Compromise Can Be Dangerous

This last week or so has brought us commentaries from a wide variety of people along the political spectrum about the compromise reached between President Obama and the Republicans in Congress regarding the soon to expire "Bush tax cuts;" that is, the tax cuts proposed by President George W. Bush and enacted by Congress early in Bush's presidency. The first thing to note is the hypocrisy of both sides. Since Obama took office in January 2009, the Republicans have told Americans how he would bankrupt (is bankrupting) the country. Of course, their hypocrisy in reference to Obama started then, since they chose to ignore the Republican record during the previous eight years of George W. Bush, where a budget surplus turned into flowing red ink, with two wars, a Medicare prescription drug benefit, tax cuts (favoring the wealthy), and the bolstering of security around the nation in the wake of the 9/11 attacks, all done without paying for them. This was just the deficit spending done under one Republican president.*

Now Republicans, instead of being fiscally responsible, have more or less demanded that the "Bush tax cuts" be renewed for every income level, including the super, super, super rich.** Then on top of that, they want the tax on estates left by multimillionaires to be lowered to about 35%.*** I've heard several figures tossed out there, but needless to say, there aren't many Americans who would have to pay the upper rate, something around only 40,000. Let's see....if you have the "minimum" upper level estate of 3 million dollars, the tax would be $1.65 million, and the estate would still have $1.35 million in value. I'll tell you, getting by on that could be difficult! Anybody want to leave me that paltry amount in their will? I'll struggle along on it. Did I mention that all of this tax cutting for the wealthy will go on the national credit card? Yep! All of the money in the entire tax package will be borrowed (much of it probably from the Chinese). So, the country is going to borrow more money to give money to people who have so much money now, they can't spend all of it.

Some economists feel this will all stimulate the economy and help bring down the unemployment rate, which certainly is an admirable goal. Let me tell you what I think will happen. It may help somewhat, but the wealthy will turn their tax "savings" over to their money managers and hedge funds. These ruthless people will then drive up prices on EVERYTHING! There will be additional income transfer from your pockets to the bank accounts of America's elite. In the end, all of us will suffer the consequences, and it will all be done with borrowed money. We hear how "you can't raise taxes, even on the wealthy, in a recession." Well, it hasn't bothered the wealthy one bit in driving up the price of oil and gasoline "in a recession." I'm telling you, in the not too distant future, the $4 to $5 a gallon for gas of a couple of years ago will look "good." The income disparity in the country will not abate, it will grow larger. The estate tax cut will allow more concentration at the very top, where essentially now the top 1% owns more of the national wealth than than the bottom 90%!!!!!!!!!!!!!!!! Folks, if this doesn't bother you, it should, and it will have an impact on your life or the lives of your children or grandchildren. It should scare the livin' hell out of you! As the days have passed, at least some folks, Republicans and Democrats, have looked over this whole thing and they have begun to dislike it.

The Democrats have blasted the Republicans for tax cuts for the rich for years. Now a Democratic president seems to be saying, "I didn't really mean it." Just from what I've heard on some television programs from people with contacts within both political parties, the Republicans were astounded how quickly President Obama gave in to all of their demands, especially on the estate tax. The President at least needed to make Republicans defend, VERY PUBLICLY, tax cuts for the wealthiest Americans; tax cuts being put on the national credit card bill. The country is going to have to deal with all of this debt. When they come to cut things you or your family or your neighbors need, just remember all of these tax cuts for the wealthy. I've been preaching here for years how the wealthy have absolutely taken over the country. They LOVE Republicans, but they have deep affection for Democrats, as they are not a hell of a lot better. Lest we forget, Republican pushed deregulation (aided by "some" Democrats) of the banking industry was pursued for years, ending with the "Gramm-Leach-Bliley Act," a gift to wealthy bankers that has brought the country to the abyss, as it is the immediate cause for our current economic problems. It was a compromise signed by President Clinton, a Democrat!****

The time for all of this negotiation about shoving money into the hands of America's wealthy was a month or two BEFORE this last election, not AFTER the election, Mr. President! This guy needs a crash course in politics. (A Word History is below the notes)


* For more information, see:
http://pontificating-randy.blogspot.com/2010/07/gop-keynesians-in-disguise.html

** Personally, I favor raising the top level from the $250,000 to like a half million. If you're making a half mil, you're not poor, not that 250 thousand is small change. Keep in mind, those earning the $250,000 (or half million favored by me) would still have their taxes reduced up to that level. It is only on the amount above that they would pay about 3.5% more. Some prominent wealthy folks like Warren Buffett and Bill Gates have said taxes on wealthy people like themselves should NOT be extended.

*** Due to a quirk in the law passed during George W. Bush's term, there is NO estate tax right now! It is scheduled to go to a maximum 55% on amounts OVER 3 million dollars in 2011. The tax percentage varies on lesser amounts. So, you must have an estate worth in excess of 3 mil to pay the top rate. Presently, I'm a ways off....ah....quite a ways off! The Obama-GOP Bill would do two things to alter the 2011 estate tax: it would lower the maximum tax to 35% AND raise to $5 million/$10 million (depending upon status) the beginning amount subject to that maximum tax. Again, billionaires like Buffett have said that this is wrong, and that it even goes against the capitalist principle of "meritocracy;" that is, by being able to pass huge sums on to others, those people will not have to be "good at anything," rather they will be fantastically wealthy without having to have proven themselves in the market place.

**** For more on "Gramm-Leach-Bliley" see:
http://pontificating-randy.blogspot.com/2009/03/understanding-crisis-part-three.html

WORD HISTORY:
Wealth (Weal)-This word, related to "well" (as in, "well off, financially or health wise"), goes back to the Indo European root "wel," which had the notion of "to wish, to desire, to will." This gave Old  Germanic "welon," which meant "well being, welfare (not the government program), possessions, riches" (all things humans "desire"). This then gave Old English "wela/weola," with the same general meaning. This then became "wele" and eventually what is now the archaic "weal." By the 1200s, a "th" was added to the end, perhaps in imitation of "health." By the latter part of the 1300s, a "y" had been tacked onto the ending to mean "people of great means, the rich" (in a collective sense). Close English relative German has "Wohl," a noun, meaning "well being, welfare." In the other Germanic languages, the related words are more closely associated with English "well," or they are used in compounds that match English "welfare" (Norwegian has "velferd," for example, and German has the direct word, "Wohlfahrt").

Understanding The Crisis, Part Three

I hope that all of you will try your best to follow this series. I also hope that I’ll explain things in a way that you can understand them, although certain aspects can be VERY complex. I know, too, that there is some really DRY stuff here, but please try to stick with reading it, as it is all VERY important, as I’m sure Congress and members of BOTH parties will be trying to assess what has happened in recent times, and to then put in place new laws to govern banks and various investments.

During the Great Depression of the 1930s, banks failed by the thousands. In an effort to prevent, or to at least control, such things from happening again, the Glass-Steagall Act was passed and signed into law in 1933.*** First, it established the Federal Deposit Insurance Corporation (better known to most of us as the “FDIC”), which insured bank deposits (then up to a limit of $100,000, which was quite a sum for those times); that is, if you had $5000 in a bank and that bank collapsed, you still got your $5000 back. Why would this help? Okay, one of the reasons for bank failures was “a run on the banks;” that is, many people were fearful of losing their money, sometimes their life savings, from a failing bank, and they withdrew their money. Now, there’s no question that some banks were shaky for a variety of reasons, but when a few banks collapsed, it caused even “healthier” banks to fail, because depositors withdrew their money. In such situations, even rumors (whether true or false made no difference) could cause bank failures, because depositors were terrified of losing their money, and thus the fear of a bank collapsing brought about the reality of that bank collapsing. With deposits insured, and the public aware that they could get their money even if their bank failed, it was hoped that “panics,” with mass bank withdrawals, could be curtailed, or even stopped, thus preventing the collapse of “healthy“ banks.

The new law also gave more power to the Federal Reserve in regulating interest rates, but that’s another matter. Further, “Glass-Steagall” separated banks into commercial banks and investment banks, with rigid barriers against mixing the two. Part of the reason for the Depression was seen by many, but not all, as banks having gotten too involved in investments in the stock market (including “speculation“ in stocks), for one thing. In those pre-Depression times, many banks often had brokerage departments, which often issued various securities, including stocks and bonds for corporate clients, while the rest of the bank took care of the more traditional banking roles of deposits and lending. By assuming so much risk in the brokerage area, investments gone sour could pull down the whole bank, rather than just the brokerage part. So what does this mean? Well, let’s say that you have your life savings in bank XYZ. The bank also has a brokerage unit which takes a major hit during “The Crash.” The losses from the brokerage unit have to be covered by the whole bank, not just the brokerage part. Ahh...cough, cough....guess whose money is now at risk?

Further, collapsing banks, the resulting jobs losses and the financial losses to depositors fed into the “depression” mentality that kept the downward spiral going, and as mentioned above, often caused mass withdrawals from other banks, even though some of those banks might have been sound, causing these banks to either fail or teeter on the brink. So you see, there was kind of a chain reaction. When you hear, “Your money is safer under your mattress, than in a bank,” this is more or less what is meant.

I won’t get into too much more on this part of the subject, but there were additions to the Glass Steagall Act made later in the 1950s, prohibiting bank holding companies that owned two or more individual banks from buying banks in another state.+++ Further, these bank holding companies were restricted to more or less traditional banking practices and restricted banks from the insurance business .

Many bankers didn’t like the laws, and over time, there were attempts to get aspects of the laws changed or repealed, with more intense efforts beginning during the Reagan years. In 1987, the Federal Reserve Board voted to loosen restrictions on some banking activities, including the issuance of....“mortgage backed securities.” Then Fed Chairman, Paul Volcker, dissented, fearing that banks would lower the standards for loans, then market shady loans to the public, all to make money from these securities they would then sell. (See Part One, for the basic workings of the mortgage lending business) Also in 1986/1987, the Fed broke the precedent of Glass-Steagall by allowing banks to again engage in certain limited investment activity, but limited such activity to no more than 5% of their gross business. In 1989, the Fed, now under Alan Greenspan, a strong advocate of deregulation, increased the percentage to 10%, and in 1996, to 25%. Gradually the banking laws were being dismantled.

In 1999, Senator Phil Gramm (R-Texas), Rep. Jim Leach (R-Iowa) and Rep. Tom Bliley (R-Virginia) introduced a measure in Congress that would effectively repeal much of “Glass-Steagall.” It permitted banks to outright own investment firms and insurance companies. The basic bill, also known as “The Financial Services Modernization Act,” had the support of the Clinton White House and Treasury Secretary Robert Rubin.^^^ The first vote in the Senate was 54-44, with 53 Republicans and one Democrat voting for the bill, and 44 Democrats against. The House passed a somewhat different version by voice vote; that is, there was no roll call to indicate how individual members voted. The bill went to conference committee to get an agreement between the two versions and the final bill was then passed by the Senate 90-8 and by the House 362-57. Clinton signed the bill into law. The walls between various financial sectors were shattered.

To be continued...

(No "Word History" this time)

***This was actually Glass-Steagall #2, as a previous act was passed in early 1932 and was known by the same name.
+++One could certainly argue that this prevented any banks or bank holding companies from becoming “too big to fail.”
^^^Rubin was a former exec of Wall Street investment firm "Goldman-Sachs." Not long after Glass-Steagall was repealed, he went to work for one of the beneficaries of the new law, Wall Street financial conglomerate "Citigroup." Hmm, now you people don't think....there could have been some tie....oh come on!!! You folks are cynical!!! (But so am I!)