Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1239.3 | -13.1 | -1.05% |
| Eurostoxx Index | 2247.2 | -41.100 | -1.80% |
| Oil (WTI) | 97.88 | -0.260 | -0.26% |
| US Dollar Index (DXY) | 77.842 | 0.298 | 0.38% |
| 10 Year Govt Bond Yield | 2.00% | -0.06% |
Markets are weaker this morning as Spanish bond yields rose at an auction. The 10-year Spanish bond yield rose 21 basis points to 6.32%. The Italian government bond yield rose to 7.03%. EURIBOR / OIS is about 1.5 basis points higher at 90.9 bps. The UK and Germany are clashing over a proposed financial transaction tax, with the UK refusing to go along with a Euro Financial Transactions tax unless the US and Asian markets institute one. The City of London is in fact the financial center of Europe and the UK estimates that they would end up paying roughly 80% of the tax. British Prime Minister David Cameron cheekily suggested that requiring the UK to institute a financial transactions tax would be like asking the French to institute a cheese tax.
There was a slew of encouraging economic data this morning. The Producer Price Index came in lower than expected, indicating inflationary pressures (at least as measured by the government) remain under control. Retail sales came in better than expected, though the .6% increase is a modest number. I have pointed out that there has been a disconnect lately between the sentiment indicators and the actual spending numbers. Finally Empire Manufacturing came in better than expected as well.
The Wall Street Journal has a story on the state of finances at FHA. The FHA’s reserves have dropped to $2.6 billion which is .24% of the $1.1 trillion of loans it insures. The FHA is actually required to hold 2% reserves. This raises the possibility that FHA will run out of money and need more money from the government. The recent audit of FHA estimates they will squeak by, assuming real estate prices drop 5.6% this year and rise 1.2% in 2012. Fortunately for FHA, they can go directly to Treasury and can bypass Congress.
Filed under: Uncategorized |
All Things in Moderation 
Brent, I was going to link in this comment to an "Economist" article this morning, but when I saw that it quoted Strauss-Kahn as an authority I decided to fuggedaboudit.The article suggested the EMU might be toast and the world economy could spiral into depression, so now no one has to read it.
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It's a busy day in Wisconsin.1) The major effort to recall Governor Scott Walker kicked off just after midnight. http://www.jsonline.com/news/statepolitics/walker-recall-effort-to-start-at-midnight-tn31qjo-133810473.html2) Herman Cain stumbles in an interview with the Milwaukee Journal-Sentinel editorial board.http://www.jsonline.com/news/statepolitics/cain-backs-collective-bargaining-for-public-employees-l931tg4-133828808.htmlCain calls the media reaction "flyspecking."He seems to be OK with public employee unions, though, as long as the unions don't engage in "collective hijacking."3) The Green Bay Packers won big over NFC North rival Minnesota Vikings, 45-7 at Lambeau Field last night. The Pack is now 9-0 this season. Going back to last season, the team has won its last 15 games.http://www.jsonline.com/sports/packers/133843398.html
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For Scott:NPR did an homage to Frerich Hayek this morning. Thanks to you, I knew who they were talking about before they said his name!
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I saw a bit of the Monday night game. AR absolutely dismantled the Vikes at will. The Pack offense looks like the Pats at their height of power a few years ago.
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The OWS legal eagles have obtained a temporary restraining order allowing them back into Zuccotti Park. A hearing is sked for late morning.
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NEXT YEAR’S CRISISI was reading an interesting piece in Bloomberg about how the swaps market is directly tied to the largest municipal bankruptcy in history, Jefferson County, Alabama. “Governments Using Swaps Emulate Subprime Victims of Wall Street”http://news.businessweek.com/article.asp?documentKey=1376-LQ6VQJ0UQVI901-15TD5JJPS94EFD7F5EJDI5VDIOThis is VERY arcane subject matter, which ironically points out the flaw in the whole program. City and state financial authorities had absolutely no idea what they were buying from Wall Street in the just past decade. So not only has the Federal government bailed out the institutions involved, the lower levels of government CONTINUE to bail them out by providing contract revenue streams, which these authorities are unable to break, excepting paying large penalty amounts.This story leads to another hidden cost in our economy, the ridiculously low interest rates. I know that is heresy, but you have to understand who and what relies upon revenue stream that are closely pegged either directly or indirectly Treasury yields. To start with, this year was the first time that Social Security has ever gone cash flow negative. The reason ISN”T the high unemployment, although that is a major contributing factor. It’s the fact that the Social Security Trust Fund about which you have heard so much, is actually composed solely of Treasuries. http://www.ssa.gov/oact/progdata/fundFAQ.html#n3The lower the Treasury yields, currently at or near 60 year lows, the less revenue credited to Social Security. It doesn’t stop there. Many pension funds across the nation rely on either Treasuries or other fixed investments that are closely tied to Treasuries for their returns. Many if not most pension funds both public and private across the nation have been relying on rates of return that are now entirely unrealistic, and probably always were. Here’s a story of how last year the state of New York cut its anticipated rate of return from 8 percent to 7.5 PERCENT! This is spite of the fact that their ACTUAL rate of return over the last 5 years was 1.1 percent!“New York May Cut Assumed Rate of Return on Pension Investments”http://www.bloomberg.com/news/2010-08-20/new-york-may-cut-assumed-8-rate-of-return-on-retiree-pension-investments.htmlIt’s not just the pensions plans themselves that are at risk. Most of these plans are in some way tied to insurance companies. Low Treasury rates adversely affect their returns and financial stability as outlined in this 2001 study: “The Impact of Inordinately Low 30-Year Treasury Rates onDefined Benefit Plans”http://www.actuary.org/pdf/pension/treasurybonds_071101.pdfNow this is not reading for the commercial breaks of a football game, but all the lay reader needs to know is that the “low” rates the actuaries were worried about at that time were between 5-6%, as opposed to today’s 2-3%!Finally, who is ultimately backstopping this potential problem . . . you are. The Pension Benefit Guaranty Corporation is the agency of the Federal government that acts effectively speaking like the FDIC (though that a big oversimplification). So to the extent that private pension funds are seriously under funded, about 30% in many estimates, the government could wind up on the hook for hundreds of billions of dollars, AGAIN!“Milliman: Fed's ‘Operation Twist’ hurts company pension plans”http://ebn.benefitnews.com/news/federal-reserve-stocks-operation-twist-2718029-1.htmlSee also:http://www.milkeninstitute.org/newsroom/newsroom.taf?cat=press&function=detail&level1=new&ID=200(continued)
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Now if you were looking for a a cheerful summarization, I don’t have one, because the solution creates it’s own problems. To the extent that Treasury yields rise to a more “normal” rate, borrowing costs for all Americans will increase. I wanted to point out that as the saying goes there is no such thing as a free lunch. The “next crisis” will occur because “we” as in local and state governments, plus private employers, have made promises that were never based on realistic assumptions. Just as borrowers who need cash in large sums immediately, are driven to unethical and illegal lenders, so too these governmental authorities were easy prey, pigeons really, for Wall Street salesmen selling exotic financial products, the sellers themselves never really understood. Jefferson County, Alabama was just the opening chapter in this book.
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think I lost part one, standby for a resend
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NEXT YEAR’S CRISISI was reading an interesting piece in Bloomberg about how the swaps market is directly tied to the largest municipal bankruptcy in history, Jefferson County, Alabama. “Governments Using Swaps Emulate Subprime Victims of Wall Street”http://news.businessweek.com/article.asp?documentKey=1376-LQ6VQJ0UQVI901-15TD5JJPS94EFD7F5EJDI5VDIOThis is VERY arcane subject matter, which ironically points out the flaw in the whole program. City and state financial authorities had absolutely no idea what they were buying from Wall Street in the just past decade. So not only has the Federal government bailed out the institutions involved, the lower levels of government CONTINUE to bail them out by providing contract revenue streams, which these authorities are unable to break, excepting paying large penalty amounts.This story leads to another hidden cost in our economy, the ridiculously low interest rates. I know that is heresy, but you have to understand who and what relies upon revenue stream that are closely pegged either directly or indirectly Treasury yields. To start with, this year was the first time that Social Security has ever gone cash flow negative. The reason ISN”T the high unemployment, although that is a major contributing factor. It’s the fact that the Social Security Trust Fund about which you have heard so much, is actually composed solely of Treasuries. http://www.ssa.gov/oact/progdata/fundFAQ.html#n3The lower the Treasury yields, currently at or near 60 year lows, the less revenue credited to Social Security. It doesn’t stop there. Many pension funds across the nation rely on either Treasuries or other fixed investments that are closely tied to Treasuries for their returns. Many if not most pension funds both public and private across the nation have been relying on rates of return that are now entirely unrealistic, and probably always were. Here’s a story of how last year the state of New York cut its anticipated rate of return from 8 percent to 7.5 PERCENT! This is spite of the fact that their ACTUAL rate of return over the last 5 years was 1.1 percent!“New York May Cut Assumed Rate of Return on Pension Investments”http://www.bloomberg.com/news/2010-08-20/new-york-may-cut-assumed-8-rate-of-return-on-retiree-pension-investments.htmlIt’s not just the pensions plans themselves that are at risk. Most of these plans are in some way tied to insurance companies. Low Treasury rates adversely affect their returns and financial stability as outlined in this 2001 study: “The Impact of Inordinately Low 30-Year Treasury Rates onDefined Benefit Plans”http://www.actuary.org/pdf/pension/treasurybonds_071101.pdfNow this is not reading for the commercial breaks of a football game, but all the lay reader needs to know is that the “low” rates the actuaries were worried about at that time were between 5-6%, as opposed to today’s 2-3%!Finally, who is ultimately backstopping this potential problem . . . you are. The Pension Benefit Guaranty Corporation is the agency of the Federal government that acts effectively speaking like the FDIC (though that a big oversimplification). So to the extent that private pension funds are seriously under funded, about 30% in many estimates, the government could wind up on the hook for hundreds of billions of dollars, AGAIN!“Milliman: Fed's ‘Operation Twist’ hurts company pension plans”http://ebn.benefitnews.com/news/federal-reserve-stocks-operation-twist-2718029-1.htmlSee also:http://www.milkeninstitute.org/newsroom/newsroom.taf?cat=press&function=detail&level1=new&ID=200
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Mich:Thanks for the link to NPR on Hayek. He's been a favorite of mine for about 15 years. Interesting that, despite majoring in economics at school, I had to learn about him on my own, after I graduated.
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The order of my posts was oviously reversed.I feel like John Heard in "Home Alone" yelling "KEVIN!" a the top of my lungs for help.
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Hmmm does anybody know what keeps happening to the first part of my post? I see it appear, in the comments section, and then minutes later it's gone.
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MsJS:The OWS legal eagles have obtained a temporary restraining order allowing them back into Zuccotti Park.My understanding is that they were always going to be allowed back in after their mess was cleaned up. They simply weren't going to be allowed to set up encampments there anymore.Does the restraining order allow them set up tents and continue to live there?
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john:I saw and read your comment which now seems to have disappeared. Not sure what is going on. Perhaps someone inadvertantly deleted it?
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"Going back to last season, the team has won its last 15 games."Thank you Mendenhall for fumbling on second-and-2 situation, down 21-17 at the start of the fourth quarter./Steelers fan
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Ok, maybe it was length, so I'll try in three parts this time. Part 1NEXT YEAR’S CRISISI was reading an interesting piece in Bloomberg about how the swaps market is directly tied to the largest municipal bankruptcy in history, Jefferson County, Alabama. “Governments Using Swaps Emulate Subprime Victims of Wall Street”http://news.businessweek.com/article.asp?documentKey=1376-LQ6VQJ0UQVI901-15TD5JJPS94EFD7F5EJDI5VDIOThis is VERY arcane subject matter, which ironically points out the flaw in the whole program. City and state financial authorities had absolutely no idea what they were buying from Wall Street in the just past decade. So not only has the Federal government bailed out the institutions involved, the lower levels of government CONTINUE to bail them out by providing contract revenue streams, which these authorities are unable to break, excepting paying large penalty amounts.This story leads to another hidden cost in our economy, the ridiculously low interest rates. I know that is heresy, but you have to understand who and what relies upon revenue stream that are closely pegged either directly or indirectly Treasury yields. To start with, this year was the first time that Social Security has ever gone cash flow negative. The reason ISN”T the high unemployment, although that is a major contributing factor. It’s the fact that the Social Security Trust Fund about which you have heard so much, is actually composed solely of Treasuries. http://www.ssa.gov/oact/progdata/fundFAQ.html#n3The lower the Treasury yields, currently at or near 60 year lows, the less revenue credited to Social Security.
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part 2It doesn’t stop there. Many pension funds across the nation rely on either Treasuries or other fixed investments that are closely tied to Treasuries for their returns. Many if not most pension funds both public and private across the nation have been relying on rates of return that are now entirely unrealistic, and probably always were. Here’s a story of how last year the state of New York cut its anticipated rate of return from 8 percent to 7.5 PERCENT! This is spite of the fact that their ACTUAL rate of return over the last 5 years was 1.1 percent!“New York May Cut Assumed Rate of Return on Pension Investments”http://www.bloomberg.com/news/2010-08-20/new-york-may-cut-assumed-8-rate-of-return-on-retiree-pension-investments.htmlIt’s not just the pensions plans themselves that are at risk. Most of these plans are in some way tied to insurance companies. Low Treasury rates adversely affect their returns and financial stability as outlined in this 2001 study: “The Impact of Inordinately Low 30-Year Treasury Rates onDefined Benefit Plans”http://www.actuary.org/pdf/pension/treasurybonds_071101.pdfNow this is not reading for the commercial breaks of a football game, but all the lay reader needs to know is that the “low” rates the actuaries were worried about at that time were between 5-6%, as opposed to today’s 2-3%!Finally, who is ultimately backstopping this potential problem . . . you are. The Pension Benefit Guaranty Corporation is the agency of the Federal government that acts effectively speaking like the FDIC (though that a big oversimplification). So to the extent that private pension funds are seriously under funded, about 30% in many estimates, the government could wind up on the hook for hundreds of billions of dollars, AGAIN!“Milliman: Fed's ‘Operation Twist’ hurts company pension plans”http://ebn.benefitnews.com/news/federal-reserve-stocks-operation-twist-2718029-1.htmlSee also:http://www.milkeninstitute.org/newsroom/newsroom.taf?cat=press&function=detail&level1=new&ID=200Now if you were looking for a a cheerful summarization, I don’t have one, because the solution creates it’s own problems. To the extent that Treasury yields rise to a more “normal” rate, borrowing costs for all Americans will increase. I wanted to point out that as the saying goes there is no such thing as a free lunch. The “next crisis” will occur because “we” as in local and state governments, plus private employers, have made promises that were never based on realistic assumptions. Just as borrowers who need cash in large sums immediately, are driven to unethical and illegal lenders, so too these governmental authorities were easy prey, pigeons really, for Wall Street salesmen selling exotic financial products, the sellers themselves never really understood. Jefferson County, Alabama was just the opening chapter in this book.
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ok, it seemed to work broken up in two parts.hope you guys enjoy on some level.
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ScottC: The temp restraining order allows the protesters to return with all of their equipment, tents included.
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what's the city's responsibility for these protesters if they return and it's gets cold? hypothermia is going to be a problem.
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John,I certainly enjoyed it and appreciated the effort it obviously took to pull that information together. Lots of thoughts. Have these private companies that are likely to need a pension bailout been reporting a profit? Are we going to end up bailing out these companies that should be bailing themselves out?
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NoVA, not just hypothermia. If the OWSers use some sort of heating devices, they run the risk of fire. Ever see a synthetic tent burn? It's not pretty. Even ones labelled 'flame resistant' burn. If generators are used and used incorrectly, there's a risk of CO (carbon monoxide) buildup.Also, a city's homeless may gravitate to the encampments seeking food and warmth, leading to possible confrontations.Municipal gummints don't want any of those headaches. I don't blame them. Even if not legally responsible, they will have to respond in some fashion.
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ash:For clarification, there really isn't much difference between the projected rate of return used by private or public pensions fund. I have seen some go as low as 6% while other like NY state as you saw go as high as 8%. So the underfunding issue it seems to me would potentially hit all the plans at the same time, much like the last financial crisis. It's the herd mentality of investing that will cause the problem. Not sure if I answered your question or not.
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john:I am trying to understand the article on Jefferson County. It doesn't really make a lot of sense.We'd need more details on the swaps that were done to really understand this, but if Jefferson issued floating rate bonds and then swapped them, they would typically be protected from rising interest rates. The swap would consist of fixed rate payments by Jefferson to the swap counterpary, and floating rate payments to Jefferson from the counterparty. The floating rate paid to Jefferson would normally be set in the same or a similar manner to the way the rate was set on the underlying bond. Hence, from Jefferson's perspective, the package of the bond and the swap would behave exactly like a fixed rate bond.If this is the way it worked, then of course Jefferson is suffering from having essentially issued a long term, fixed rate security in an environment in which rates have dropped. That is not the fault of the swap. It is the fault of the decision to lock in a long term fixed rate.Now, it is possible that the floating rate on the swap is mismatched to the ARS rate on the note, or that the floating index used on the swap had at the time a high correlation to the ARS rate that has since been broken. If that is the case (and I have no knwoledge that it is…I am just speculating as this is the only explanation that makes the article somewhat coherent to me), then it would be possible that Jefferson's costs would increase above their fixed rate. If the ARS that they owe on the note is increasing while at the same time the floating index on the swap (which is meant to hedge the ARS rate) is decreasing, then the net package of the note and the swap would result in a rising cost, as the two floating rates diverged. But if that is the case, it has nothing to do with the inherent nature or risks of swaps/derivatives. That has to do with a poorly designed hedge.Also, the article says this:In testimony at a July 29 SEC hearing held in Birmingham, he estimated that municipal taxpayers have paid $20 billion in fees on swaps valued at $1 trillion in the past five years…This doesn't make a lot of sense to me. Fees are not generally associated with swaps, and when they are they are usually one time, up front fees paid. They are not usually paid on a regular basis throughout the life of a swap. I'd like to know what these fees actually are.Finally, you say:the lower levels of government CONTINUE to bail them out by providing contract revenue streams, which these authorities are unable to break, excepting paying large penalty amounts.First of all, the breaking of a swap does not involve a "penalty amount". It involves paying the value of the contract. There is a name for the ability to break a contract without paying the value of it…an option. And options are not generally free. There is no reason anyone should expect Jefferson to have the ability to honor the contract if it benefits them economically to do so, but cancel it if it doesn't.Finally, the honoring of a legal contract is not a "bailout" in any meaningful or traditional sense of the term. Is the government "bailing out" government employees when it continues to pay them what it has contracted to pay them?
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MsJS:The temp restraining order allows the protesters to return with all of their equipment, tents included.Apparently our courts, or at least that particular one, doesn't have much respect for property rights.
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MsJS — that didn't occur to me. but it should have. I got about an hour's worth of fire fighting 101 as part of my EMT class. One of the things that stuck with me was that fires burn hotter and are more toxic now than say 60 years ago b/c of all the chemicals in furniture. never occurred to me before that setting a desk on fire today vs. a wooden one from the 50s is a completely different thing.
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scott:Please allow me some literary license for the wider audience in the use of the terms bailout and the term penalty for the fulfillment of the contract, although I would also agree if you asserted that these were judgemental terms as well. I think you understand exactly how the contracts work. They were essentially directional bets on interest rates were they not? In my opinion, not something that municipal authorities, pension funds, etc. should be involved in. Of course when you overpromise, as I wrote, you HAVE to chase higher return.I DID enjoy your techincal explanation very much. I'm just always caught between how techincal we can get. That's why I normally use CNBC even though I read Bloomberg as much. CNBC is written for a more popular audience.
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John,That wasn't exactly what I was asking, but looking back at it, my question was pretty poor and in lawyer parlance, I withdraw the question. As for OWS, I tend to agree that getting booted out of the various parks (the same thing is happening in Detroit) is probably a blessing in disguise. If the movement is unable to maintain momentum as a result, they had no hope of accomplishing anything anyway.
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scott:Do you think I "oversold" the Jefferson County part of the story as the lead in to my main emphasis, the corrosive effect of lower interest rates over time?
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Scott: Apparently our courts, or at least that particular one, doesn't have much respect for property rights.Didn't I say yesterday there was some eminent domain issues? Even if it was public property, wouldn't there be an issue of a single group monopolizing a public resource? I mean, movies do it for a few days at a time when they are shooting scenes, but isn't there a point where they should legally be compelled to allow general access to a public resource?
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ScottC: The theory behind the temporary restraining order is that NYC can't legally keep OWS and their equipment out of the park. I have no expertise in this area, so I can't comment.There's a hearing starting @ 11:30 EST and the NY Supreme Court is reportedly going to weigh in soon after that.ashot: I don't really understand why the Occupy movement is camping out in places like Oakland, Detroit, or Portland. Sit-ins are most effective when they are held at or near the institution the protesters want to change. What do they expect the cities that are not part of big finance/big politics to actually do to further their goals?
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MsJs- I have not closely followed OWS and did not know there was an occupy Detroit until this week so I am far from an expert. That said, I am guessing the Occupy movement in other cities is a gesture of solidarity by people who, for whatever reason, are unable to get to New York. To put it bluntly, I think it's time for OWS to either evolve or become extinct.
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"I think it's time for OWS to either evolve or become extinct"As someone who works a block away from Occupy DC, I agree. It's not their park.
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Two things:1. John's comment is another one that should actually be a top level post.2. For the history of Jefferson County & it's sewer system fiasco, see this series from Matt Taibbi in Rolling Stone:Looting Main StreetJefferson County, Alabama: Screwed By Wall Street, Still PayingThe Continual Screwing of Jefferson County, AlabamaJefferson County, Alabama – Screwed by Wall Street – Files for Bankruptcy
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john:Please allow me some literary license for the wider audience in the use of the terms bailout and the term penalty for the fulfillment of the contract…Sorry, but I can't do that. Such terms frame the issue in an inflammatory and inaccurate way. I will object when they are used.They were essentially directional bets on interest rates were they not?Well, let's start with the caveat that I don't actually know the details of the swaps. But if they were what I suspect they were, then no, they were not directional bets on interest rates.Any entity that is borrowing money needs to decide whether to borrow on a term, fixed rate basis or on a periodically resetting floating rate basis. Inherent in this decision is the risk that in the future the market will move in a way disadvantageous to the borrower. If I decide to borrow for 5 years on a floating rate basis and rates spend the next 5 years going up, I will end up paying more than if I had borrowed on a fixed basis. If I borrow on a fixed rate basis, and rates spend the next 5 years dropping, then I would have been better off borrowing on a floating basis. Again, please note because this is very important….this risk in inherent in the decision to borrow money. It has nothing whatsoever to do with doing a swap. There is no "bet" going on. It is risk that is part of the very nature of borrowing money.Now, suppose I decide to borrow on a term, fixed rate basis. This means that the universe of people willing to lend to me is limited to only those who are themselves looking for a fixed rate return. What a swap does is increase that universe of lenders to include people who are looking for a floating rate return, because a swap allows me to turn floating rate borrowing into a fixed rate liability. With an increased universe of lenders, naturally I will be able get more competitive borrowing rates.So from a borrower's persepctive, it no longer matters whether I borrow from a lender for 5 years for fixed rate X, or if I borrow from a lender on a floating rate basis and swap it into fixed rate X. What I end up paying is fixed rate X. And the decision to enter the swap had nothing whatsoever to do with "betting" on the direction of interest rates. That "bet" (if you really want to call it that) was made when I decided to borrow on a fixed rate rather than a floating rate basis. The swap simply allowed me to achieve that borrowing in a more efficient, competitive way.Now, there is additional interest rate risk added by doing the swap if and only if the floating index on the swap does not match the floating index on the underlying loan. But as long as the indices match, borrowing on a floating basis and swapping into a fixed rate carries with it the exact same risks as simply borrowing on a fixed rate basis directly.So, no, I doubt very much that these swaps were in and of themselves, intended to be a directional bet on interest rates.
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Thanks to both Scott and John. I have a much better understanding of all this thanks to these posts.
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scott:I think you are correct that the terms I used can be considered inflammatory. I would disagree with you on this however: "Again, please note because this is very important….this risk in inherent in the decision to borrow money. It has nothing whatsoever to do with doing a swap. There is no "bet" going on. It is risk that is part of the very nature of borrowing money."That is precisly how these instruments were sold however as PROTECTION against the vagaries of interest rate changes. so to the extent you are correct, it is the seller's knwoledge advantage over the buyer. (again, agreed that neither of us know from the story what precisely was bought)This story from the NYT points out I believe the marketing involved (once again you possess superior technical expertise to the writer, but the buyers did not)http://www.nytimes.com/2010/03/07/business/07gret.htmlWhat did you think of the rest about the effect of low interest rates over time?
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john:That is precisly how these instruments were sold however as PROTECTION against the vagaries of interest rate changes.I just read Taibbi's piece that jnc linked to. If you wasde through all of his editorial nonsense, it turns out that my suspicion was correct. The two floating indices did not match and that was the (or rather a) problem. The rate on the loan was set on a municipal bond index, while the swap was set on LIBOR. So, still, the swap was not a bet on the direction of interest rates. If you really want to use the "bet" terminology, it was a bet on the correlation between LIBOR and the muni bond index. Rates could have gone up or down, but as long as that correlation held, the swap would have acted as a reasonable hedge. Once that correlation broke, it was no longer a hedge.I have no idea how the deal was marketed to Jefferson. It is certainly possible that all of the relevant risks were not divulged or explained to Jefferson. (Based on Taibbi's article, it seems even more likely that they were explained, and that the Jefferson officials didn't care. The amount of government corruption involved was apparently astounding.) But, again, that is quite a different problem from saying, as Taibbi stupidly suggests, that these "toxic" derivatives are to blame.
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I am so glad I read this series of posts.1] I learned a great deal from Scott and John; and John, I really welcome your involvement here. So much so, that I am going to re-read the series at my leisure, assuming I have leisure ever again.2] I throw out to Ashot and QB a First A. proposition. Reasonable time, place, and manner restrictions are commonly considered a necessary corollary to the 1st A.Examples: no loud demonstrations near classrooms, db restrictions on live music, no monopolization of the public soap box. For many ideas to be heard, cities usually permit use of public speaking areas on a first come first serve basis and can impose reasonable time restrictions on each speaker. City councils and other legislative bodies open to the public often restrict testimony for and against a proposition to alternate speakers, pro and con, each with x minutes to present their arguments.These restrictions are usually upheld.Thus the right of one group to assemble and seek redress of grievances can also have reasonable time, place, and manner restrictions. These OWS folks cannot block traffic, for example. Can they camp in the park? I think public safety and public health regulations trump the length of the stay, but i also think the park has to be open, eventually, to others who want to petition for the redress of completely different grievances.BTW, I suggested to QB that I thought time – place – manner restrictions were the way to regulate money in the marketplace of ideas and he correctly pointed out that "Citizens United" presented a starker choice – a ban on the movie for 30 days before the election. On the narrow issue, I was for CU in that case. On the broader issue of equating speech with funding, I thought the Supremes missed an opportunity to say that reasonable time, place, and manner restrictions could be imposed.
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john:What did you think of the rest about the effect of low interest rates over time?I confess I only focused on the Jefferson County thing. But clearly low interest rates are a problem for lots of investors. And equally clearly, many public pension plans are a total disaster.
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When you come right down to it, Scott has a superior technical knowledge to my own on this aspect of the bond market, and to nearly everyone else too. So I would say to Scott that you have the same problem that Michael Jordan did when he was coach GM of the Washington Wizards. The others can't play on your level, and pretending they can will cause big problems for them down the road
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scott:BTW, should I ever have reason to repost this, I will eliminate the terms bailout and penalty and find more appropriate language.
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Mark,Re time, place and manner vis-a-vis OWS, I agree. I have not studied the issue closely. My understanding is that in NYC they are actually occupying some private property. Either way, I think the notion that a group of people can permanently encamp in a public park, monopolize it, disrupt the neighborhood with noise, cause serious public health problems, is a dead-bang loser under the 1st. I really can't conceive of how a judge thought she or he could restrain removal at this point.Interesting thought re Citizens United, but that doesn't sound to me like time, place, and manner. It sounds like quantity regulation. I would need to go back and study the case again, but as I recall the Obama administration actually abandoned as indefensible the rationale of the Austin case on which defenders of the prohibition generally still rely. I.e., they abandoned the idea that "too much speech" for A means "too little" for B, or what I have always called the "drowning out" theory of censorhsip. That seems to me to preclude your solution if I understand it.
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john: The others can't play on your level, and pretending they can will cause big problems for them down the roadScott doesn't pretend that other people can play at his level. He knows such cannot be. 😉
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@QB, Mark, and others: A bit more on the temporary restraining order in NYC.The judge who signed it, Judge Lucy Billings, was once a lawyer at the ACLU-25 years. I'm guessing her name was in a OWS protester's Roladex as the judge to call.The court system has removed her from the case and will randomly select another judge for a hearing that may take place as early as this afternoon.
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john:should I ever have reason to repost this, I will eliminate the terms bailout and penalty and find more appropriate language. Thanks.The others can't play on your level, and pretending they can will cause big problems for them down the road…I definitely don't want to shut down discussion of these things with the hammer of authority. (I hate when scientists do it, so I'm not going to do it myself.) But hopefully my knowledge/experience can shed some light on a subject that is fraught with misunderstanding in public perception.
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Thank you, Scott. Truly.
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Dangit, put this on the wrong thread:I remember once saying to shrink or someone at PL (after much silly talk about options and derivatives had transpired) that I doubted any regulars on PL had real expertise in the field.Lol, luckily Scott showed up a few minutes later to disabuse me.
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scott:That was my poor wording. I only meant that the buyers of these instruments lack your level of financial understanding. They probably sat through a Power Point presntation while they were checking their text messages. It was not in any way a slam at you.
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The court system has removed her from the case and will randomly select another judge for a hearing that may take place as early as this afternoon.Wow, that's interesting. Judge shopping is not supposed be possible or allowed in most places, but the reality is often different, even in the federal system. Will be interested to see what happens here.
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QB, in the wee hours of the morning the court system said that Billings could proceed since she had been contacted already. In the light of day, the system made a course correction.So whatever judge shopping took place, it didn't last long. There will be a new hearing with a different judge this afternoon.
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The court system has removed her from the case and will randomly select another judge for a hearing that may take place as early as this afternoon.This reminds me that the judge who let Sandusky out on bail apperently worked somewhat regularly with the Second Mile, Sandusky's charity/ recruitment tool. It's been a long time since I've looked at or though about time, place, manner restrictions (TPM), but that would seem to be the best way to argue for ending OWS. That's probably the justification for requiring groups to get permits to be in the park to begin with. I don't have the knowledge about CU to disagree with QB's statement, but I will say that thinking about it as a TPM restriction is certainly interesting and a perspective I had not previously considered. I always thought it was an issue of whether protecting people's faith in our electoral system was a sufficiently compelling state interest to allow for the restriction of what is clearly political speech.
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Great discussion everyone. I haven't had time to read all of John's links but will try to get caught up later. Derivatives etc. are not something I know much about so I generally stay away from these subjects and just listen or ask questions. Too busy right now to think one up though.
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The new judge hearing the OWS case will apparently be Judge Michael D. Stallman. He's been on the bench for about 25 years.His background before that includes a stint as an assistant district attorney in NYC, several years as a law school prof, and a clerkship at the NY Supreme Court.
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john:They probably sat through a Power Point presntation while they were checking their text messages. Or, if Taibbi is correct, they were too busy trying to figure out from where the next bribe could be demanded. For all the talk JPM doing bad things, the fault for the whole debacle seems to me to lie squarely in the lap of the corrupt politicians running the show. Does anyone think they really cared to understand the risks they were taking?
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Just a note for the nonlawyers who may not know it or find it confusing, the New York Supreme Court is actually the trial-level court rather than the highest court, as in most other states and the federal system.
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QB, I don't pose a solution. If I own a newspaper, I should be able to take only Ross Perot's ads if I want, and support the Mexican Revolution. I also think that should be true for my billboard company and my internet operation and my mailers and my contributions and my movies depicting BHO as the Messiah.The one place where t-p-m could come into the equation is where FCC license of limited broadcast bands is involved, it seems to me.
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MsJS, Not surprised. They probably bent some rules under the premise of an emergency situation.I would be curious whether Mark has any interesting tales of judge shopping. For plaintiffs' lawyers who know how to work it, it can be a great boon although clearly is inappropriate. There is a judge in the EDNY who gets an amazing number of consumer class actions assigned to him. He's an eminent jurist but the most class action-friendly judge in the country, by a mile, and is building up quite a string of reversals by the Second Circuit. But it's sure fun for a while for plaintiffs, and costs defendants a lot of money.
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"For all the talk JPM doing bad things, the fault for the whole debacle seems to me to lie squarely in the lap of the corrupt politicians running the show. Does anyone think they really cared to understand the risks they were taking?"As the Taibbi piece notes, the root of the problem starts with the terms of the consent decree from the EPA which required the "Taj Mahal of sewer systems" and thus required a financing scheme to pay for it in the first place. Assuming the factual assertions in the article are true, I hold JPM responsible for two things: 1. Paying off Goldman Sachs not to bid against them2. Participating in a bribery scheme with the local officials.
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"FCC license of limited broadcast bands is involved"anyone else thing that this is obsolete? I get 4 NBC stations over-the-air now with the digital transition. the scarcity argument doesn't fly with me anymore.
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jnc:Is there some OTHER way to win a municipal contract?
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Brent wrote:"The UK and Germany are clashing over a proposed financial transaction tax, with the UK refusing to go along with a Euro Financial Transactions tax unless the US and Asian markets institute one. The City of London is in fact the financial center of Europe and the UK estimates that they would end up paying roughly 80% of the tax. British Prime Minister David Cameron cheekily suggested that requiring the UK to institute a financial transactions tax would be like asking the French to institute a cheese tax."Brent, Scott, and John – if US, Asian, London, and Euro markets all institute an FT tax and all institute the same tax, so that gaming the system is unavailable, are there any other drawbacks you would suggest to the move? Feel free to elaborate.NoVAH, I have one word for you young man, come close and lend an ear, please:RADIO.
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scott:I think we've reached a subtle agreement. You were right about my language. I believe I was right that that they had no real idea what they were buying, (or perhaps were bribed). and we can debate endlessly about how much caveat emptor should be the rule in the disbursement of taxpayer dollars, IF the financial institutions themselves do not ALSO suffer the effects of THEIR own mismanagement!
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BTW…one final thing about the Jefferson County debacle. Both Taibbi and the author of john's link imply that, had the County simply kept its original fixed rate borrowing and not switched to floating plus a swap, it would now be enjoying the benefits of lower rates, as it could have refinanced without having to pay the high cost of terminating the swap. That is wrong.It still would have had to pay an equivalently high cost in order to buy back its own bonds, because, having been issued with a much higher interest rate than currently available, those bonds would have been worth much, much more than par.Basically, relative to interest rate movements, the value of a swap is a reflection of the value of the bond it is simulating. If it costs X to buy back bonds with a fixed coupon of Y%, it would also cost X to buy back a swap with a fixed coupon of Y%. The notion that Jefferson could have refinanced at no cost had it not had the swap in place is wrong, unless the bonds it would have issued instead were issued with a call option.
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mark — what's that? i get 200+ stations via satellite. more seriously, i have a friend who works on spectrum issues for the FCC. that's a role i think they can have. content monitor? not so much.
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mark:A better discussion of the subject than I could provide having no expertise in taxes:"The Wrong Tax for EuropeKenneth Rogoff"http://www.project-syndicate.org/commentary/rogoff85/English
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john:Is there some OTHER way to win a municipal contract?Exactly why I blame the county officials, not JPM. I've always found it baffling that when a government official demands a bribe, the guy who has to pay it gets in trouble.
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Mark:are there any other drawbacks you would suggest to the move?Yes. It will impose a huge cost which will deter business and will eliminate jobs.Apart from simply as a revenue generator, are there any benefits?
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Mark et al:I have an idea. How about if we include under the definition of "financial transactions" every withdrawal made at an ATM machine. Does that change anyone's mind about the FT tax?What about a legal consultation tax? Every time a lawyer communicates with a client, he has to pay the government a percentage of what he charges the client. Good idea?
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I have no problem with including all automated financial transactions, Scott. That is, if they are electronically automated and therefore ridiculously easy to collect at the moment of the transaction. ATMs and real property transfers included.The heart of Rogoff's objection:"Such taxes surely reduce liquidity in financial markets. With fewer trades, the information content of prices is arguably reduced. But both theoretical and simulation results suggest no obvious decline in volatility. And, while raising so much revenue with so low a tax rate sounds grand, the declining volume of trades would shrink the tax base precipitously. As a result, the ultimate revenue gains are likely to prove disappointing, as Sweden discovered when it attempted to tax financial transactions two decades ago.Worse still, over the long run, the tax burden would shift. Higher transactions taxes increase the cost of capital, ultimately lowering investment. With a lower capital stock, output would trend downward, reducing government revenues and substantially offsetting the direct gain from the tax. In the long run, wages would fall, and ordinary workers would end up bearing a significant share of the cost. More broadly, FTTs violate the general public-finance principle that it is inefficient to tax intermediate factors of production, particularly ones that are highly mobile and fluid in their response."1] how could a tenth of a penny tax reduce liquidity by more than, say, a tenth of a penny?2] aside from day trading, would volume of transactions decline precipitously? Why?3] what did Sweden do two decades ago?4] Scott, why is it a huge cost?
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Mark:I hold no brief either way on this, but "day trading' is no longer a viable term per se. Estimates are that up to 70% of share volume today is high-frequency trading or algorithmic trading if you will (though the terms are not exactly interchangeable) conducted outside of actual humans making investment decisions.
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Pretty good discussion here:"High-speed computers put stock markets at risk"http://philebersole.wordpress.com/2011/10/26/high-speed-computers-put-stock-markets-at-risk/
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Rogoff is correct when he says liquidity would drop, if (and a big if) you define liquidity as trading volume. A 10 basis point tax would kill high frequency trading, and that volume would disappear. However, many HFT algos seem to be in the business of taking liquidity, not providing it. If a HFT algo is sensing your order as an institution and front-running it, then they aren't providing liquidity at all – they are taking liquidity and their absence from the market will not be missed, except by the stock exchanges themselves. Any analysis that doesn't anticipate a massive decrease in trading volume is going to wildly overstate the proceeds from the tax.Now, if there isn't a market maker exemption, then you could see liquidity drop as the costs to market making increase. This would occur in instruments that don't trade on an explicit commission, and that cost would be reflected in an increased bid/ask spread. That said, rock-bottom commission rates and Dodd-Frank are doing more to reduce market making activity than 10 basis point tax would. The UK already has a financial transactions tax of sorts in the equity market, called a stamp tax. When you purchase a stock, you pay 50 basis points as a tax. Ironically, this tax created a whole derivatives market called equity swaps and certificates of differences, which take advantage of the fact that dealers don't have to pay the tax and can pass on those savings to institutions. City Index (the betting firm) used the same exemption to allow punters to bet on all of the major FTSE stocks through certificates of differences, which entails large leverage, and allowing "investors" to use a credit card to bet. Ironically, the profits on CFD trades are considered gambling winnings and are therefore tax free in the UK. The Law of Unintended Consequences.The tax would simply get passed on to investors, and it probably would, at the margin, reduce their trading volume. If dealers have to pay it on their hedging transactions, bid/ask spreads will widen.
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Mark:Scott, why is it a huge cost?Well, the easy answer is that the cost will be exactly equal to the revenues collected. If you expect to collect big reveneues, the cost will, necessarily, be equally big. But also, in a business where trades are executed for profits which are fractions of a basis point, charging a full basis point tax will destroy that business. For example, right now I have several swap dealer screens in front of me showing markets in swap prices from 2 years out to 30 years. The bid/offer for most dealers is typically about .5 of a basis point. So for a 5 year swap I can pay a fixed rate of 1.34% or receive a fixed rate of 1.335%. So that dealer is willing to buy and sell (swap lingo I can explain if necessary) that swap for a spread of .005%. If you add a 1 basis point (.01%) transaction tax onto it, his bid/offer necessarily becomes 1.325%/1.35%, or 2.5 basis points. That is a profit margin spread 5 times larger than what the dealer is actually willing to work for, but 80% of the margin goes to the government. It is absurd.In any other context the notion would be unthinkable. Imagine, as I proposed, a lawyer consultation fee in which you had to charge your customer 5 times what you would otherwise charge him just to pay the government its "share" of your business. And then you have to pay income tax on top of it! What a great idea, eh?
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Scott: And we on the left thought Cain's 9-9-9 plan was absurd.
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How did we survive the tax until the 60's? I'm not being snarky, just curious. Word is the FTT will never happen anyway so I wouldn't be too worried about it you guys. I guess we're left with taxing short term capital gains or nothing. Pretty sure we'll get nothing and settle on pretend and extend for the banks and real estate and wait for the middle class to de-leverage further before things will turn around. Gridlock is our friend.
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MsJS:And we on the left thought Cain's 9-9-9 plan was absurd.There's no reason they can't both be absurd.lms:How did we survive the tax until the 60's?It's not a question of surviving. The financial world has evolved, and part of that evolution includes and has even sprung out of changes in the law. It's not going to devolve simply because the law has been changed back to what it once was, but that doesn't mean changing the law will not have deleterious effects.
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Brent and Scott, I understand both of your comments and Scott's numerical example. In Scott's example, the dealer makes the same "house" profit for handling the transaction as he would have otherwise, but the investor gets ever so slightly nicked. The increased spread that would be required is not the dealer's cost of business, it is the investor's, much as a general sales tax is the consumer's cost.UNLESS NOT EVERYONE GOES ALONG. If any major nation with an exchange refuses to impose the tax, than dealers as in Scott's example will only work at the untaxed site, eventually. Or else dealers at the taxed sites will earn much less than dealers at the untaxed sites. Or else Dealers at the untaxed sites will undercut the price of the taxed sites. Which is why I asked the question based on the global assumption of the FT tax.Brent, I accept that estimating the revenue based on the untaxed volume of these markets would lead to uber cheerfulness by the taxing authorities and entities. I still see this as a useful tax and I would throw in ATMs, real estate closings, and anything else that has an automated transfer of payment as a possible expansion point for the tax. This would seem relatively painless compared with most revenue plans the USA Europe and Japan must consider now.
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I guess I appreciated the stock market better before HFT and when there weren't so many different types of transactions that the average person not only can't understand but wouldn't have a clue how to invest in. We put a couple thousand into an IRA about 10 years ago before we started investing on our own and that thing is only worth about $700 bucks today. If my husband dies I'll get the full $2000 but otherwise we leave it in or take $13 a month payments until the current value runs out. SheeshI read earlier that the big banks somehow managed to talk several states, CA is one, into issuing debit cards for unemployment checks to save the states money. Lol, now the unemployed get to pay an ATM fee to withdraw their money if they don't happen to have that bank close to home. Apropos of nothing I know, but typical.The banks and Wall Street appear to be untouchable to most of us.
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Mark:I understand both of your commentsI'm sorry, Mark, but if you think that paying a bid/offer spread 5 times larger than what currentlly exists is properly characterized as being "ever so slightly nicked," I don't think you do understand. To stick with the metaphor, it is more accurately characterized as having one's arm and leg hacked off by an axe. I am serious Mark…if it is strictly revenue that you are after, why financial transactions? Why not a special tax on what lawyers do? Why should bank clients be forced to pay 5 times what they now pay for a financial product, but your clients should not be forced to pay 5 times what they now pay for your services?
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This would seem relatively painless compared with most revenue plans the USA Europe and Japan must consider now.Mark, it appears to me that most conservatives and possibly some liberals don't believe in a revenue plan. Why else are we still here three years after the crash? Right now some are claiming the "super committee" is discussing some sort of tax to increase revenue by $300 billion over 10 years, lol, but even at that they'll only do it if the Bush tax cuts become law rather than expire as they're supposed to. I would be very surprised to discover that many of the conservatives here believe we need more revenue.
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I, for one, think we need to actually scale back the scope of government so that taxation rates of no more than 17% of GDP fully fund the government. That being said, if the electorate is interested in spending tax revenues in excess of 17% of GDP, a flat income tax rate for all earned income (no deductions) should be implemented immediately at such a rate as to fully fund the federal government. I would also eliminate corporate income tax as well as capital gains taxes. We should pay, through income tax primarily, for the government we want.
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@lms – If you are just a buy and hold investor, HFT has almost no effect on you. What HFT does is sniff out large orders from mutual funds, get in front of them and unwind into the fund order as it breaks price. In a lot of ways, HFT is an automated version of what the locals have done forever in the commodities and futures pits and on the floor of the stock exchanges.
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Scott, investors would not pay five times what they now pay for a financial product, they would pay five times what they now pay the dealer in transaction fees, 80% of which would be in the form of a tax. I thought your example was clear.
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brent, I understand what they are but even you said they wouldn't be missed as they are taking liquidity out of the market right? And isn't the speculation still that they caused the most recent flash crash, or is that no big deal also?
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@lms, I do think they take liquidity out of the market and I don't defend them, but I think their effects on everyone are overstated.Re the flash crash, the way I understand HFT, they get out of the market when it gets too volatile. In the flash crash, a lot of trades below the market ended up getting canceled. If you are a HFT, you are running a flat book (ie no positions at the end of the day). If you are making a fraction of a penny on a typical trade, and you stand the chance to lose multiple $$s on a trade if the the exchange cancels one side of your trade long after the market closes when you can't do anything about it, then you will get out of the way when the market gets too volatile. It may have been some sort of arbitrage or asset allocation program behind the flash crash, but I don't think HFT was behind it.And regarding the flash crash, investors have squeezed the specialist and the market maker out of the business, so they no longer have liquidity providers standing ready to take the other side when the market gets imbalanced. But hey, you get to trade for half a penny a share and your bid / ask spread is a penny. But you also have to stomach more volatility and the knowledge that when you absolutely, positively need to sell, there might be no buyer.
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Interesting Brent, thanks. I'm pretty sure I don't have enough money to risk trades of a half penny or penny. We're mostly out of the market, we each have a couple of companies we're invested in but that's it for us anymore. We made quite a bit of money on a few of our stocks in the last 8 to 10 years and probably sold a little early last year, but you never know. We don't have that much money anyway but there's no where really good to put it right now if you're close to retirement and risk averse as we're becoming.
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Mark:Scott, investors would not pay five times what they now pay for a financial product….That depends upon the product. One does not "pay" for an interest rate swap. There is no cash that exchanges hands upon execution. It is simply an agreement to exchange cashflows in the future based on two different rates, usually a floating rate index and an agreed fixed rate.At any time during the life of the swap, it can be terminated by taking the difference between the agreed fixed rate and the current market fixed rate for that maturity swap, and present valuing that difference over the hypothetical life. That means that at the point of execution, any given swap has a value of exactly zero, plus or minus any bid/offer spread. That is to say, upon execution of a swap, the "cost" of that swap is exactly equal to the bid offer spread. There is no other "value", and the bid/offer is what the client gives up in order to enter the trade.So, like I said, if you are going to force that spread to be increased by a factor of 5, you are indeed increasing the cost of that transaction by a factor of 5. Contrary to what you seem to think, a basis point on a swap agreement is no small amount. A basis point on each end of a transaction, getting in and getting out, is simply huge. Combined with the already onerous burdens proposed in Dodd-Frank, it would render many business models (including mine) simply not viable. And still, I remain curious…why is your search for revenue targeting strictly certain financial transactions? Your failure to answer my questions about a legal consultancy tax suggests to me that you think I am being facetious. I am not. If the goal is simply a search for revenue, why shouldn't the clients of lawyers be targeted? Indeed, if revenue is the goal, why should any transaction between any two entities for any reason be exempted?
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McWing:We should pay, through income tax primarily, for the government we want.I strongly agree, although I am somewhat indifferent between an income tax or a consumption tax.The notion that the financing of government, or any portion of it, should be forced upon a small constituency (like, for example, those who engage in "financial transactions") in order to raise the most revenue by effecting the least number of people is precisely the opposite of what the government ought to be doing. The costs of running the government should be borne by the largest, not the smallest, constituency possible.
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You know what's funny about all this to me. Here we are discussing a financial transaction tax, a flat tax, ending corporate and capital gains taxes, enacting a slight increase in taxes on the really wealthy and all other weird scenarios that really won't make a dent in the deficit anyway. The only people who can bail us out is the middle class, doesn't matter really whether we caused the crisis or not, we're the only population large enough to make a dent in the darn thing. I imagine they'll either cut our benefits or raise our taxes or both, might as well get it over with.
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Scott, I thought I answered you. I would favor the expansion of the transfer tax to all automated transfers, if indeed we move toward that model. Automated transfers, because of the ease of collection at the transfer point. No self reporting. No forms. No paperwork.Every single check and every credit card payment would be fair game at the point of withdrawal from one account and at the deposit to another.Have I made this clear? Pay me with a check and it gets the automated transfer payment tax when it comes out of your account and when it goes into mine.***********************************I have no objection to that. I want the west, but especially my nation, to have an opportunity to be fiscally sound. This requires meeting commitments already made as well as making fewer commitments in the future. This requires revenue.
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Mark:Have I made this clear?Yes, I think so. It sounds like a plan ripe for new tax avoidance schemes. It also sounds like an incentive to return to a cash-based economy. I also think that if one desires the government to make fewer commitments in the future, the very last thing one should do is propose giving it even more money than it already collects. As far as I am concerned the road to fiscal soundness can only begin with a demonstration by the government of a willingness to stop spending money. Until that happens, I consider the introduction of new revenue streams as simply throwing good money after bad.
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Mark:I had a eureka moment this morning thinking about our discussion of your proposed FT tax.What you are suggesting is a 1 basis point charge on a given cash flow, whereas I was thinking of (and my example of the change in bid/offer spread reflected) a 1 basis point charge on the notional amount of a swap transaction. The difference is massive.Cashflows on a standard interest rate swap transaction are calculated as the difference between two rates multiplied by a notional amount for the fraction of the year that the payment covers. So, for example, if the notional amount was $100 million, the fixed rate was 1% and the 3 month floating LIBOR set was .25%, the cash flow owed for that quarterly period would be:$100,000,000 X (1% – .25%) X (3/12) = $187,500So a 1 basis point tax as I was interpreting it would mean that instead of a payment of .75%, it would be a payment of .76%, or $190,000, so a tax of $2,500 for a single quarterly payment.But what I now think you mean is that the tax would be 1 basis point on the calculated cashflow, ie $187,500 X .01% = $18.75.Obviously there is a huge difference between $2,500 and $19 per cash flow, and not nearly so onerous as I was thinking.I still don't like the idea of the tax, but it is not nearly so absurd a proposal as I had originally imagined.
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Personally, I wouldn't mind if Mark ran for President.
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lms:I work on the paradoxical assumption that anyone who wants to be president probably shouldn't be.
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Scott wrote:But what I now think you mean is that the tax would be 1 basis point on the calculated cashflow, ie $187,500 X .01% = $18.75.***Yes. Is that not what the FT tax proposed in Europe means? And I would actually prefer the base for the tax to be the totality of all automated transactions.I propose a tax so small and so broad based that it would raise revenue without distorting any individual decision making. I think the evasion at the edges will be the temptation to barter, but ATM charges two orders of magnitude higher do not change our behavior. I would also fearthe temptation for government to raise the tax level until it did affect decision making and behaviors.LMS, I would love to have the ear of a President, but there is no elective office I would ever want, under any circumstance.US District Judge? Sure. 15 years ago.But thanks!
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I know what you mean Mark. I've been pressed several times to run for City Council but always preferred to be a thorn in their side. I finally quit going to most of the meetings this year in protest. Fat lot of good it did though. I've considered becoming active in the "new" Chamber but I think I'll wait and see if their accounting practices differ substantially from the "old" Chamber that's still kicking around. We have two now, lol.
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Mark: I propose a tax so small and so broad based that it would raise revenue without distorting any individual decision making.I like that idea. That's a good strategy for taxes, but especially what is potentially a VAT tax. I tend to suspect that VAT taxes of 20% do a lot to distort decision making in Europe. Greece has a 23% VAT tax and a top maximum income tax of 45%, BTW. Spain also has a top maximum income tax of 45% and a vat tax of 18%. Which you think would tell certain people (who are not here) that have argued in the past that high taxes and high government spending and power labor unions magically create a robust economy. Not quite so simple. Still, it seems like a broad micro-tax could raise revenues on transactions without distorting individual behavior (not good for people who want to discourage frequent trading, but otherwise not bad). but ATM charges two orders of magnitude higher do not change our behavior.Oh, they change my behavior. I avoid ATM charges like the plague. And, frankly, I'd routinely pay ATM charges, to the tune of $20 or more a year, if they were .10¢ per transaction, as opposed to $3 from the outside bank and then another $2 or $3 from my bank.
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