Time to Pay Your Taxes, Support Wall Street, and Take a Licking
I spent all night trying to figure out how much I owe in taxes. I also couldn't help thinking about how my tax dollars are supporting a financial system that rewards risky bets that hurt me.
Some of the dollars I'm sending to Washington are now being used to backstop Wall Street investment bankers, hedge fund and private equity managers, and anybody else associated with a borrower that's too big to fail. The reason they're too big to fail is they've borrowed so much from me and from you - from our pension funds and money-market funds - that if they went bust, our savings would disappear. Even the danger of them going bust might make us so anxious we'd demand our money, which would close down the entire financial system.
The reason they've been able to borrow so much from us without putting up much of their own capital is they're unregulated, and don't have to put up their own money. The tax code also rewards them for borrowing rather than investing, by letting them deduct interest payments on the money they borrow. The tax code also allows them to treat the earnings they get on the investments they make with the money you and I lend them as capital gains rather than ordinary income. So many of them are paying taxes at a lower marginal tax rate than you and I are paying.
Finally, when the risky investments they've made with our money go bad, we get a housing crisis, and the value of our homes - our biggest assets - plummets. And our pension funds get socked. Yet most of them continue to pull in whopping incomes. James Cayne,the former CEO of Bear Stearns, left the company with a $232 million pay package. That's because when they place risky bets that pay off, they get the windfall, and when their bets go bad they're bailed out with our tax dollars.
Full circle.
This just doesn't make sense to me. We want a tax system that rewards risk taking. But not any risks - and not one where it's heads they win and tails I lose.
Some of the dollars I'm sending to Washington are now being used to backstop Wall Street investment bankers, hedge fund and private equity managers, and anybody else associated with a borrower that's too big to fail. The reason they're too big to fail is they've borrowed so much from me and from you - from our pension funds and money-market funds - that if they went bust, our savings would disappear. Even the danger of them going bust might make us so anxious we'd demand our money, which would close down the entire financial system.
The reason they've been able to borrow so much from us without putting up much of their own capital is they're unregulated, and don't have to put up their own money. The tax code also rewards them for borrowing rather than investing, by letting them deduct interest payments on the money they borrow. The tax code also allows them to treat the earnings they get on the investments they make with the money you and I lend them as capital gains rather than ordinary income. So many of them are paying taxes at a lower marginal tax rate than you and I are paying.
Finally, when the risky investments they've made with our money go bad, we get a housing crisis, and the value of our homes - our biggest assets - plummets. And our pension funds get socked. Yet most of them continue to pull in whopping incomes. James Cayne,the former CEO of Bear Stearns, left the company with a $232 million pay package. That's because when they place risky bets that pay off, they get the windfall, and when their bets go bad they're bailed out with our tax dollars.
Full circle.
This just doesn't make sense to me. We want a tax system that rewards risk taking. But not any risks - and not one where it's heads they win and tails I lose.
posted by Robert Reich | 10:47 AM
33 Comments:
Dr. Reich,
The answer to the "heads you lose, tails I win" dilemma you pose regarding current structural inequities in our financial system might lie pragmatically in the words of President Harry Truman:
"The danger to our democracy comes not from the masses but from the concentration of wealth in the hands of a few -- and the Income Tax is the best remedy for that."
This is just the kind of situation that can quickly lead to violent revolution. The rich and powerful commit evil illegal acts and are not held accountable. One more disaster - one more Hurricane Katrina, one more disaster in Iraq, one more collapsed bank could trigger a meltdown of historic proportions. At the very least these CEOs should be stripped of their wealth and be sentenced to work rebuilding the country's infrastructure which they so casually assisted in destroying.
Let me see if I understand this;
If I walk into a Las Vegas casino and start asking people for money so I can bet on 23 red, chances are I would either be laughed at, punched, or thrown out on the curb.
If I walk into an investment bank and tell them I am a hedge fund manager and want money so I can bet on mortgage derivatives, they'll not only give it to me, if I loose the government will pay the debt, and I leave with a large compensation package.
Hmmmm, Sounds good to me, where do I sign?
It's insanity.
I listened to Paulson on CSPAN, and he could give no details on the "sweeping" reforms that they are talking about. It's like they know that the shit is hitting the fan, and as long as they are on record with "reforms" then history will look positively on them, even if they're leaving it to others to actually do the hard work of reforming the system over the next many years.
Well, from today's DOW, it looks like some fools have bought into it lock, stock, and barrel, but IMO just wait till earnings season for reality to set in once again.
What difference does it make if the money being lent to these banks etc. is being printed by the Fed rather than raised via taxation*? Futhermore, what difference does it make if the money being lent to these banks is very likely to be repaid?
I don't really know what's going on in the US, but here in the US, I've seen some economists suggest that when the UK government resells Northern Rock after nationalising it, it's likely to make a profit (or at least the eventual value is likely to exceed to liability taken onto the govt's books)
* If that is indeed what's going on - I'm not at all sure.
oops, I meant here in the UK
Looks to me like the only way to beat this system is to die owing the government money. If Marcuswan is correct about a violent revolution, many will die, most owing the government money. Ain't America great, or what?!
This is quite shocking and comes as a big surprise to me.
Something like this has never happened before, has it? Has there ever been a case throughout all of human history where a small group of people figured out how to fleece the rest of the group?
/sarcasm
Yeah, wake me when something out of the ordinary does happen.
Also, I don't think it is just the tax system that is the problem here.
Marcuse, oh your comment gave me much enjoyment! Imagine Americans lumbering around with their big bellies and pich forks!
Just think of all the great slogans: Diet for the revolution, die for the cause!
The only way to get the people onto the streets is to shut down the all-you-can-eat buffets.
"Heads they win and tails I lose". Almost, but not quite. It's heads they win, tails they win and we just lose; it's only a matter of degree.
Dr. Reich:
How is it that these "too big to fail" players are allowed to continue to escape regulation? I think much of the blame lays at the door of the money politics of Washington DC where legalized bribery prevents any real change from happening. Unfortunately, the right is much better at appealing to the vast middle than the left is. As one of your loyal readers, I find the comments generally reflect a minority view towards wealth. American's do not loathe wealth. Your post certainly has the right spirit but generally speaking, the left does not sufficiently stress prosperity and economic growth. Rather than offer enough ideas that combine economic justice with prosperity, the solutions offered always seem more weighted toward fairness at the expense of prosperity. The two should not be mutually exclusive but the right wing will always portray efforts as anti-business. I am sure that you could easily recite how effective regulation of financial institutions which currently operate without any, is actually better for a capitalist system, better for the free market and more conservative. Until someone can marry arguments for economic justice and good business practices, the campaign cash will always provide cover for a government acting against its citizen's best interests.
Until someone can marry arguments for economic justice and good business practices, the campaign cash will always provide cover for a government acting against its citizen's best interests.
Is there any money in it? If so then it will happen. The only time we get regulation is when there is a crisis and business needs the tax payer to step in.
Although things have slipped so far, in regards to representation, it seems this time business will get the tax payer on the hook for the losses without any new regulatory constraints.
Even Bill Clinton was a champion of deregulation.
And your "loathe money" comment... it is tough to have respect for those who are rewardedly handsomely for utter failure. The idea that those who satisfy the needs of many are compensated for their work, is alive and well on both sides of the political spectrum in this country. Your average American, left or right, understands why Henry Ford made money. Now please explain to them why their "loathing" of IB executives, like the ones at Bear Stearns, is unfounded.
Sorry anonymous, I now see I missed the operative "not" in your sentence "American's do not loathe wealth." We are in agreement and I was having another conversation with myself on the intertubes.
So, what does free-market capitalism really mean today?
Unregulated risk-taking with absolutely no risk to the gamblers (hedge funds and the banks that funded them). Capitalism may be the best engine for creating capital but it's clearly the runaway leader in destroying it too.
And what is Wall Street's legacy? Turning America in the 21st century into a third world nation that has gambled away its future all for the love of bonus money at the end of the year. Less than 1% of the nation's citizens destroyed our future. Who are these maniacs?
Where are the leaders now that will pull us out of this mess? Time to pull out my copy of The Gladiator and marvel at human folly once again. Are we the new Romans?
RS Love
I sincerely hope that Robert Reich and Joseph Stiglitz are asked to convene a meeting of the best and the brightest we have to brainstorm how best to reform our broken (and broke) financial system. This is way beyond 1929 at this point. And I'm open-minded about who leads; I don't trust either party but the next President will need courage.
Where does one begin to categorize this folly? Criminal? Hubris? How can anyone possibly think this is good business?
Even if this is meant to be an IMF-style enshacklement of US consumers, don't they see what is going on in Latin America today?
I'm putting nationalization on the table.
Professor:
I've admired you for years and only wish we had the chance for a nice discourse.
You are indeed correct that something is terribly amiss. Wall Street et.al has sacrificed our productive industries for short term cronyism and false profits.
This is not to say that most of the populace who embraced debt at wealth is any less guilty. Retirees who saved now have to suffer from low interest rates to keep the debtors/live for today folks and crooks afloat.
Just believe that any taxes you owe today will certainly be less than tomorrow. Deferring into a 401k or IRA likely will be a bad joke.
So., I've written all my legislators that if you are going to consider me rich and raise my taxes the least you could do is provide healthcare, a decent pension and mass transit.
We have squandered our inheritance and sentenced our kids to a far less rewarding future. One day, if we are to recover, we will have a national industrial plan that may well include less dependence on oil.
If I here one more jerk with a Harvard or Yale degree saying that this debacle couldn't be prevented I think I'll puke. We forgot all about lending due diligence. Professor, I'm sorry, but many of your colleagues aren't worthy of their noble sheepskin.
My family of five's share of the national debt $155,393.70. It will only get worse after this fiasco.
This debt isn't bound to us though, which makes it tempting to just pack up and move to another country.
Corporations went global, maybe it is time for the citizens to do the same.
Dear Dr. Reich:
Thank you for your column. Your analysis is on the mark.
It saddens me that our country has become this way. America used to stand for justice and optimism. Hope. Recently, those who defend the "American Way" are the first to bleed its people dry. I am a Physician. I treat people who have no insurance. The self professed "greatest country on Earth" is exposed with a simple survey of how it treats its people. The disparity is staggering. It is a tragedy.
People are busy with their problems. The more problems they have, the less time they have to pay attention to protecting their Democracy. We are giving the protections away to the few who may benefit because we are too busy to mind the store.
However, I still believe there is hope. People must become conscious. However, the future, I fear, may be turbulent and unfocused before it gets better.
Professor:
Speak Louder nad more clearly please-
Are yoou advocating the Norway / sweden style of rescue (from 1992) where the banks nationalized, shareholders were written down to zero, and the management was entirely purged.?
That's a way certain to avoid moral hazard as everyone involved lost their job and equity in the company.
Hope you will advocate something similar in your appearances.
Dr. Reich,
Politically, I'm independent but it is indeed true (as one commentator has said) that the Right does a great job convincing the general public that government commercial regulations are not in its best interests. I'm surprised the Right doesn't stretch this reasoning to criminal and civil law as well.
I have lived in a European country for many years, The Netherlands. It has a highly regulated banking and lending system without in any way affecting the prosperity of its citizens or commercial growth.
On the contrary, recurring financial fiascos of the magnitude in the U.S. are unheard of. And if the system breaks down a bit here or there, it is corrected immediately and equitably in the interests of ALL. Effective processes of Due Diligence control to insure the Safety of the financial system are not matters of narrow-minded, Right-Left-Center parochial debate here. They are accepted as only normal for the protection and security of entire system in addition to corrective discipline of the Market Place.
When are we Americans going to start to see through the ideological propaganda of conservative politicians that an unfettered MARKET is the perfect,
the final and only determiner of economic justice? When are we going to come to grips with the common-sense reality that a society without a framework of strictly enforced but just regulations regarding Oversight -- particularly of the entire financial system -- only opens the door to greedy, fraudulent misuse of the system all in the name of growth and properity for Everyone, of course.
But, when the inevitable breakdowns occur, the Everyone Prospering is just a few and the Victims Losing are Many. We were taught this lesson in 1990-94 and now again with this financial meltdown that has reached another
level of destructiveness to mainstream America , while the Few get bailed out.
Do we have to have a DOOMS DAY Scenario to finally come to our objective senses in managing our economy with a balanced, fair set of rules and regulations that pro-actively give early warnings and stir actions to mitigate the excesses that ultimately always come back to hurt so many?
One small step forward out of this blind vulnerabity (to the fog of financially complex, devious dealings) is to welcome the GOD of TRANSPARENCY to the financial meeting table ... and don't limit His workings or purview.
Frank Thomas, The Netherlands
"Here's what I don't get about conservatives. We are able to recognize the danger in Big Government; our understanding of the fallenness of human nature makes us rightly suspicious of the concentration of power in the hands of the state. But what makes us so willing to disbelieve that concentrating so much unchecked power in the hands of financiers will lead us to paradise? Is the financier any less human and more angelic than the government bureaucrat? Is he less susceptible to greed, to envy, and to all the ordinary vices that deform human character and cause us to behave in foolish and reckless ways?" -From Free Market Meltdown by Rod Dreher
Some conservatives are getting a clue apparently.
Re; Rod Dreher Quote:
Nice to hear some conservative common sense about governmental fiduciary Oversight.
The piece reminded me poingnantly of some rather stupid advice Sec. Paulson was giving Europe a number of months ago. In so many words, he pontificated: "Europe should spend more, it saves too much money. Then Europe would not be plagued by such stangnant 2-3% GNP growth rates.
This was especially laughable when one realizes it's Europe's savings that indirectly enable routine funding of monthly our deficits by selling Treasury bonds to European financial institutions.
Also, these same savings give stability to European economies by enabling the Investments to go forward at a good pace, thus acting as a solid stabilizer-- even in periods of cyclical slowdown.
Little wonder, Europe silently said, "Thanks, Henry, but we're doing ok with our slower growth rates. By the way how many billions in Treasury securities will you be asking us to purchase next quarter?"
Three entire generations have forgotten what a bif crash looks and feels like.
The Fed is ensuring that we will all soon find out, and likely not forget again for a while.
BB thinks he's smart enough to avoid this fate. He's not.
Mr. Thomas:
Do we need a dommsday scenario to enact any meaningful change? Apparently the answer is yes.
I find it interesting that this article mentions people withdrawing from their mutual funds. Back in 2000 my 401k took a big hit. It has taken until this year for it to return to it's same level and begining this year it once again began to slide. So I've rolled the whole sad lump into an IRA and am in the process of stuffing it into several short term CDs. I want off this crazy roller coaster. I'm tired and feel like the past 8 years I've been running on a treadmill at top speed and have gained nothing.
What no one has ever been able to adequately explain to me is why I am forced to gamble with my retirement savings. What happened to pensions? What kind of world do we live in where retirement isn't possible for the majority until they are 70, and even then only at a much lower standard of living? Maybe it's my generation?
"concentration of wealth in the hands of a few"... hm, say it takes 1M to get over the hump, start living off interest.
Aren't there like, uh, over a million people that have over $1M?
They're just printing money, aren't they?
Signed -?
Normally I don't believe in anonymity...but I have a day job.
To Anonymous DOOMSDAY:
Dear Sir:
You have much company in your concern about the sad state-of-affairs we are in ON SO MANY FRONTS
AT THE SAME TIME!
The Core Cause of the escalating
social divisions, income insecurities, and general financial instability permeating
our society can be found, I believe, in a remark by my favorite President, Harry Truman:
"It has been my experience in public life that there are few problems which cannot be worked out, if we make a real effort to
understand the other fellow's point of view, and if we try to find a solution on the basis of give-and-take, of fairness to both sides."
Unfortunately, we've been blessed with an Administration that doesn't listen ... that has been caught up in its own extremely costly utopian ideas of Nation Building elsewhere, while not listening to the pains and vulnerabilities of this Nation, America.
One of the results is we've retreated into an "everyone for himself" culture. In the process,
we have walked away from those more embracesive, traditional Edmund Burke conservative ideals of inclusiveness, prudence, concern for the community as well as the individual.
The result of this has been a rising fever of living beyond our means, including our Government.
A unhealthy "quick and big buck" ethos has creeped in encouraging a kind of financial gambling mindset ... which in turn has helped make our financial system unsafe for us normal human beings who might be content with a reliable 5-7% annual average return on our investments. Instead, we're in a new world of financial promoters tempting many with far higher returns that are also irresponsibly RISKY. The result? Well, as one person said, we have come to the point that even our homes have become speculative investments like stocks.
Combine all this with a national savings rate that is almost negative; a budget deficit of $40-$50 billion a month; a trade deficit of $60-$65 billion a month;
exploding oil/commodity prices;
a decayed infrastructure and deplorable health care system; a cascading Dollar which causes the Arabs to raise their prices, etc. ... and one sees how many problems are coming at us from all directions at the same time.
This last eight years, therefore, has hardly been a climate for stable investments, unless you and I had had the foresight to invest in Gold. We weren't pessimistic enough to do this.
My advice: pray we finally come together and listen to each other like Harry Truman said... that we become the great DOERS and REASONABLE people we have been years past by finding our Common Links... most importantly, by being utterly honest about the failures in our social-economic model.
After many years in Europe, I´ve noticed we Americans are quite weak in self-criticism and admission of serious mistakes. We ideologically become trapped in the game of stereotyping and demeaning each other to win political points. We have to tame this bad habit because it's very
destructive in coming to terms with the realities of our common problems and interests.
Suggest you put your money in very safe vehicles and enjoy every day with your loved ones. It is amazing
how pleasant it is to put Money
Thoughts out of one's mind and take great comfort in all the little things that really matter in so many subtle ways. As for me,
I plan to stay engaged until the Great White Chief calls.
Sorry, if I'm preaching to the doctor, but I remain an optimistic about what Americans can do when they make a genuine effort to
come together to solve some pretty serious problems.
Frank Thomas, The Netherlands
To Mr. Thomas:
Thank you for that. Your last message actually made me feel much better. Now I'm off work and headed home to hang out with my four year old son who loves rocketships. Truman was a good president. I think my father's uncle was one of his speech writers or something, a fellow named Bryce Harlow. Never really thought much about it before not being in politics myself. Have a great evening!
my tax dollars are supporting a financial system that rewards risky bets that hurt me
Dear Mr. Reich,
Not a week goes by without the Woody Guthrie line going through my head: "The gambling man is rich and the working man is poor."
That seems to be the kind of America most of our leaders want. It's so refreshing to read an alternative view from someone who knows what he's talking about.
Sincerely,
Amy Zucker Morgenstern
The diagnosis is not at issue: moral hazard risks abound.
The cure, then, will maximize the likelihood that gratuitous moral hazard is too impolitic.
Historically, a job largely for the fourth estate (e.g., Jacob Riis, H.L. Mencken).
How, then, to make it maximally profitable for the fourth estate of today to muckrake?
Imho, the key insights:
1) The introduction of particular online markets, starting with a new kind of market for the ad spaces on blogs, will provide people with new and improved ways to develop, showcase and profit from expertise.
2) Owning popular markets of the aforesaid kinds is an ideal way to increase profits for an American media conglomerate that owns a broadcast TV network.
3) The less benefit individual speculators can derive from moral hazard, the more they will utilize said markets.
Details are online at http://www.loveatmadisonandwall.com.
Given the above, the sooner media conglomerates start introducing/popularizing the aforesaid markets, the sooner a lot of top-quality entertainment programming will, in part:
1) increase awareness of (proposed) public policies that (would) put taxpayers on the receiving end of gratuitous moral hazard (e.g., increase awareness via a next-gen Jed Bartlet channeling Jon Stewart and Vietnam-era Walter Cronkite)
2) showcase elected representatives who protect taxpayers from gratuitous moral hazard
Thoughts?
Best,
Mr. Riech,
Re: Taxes. I saw you on Real Time with Bill Maher and guest Amy Holmes made some statements that were patently false about how much corporations in this country were paying in taxes. There's a fairly good explanation of said subject at Parade.com/intel and I was wondering why you didn't make this stronger argument that evening. She made some very definitive statements and no one really challenged her on them. Your thoughts?
Sorry to hear you aren't backing Hillary. I used to have great admiration for you Mr. Reich.
We currently have a president with no previous experience and look what's happened to our country.
robert your endorsement is exactly the reason i have left the democtatic party.it's become the party of judas.everybody want the middle class vote,well some dont earn that much but still vote.take oprah's bag of silver and burn in hell.betrayer
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