the function of the financial sector in our society? Simply this: Its sole function is supplying capital efficiently to aid the real economy. The financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector’s current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises.
1. The financial sector harms the real economy.
Even when not in crisis, the financial sector harms the real economy. First, it is vastly too large. The finance sector is an intermediary — essentially a “middleman”. Like all middlemen, it should be as small as possible, while still being capable of accomplishing its mission. Otherwise it is inherently parasitical. Unfortunately, it is now vastly larger than necessary, dwarfing the real economy it is supposed to serve. Forty years ago, our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%). The minimum measure of how much damage the bloated, grossly over-compensated finance sector causes to the real economy is this massive increase in the share of total national income wasted through the finance sector’s parasitism.
Second, the finance sector is worse than parasitic. In the title of his recent book, The Predator Statehttp://books.simonandschuster.com/Predator-State/James-Galbraith/9781416566830, James Galbraith aptly names the problem. The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation. The facts are alarming:
Continue reading
The American Debt Crisis
Gold for Protection and Profit
Ben Bernanke says, “Gold is not money.” Yet for thousands of years cultures across the globe have used gold as a means of exchange and store of wealth. Not one government-backed currency has endured like gold.
Doug Casey often refers back to Aristotle’s criteria for sound money as to why gold maintains this status. In Doug’s words:
- It should be durable (which is why, say, wheat isn’t a good money – it rots)
- It should be divisible (which is why artwork isn’t a good money – you can’t cut up the Mona Lisa for change)
- It should be convenient (which is why lead isn’t a good money – it just takes too much to be of value)
- It should be consistent (which is one reason why land can’t be money – each piece is different)
- And it should have value in itself (which is why paper money leads to trouble)
You don’t buy gold to get rich. You buy it because it purchases the same amount of stuff now as it did 100 years ago… while the purchasing power of the dollar has fallen by 98%.
You buy gold because Bernanke and friends have proven they’ll do anything to keep interest rates low and “fight off” the debt crisis – even if it means complete debasement of the dollar.
