Posts filed under “Really, really bad calls”
To a man whose only tool is a hammer, pretty soon everything begins to look like a nail.
I couldn’t help but be reminded of that aphorism as I read the most popular article on WSJ.com yesterday — Tax Hikes and the 2011 Economic Collapse — a screed on the Laffer curve and Supply Side Economics by none then than Art Laffer.
If either the WSJ OpEd page or Mr. Laffer had foreseen the most recent economic collapse we just lived through, or the credit crisis, or the housing collapse, or the derivatives problem, or any of the other economic disasters that befell the country I might give their warnings some credence. (I give credit to Laffer for discussing the possibility of a recession in Feb 2008 — way ahead of most right wing economists) But considering all this occurred with their man in the White House for 8 years, and they somehow missed it, leads me to one of two conclusions: Either they are extremely bad economists, or they are extremely partisan observers.
Given that so many of the dismal set missed all of the above, we should give them the benefit of the doubt. Let’s not simply assume they are bad economists — instead, this looks like just another money-losing partisan screed.
In his OpEd, Mr. Laffer confuses causation with correlation, ignores market history, makes spurious argument, and simply make up crap as he goes along.
It is, to any thinking person, an embarrassment. Consider:
• “The nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates.”
This is mostly true, but misleading.
First, 7 states have no income tax; the other two tax — New Hampshire and Tennessee — only tax dividends and interest income.
Many of the states without income taxes — think Texas, and Alaska — are blessed with natural resources. (Nevada’s blessing is Innumeracy). They don’t have income taxes because the lease licenses to the mining and oil industry throw off so much revenue, that these taxes are not needed. Confusing correlation for causation is a Freshman college error, and we should expect better from Laffer.
Note: 5 of the 9 have a corporate business tax: Alaska has a state corporate income tax, Florida has a corporate income tax (5%); New Hampshire has a Business Profits Tax (8.5%); South Dakota has a financial institutions income tax; Washington has a Business and Occupation Tax. Since these are the fastest growing states according to Laffer, is the lesson to other states to add a corporate tax?
• “Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains?”
What unmitigated and embarrassing nonsense.
As everyone else in America is well, aware, both Gates and Buffett have committed their vast wealth to charitable foundations. Hence, the issue of “nontaxed unrealized capital gains” is simply irrelevant.
And of course, Laffer is aware of this — he is simply engaging in pedantic rhetoric when he makes this claim. (I believe the vernacular term for this form of argumentation is “full of shit.”)
It really throws a monkey wrench into the ideological dogma when the wealthiest Americans, those who have benefited the most from economic freedom and entrepreneurial opportunities recognize and criticize the growing wealth disparity in America as a very real problem.
• “At the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984.”
Again, factually accurate but totally misleading.
Reagan had the good fortune to take office at the tail end of a 16 year secular bear market, just as Paul Volcker fed the economy its distasteful medicine. Inflation was broken, and interest rates began their 25 year slide towards zero.
To ignore the reality of these factors, and credit tax cuts as the sole cause of the 1980s and 90s expansion is simply to discard reality because it does not fit your neat ideological universe. That is a surefire recipe for losing money as an investor . . .
• “Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy”
After their many deductions, special legislative favors, un-repatrioted overseas profits, and too clever by half accounting, US corporations pay a very small percentage of their profits as taxes.
Decades of lobbying has created massive loopholes. Consider the total taxes paid to the US Treasury by any of the major banks and brokerages, the special tax treatment for hedge fund managers, the energy industry deductions, inadequate licensing revenue, etc.
This isn’t a question of MORE taxes — but basic Tax fairness. When American firms don’t pay their fair share of taxes, that means American citizens must make up the difference.
If you are against high taxes, you may want to consider what the total corporate tax base of America has looked like over the past 30 years — as profitability continues to go higher.
It is not just me who noticed the absurdity of the OpEd, Northern Trust’s Asha Banglore also calls out Mr. Laffer’s analysis as wanting:
“Assuming the tax cuts are allowed to expire, the forces that may prevent strong economic growth in 2011 are entirely different from tax increases. The headwinds from the financial sector, by way of a severe credit crunch, lackluster job growth, and housing market challenges are factors that will influence the near term path of the economy. The evidence presented here suggests that Mr. Laffer’s story is selective and incomplete…”
Basing your investments on “selective and incomplete” analyses is how you lose money in the captial markets.
Indeed, I have railed in these pages against the ideological, fact-free OpEd in the WSJ — not because of the politics, but because they have been such consistent money losers. That would not matter so much if it were the NYT or the Podunk Press, but this is the Journal, for crying out loud, It is supposed to be the paper of record for investors.
That the money losing OpEd page of the WSJ produces its most well read articles goes a long way in explaining one thing: Why 80% of money managers underperfom every year. Filling your head with Ideology, becoming a “magical thinker,” ignoring data, making up your own facts — these are a recipe for under-performing asset managers.
If I were to create a list of questions to ask potential managers of my money, one of them would be: “Do you read the WSJ OpEds?”
If the answer were yes, I would not walk but run in the opposite direction.
Ignore the prior bear market and Paul Volcker — nothing matters but Tax Cuts!
Revisiting “The Obama Economy” (March 4th, 2010)
WSJ Jumps the Shark (January 22nd, 2010)
Tax Hikes and the 2011 Economic Collapse
WSJ, JUNE 7, 2010
WSJ: A commission probing the financial crisis denounced Goldman Sachs Group Inc., saying the firm first dragged its feet over requests for information then dumped hundreds of millions of pages of documents on the panel. The Financial Crisis Inquiry Commission issued a subpoena to Goldman, demanding that the firm provide a key for identifying customer…Read More
Why the ‘Experts’ Failed to See How Financial Fraud Collapsed the Economy
By James K. Galbraith
The following is the text of a James K. Galbraith’s written statement to members of the Senate Judiciary Committee delivered this May. Original PDF text is here.
Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.
I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.
Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word “naughtiness.” This was on the day that the SEC charged Goldman Sachs with fraud.
There are exceptions. A famous 1993 article entitled “Looting: Bankruptcy for Profit,” by George Akerlof and Paul Romer, drew exceptionally on the experience of regulators who understood fraud. The criminologist-economist William K. Black of the University of Missouri-Kansas City is our leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it: “the best way to rob a bank is to own one.” The experience of the Savings and Loan crisis was of businesses taken over for the explicit purpose of stripping them, of bleeding them dry. This was established in court: there were over one thousand felony convictions in the wake of that debacle. Other useful chronicles of modern financial fraud include James Stewart’s Den of Thieves on the Boesky-Milken era and Kurt Eichenwald’s Conspiracy of Fools, on the Enron scandal. Yet a large gap between this history and formal analysis remains.
The big flaw in the business critique of regulation is not so much that it overstates the costs, but that it understates its benefits — in particular, the benefits of avoiding low-probability events with disastrous consequences. Think of oil spills, mine explosions, financial meltdowns or even global warming. There is a natural tendency of human…Read More
There are a variety of estimates as to the total spillage from the Deepwater Horizon disaster.
As of yesterday, they were all significantly losses worse than the 10.8 million gallons of crude the drunk captain of the Exxon Valdez spilled. The range is 23.2 million gallons by the US government, to the worst case scenario of BP itself at 92.5 million gallons.
When this is done, it will dwarf the Valdez in total spillage, economic an d environmental damage.
Tracking the Oil Spill in the Gulf
click for interactive timeline
Graphic via the NYT
Size of Oil Spill Underestimated, Scientists Say
NYT, May 13, 2010
The FT is reporting that Goldie is on the verge of 9 figure settlement with the SEC: “Goldman Sachs is hoping to avoid the Securities and Exchange Commission’s charge of fraud by reaching a settlement on a lesser offence and agreeing to a fine of hundreds of millions of dollars, according to people familiar with…Read More
I left Vegas on Friday, but before I split, I took one final lap around the Skybridge Alternative Investment conference to say goodbye to a few people.
On the way out, I interrupt a tall old codger making time with Sandra, who works as Roubini’s Research Strategies Director. She is quite fetching, and since I was late, I bulled in, barking “Pardon the interruption.” I hurriedly air kiss her goodbye (European style, MWA! on each cheek), all the while thinking about my flight to San Diego. She introduces me to Lurch, but I’m only half listening, and I shake the old guy’s hand before bolting for my flight.
In the cab from the Bellagio to the airport, it dawns on me just what Sandra said: “Barry, this is Robert Rubin.” No bullshit, that’s who it was. He looked terrible; Clinton who just had quadruple bypass, looked much better.
Then again, Slick Willie’s biggest crime was sexual, not economic in nature. Whatever rationales Rubin’s conscious mind may have made about his role in the collapse, his subconscious knows better. And while no one else seems to be doing this, his subconscious is in the process of kicking his own ass. He seems to be slowly dying inside, at the behest of his own brain’s sense of guilt.
Regardless, I was reminded of that when I came across this list of the “corrupt corporate capitalists who leveraged their connections in government for their own personal profit . . . Today we know these opportunists as deregulatory hacks hellbent on making a profit at any cost.”
And look at this! Number 1 (with a bullet), turns out to be the former Treasury Secretary of State, whom I barely acknowledged while I was rudely interrupting his rap to a young hottie so I could say good bye to her:
America’s Ten Most Corrupt Capitalists
1. Robert Rubin
2. Alan Greenspan
3. Larry Summers
4. Phil and Wendy Gramm
5. Jamie Dimon
6. Stephen Friedman
7. Robert Steel
8. Henry Paulson
9. Warren Buffett
My approach to everything I have written, studied and analyzed in this space is pretty straight forward: Start with the data and evidence and go forward from there. Figure out what the “Truth” is; try to get as close to the objective reality beneath the noise in order to make intelligent investing decisions for myself…Read More
I finally figured out how all of those right wing think tanks went so far off the rails — blaming the Community Reinvestment Act for the housing boom and bust, credit crisis and economic/market collapse.
This has all been a simple misunderstanding. You see, these Think Tanks screwed up their acronyms! They did not realize at the time that “CRA” stood for Credit Rating Agencies.
So when they were told to “go forth and lay all of the blame on the CRA” — they simply picked the wrong 3 letter acronym agency. Its funny how these misunderstandings can take on a life of their own.
Now, if only we can find a high frequency trader named Fred Fannie, we can solve two other mysteries in one fell swoop . . .
On Friday, the one man contrary indicator announced — AFTER the equity market collapse, AFTER a huge spike in gold — that it was time to dump stocks, and get long Gold. I told a buddy on hedge fund manager/Saturday that meant we were due to see gold correct and the markets rally. I had…Read More
Category: Really, really bad calls