Quote of the Day: Richard Schiff

I am not an Obama fanatic. I did not favor a surge in Afghanistan; didn’t support the nature of the financials bailouts; wanted universal health coverage; wanted proper prosecution of the thieves of Wall Street, believe the war on drugs must end yesterday.

But here, now, just shy of four years later I can look back and I can have respect for this man. He said he was going to bail out Detroit and he did; he said he was going to pass the stimulus package to stave off loss of jobs and rebuild infrastructure and he did; he said he was going to surge in Afghanistan to facilitate a later winding down of that war and he did; he said he was going to end the inane war in Iraq and he did. He passed Obamacare like he said he would. He reversed the loss of job growth trend like he said he would. He extended unemployment benefits and helped folks keep their homes like he said he would. And on and on it goes.

— Richard Schiff

Wall Street’s Rap Sheet Tells a Harrowing Story

There’s a serial killer on the loose.

This heartless criminal is slaughtering nations left and right.

For two decades, it’s been feasting on unsuspecting governments.

With each victim, its power grows.

And now, it’s at our front door.

The first reported crime occurred in 1982. That was the year when Mexico defaulted on its debt. For over two decades, Mexico and its Latin American neighbors had been borrowing money from American banks to finance their growing economies. The 1960s was a good time to be a finance minister south of the Rio Grande. Governments were flush with cash from the economic boom, largely financed by loans. When inflation drove U.S. interest rates into the double digits, Latin American governments found themselves with whopping interest payments. By the 1980s, they simply stopped paying the bills. Lenders fled, and a massive financial crisis swept through the region.

But interest rates eventually came back down, and the lenders returned. Again banks like Goldman Sachs lent money to the Mexican government, and again investors panicked. In 1994, another financial crisis struck Mexico and — in a so-called “tequila effect” — spread to Brazil. This time, the American government stepped in. Treasury Secretary Robert Rubin, who used to be the Co-Chairman of Goldman Sachs, engineered a $20 billion bailout that saved his old firm’s ass.

Meanwhile, on the other side of the world, the “East Asian miracle” was lapping up the money that was spilling out of Latin America. Hong Kong, Singapore, South Korea, and Taiwan — the “Four Asian Tigers,” they were called — were industrializing faster than any country ever before, and Wall Street was more than happy to slake their thirst for investment funds with the cool liquid of debt. Until, of course, the bubble burst. In 1997, it became clear that investors had been too optimistic and asset prices had gone too high, especially in real estate. Lenders ran for the exits, and the local economies took a bloodbath.

When the “East Asian miracle” turned into the “East Asian crisis,” investors started to question all their foreign holdings, especially the loans they made to the Russian government. Just to be safe, they fled Russia too, leaving the Kremlin no choice but to default on much of its debt. The shockwave rippled all the way to Wall Street, where the mammoth hedge fund Long-Term Capital Management nearly crumbled from a bet gone bad. Their bankruptcy probably would have brought down the global economy, had the big American banks not stepped in and bailed them out.

These titans of Wall Street were hardly daunted by this near-death experience. First, they plowed their money into the American stock market and then, when that tanked at the turn of the century, into the American housing market. This too fell, and with it, the global economy.

But that was not all they bet their chips on. Led by Goldman Sachs yet again, the American banks spread their money across Europe — trading with hedge funds in Iceland, buying up mortgages in Spain, and yes, funding a widening budget deficit in Greece. When the bubbles burst, tax revenues plummeted, and governments started running out of money. Without central banks to buy their bonds, several countries ran the risk of defaulting on their debt. But the powers-that-be didn’t want that. They wanted the big banks to be repaid. So they took it out on the workers, slashing government spending and making the recession worse.

Only one culprit has been present at all of these crime scenes. It doesn’t take a detective to see that Wall Street has been duping naïve borrowers into excess debt time and time again, only to get away with it and strike again in a new location. In fact, after each conquest, the American banks found themselves bigger and more powerful, systematically demolishing the regulations that had prevented them from such predatory behavior since the 1930s.

In recent years, we have developed an unhealthy habit of blaming the borrower, but there are two parties in every financial contract — and the lender is almost always the more experienced, more sophisticated, and more powerful of the two.

For far too many years, we have allowed our banks to run roughshod over the world. And now, while our nation grinds through high unemployment and Europe suffers through worse, the Republicans have the inexplicable gall to nominate a Wall Street tycoon as their presidential candidate. To these thugs, I say: Leave us alone. Haunt us no more. Haven’t you done enough?

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This op-ed was published in today’s South Florida Sun-Sentinel.

Putting the Spotlight on the Covert Subsidy of Wall Street

Wall Street is back in the news.

They went away for awhile, taking a backseat to gas prices and budget proposals. They preferred it that way. They make more money when no one’s paying attention.

But when you’re too big to fail, you’re too big to hide.

First, there was the announcement that JP Morgan had lost at least $2 billion in derivatives trading. Then came the Obama campaign’s attacks on Mitt Romney’s record of cutting jobs at Bain Capital, followed by the unlikely retort by Cory Booker, the Democratic Mayor of Newark, New Jersey.

But it is not enough to ask what good Wall Street does. We must go one step further: Is Wall Street so valuable — is its output so beneficial — that we must subsidize it?

In the wake of the worst financial crisis since the Great Depression, it’s hard to make that case. But that hasn’t stopped the government from giving Wall Street a bonus on top of every dollar they earn.

They don’t call it a “bonus,” but that’s what it is. Wall Street pays a lower tax rate — 15 percent — on every investment it cashes in than it would pay if that money were taxed like ordinary income. This “capital gains tax rate” is the lowest it’s been since the Great Depression.

When George W. Bush got Congress to lower this rate from 20 percent to 15 percent in 2003, it was supposed to encourage people to save and invest more, thus increasing future economic growth.

But nothing of the sort happened.

“I have worked with investors for 60 years,” said Warren Buffet, “and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.”

Capital gains taxes have been falling for twenty years, from 28 percent in 1987 to 15 percent in 2007, yet the saving rate has plummeted over those same years.

In fact, the years following the 2003 tax cut were part of the most dismal economic expansion in postwar history. Output growth, job creation, poverty reduction, and investment were all below average, if not all-time lows.

Clearly, low capital gains taxes did not lead to the prosperity that was promised.

This conclusion isn’t restricted to one decade. From 1950 to 2011, the capital gains tax rate has been positively correlated with economic growth, meaning higher taxes have been associated with faster growth. Even when you compare economic growth occurring several years after the tax rate changed, there’s still no significant negative relationship.

Yet this tax break persists, costing the government $100 billion every year (when combined with the loss from the same low tax rate applied to corporate dividends).

Where does this $100 billion go?

$70 billion of it goes to the richest 5 percent of households. Half of all capital gains income goes to the top 0.1 percent of households. That means that a mere 114,000 households receive a $50 billion subsidy from the government every year.

And it would be so easy to fix. Here’s how it would work…

If you’re in the bottom 20 percent, you’d pay an extra $1.

That’s right. Just one dollar.

If you’re in the next 20 percent, you’d pay $2. Seriously. Only two dollars.

If you’re in the middle 20 percent, you’d pay $6. That’s it. The average American, the precious middle class, would pay only six more dollars.

If you’re in the next 20 percent, you’d pay $30. On a six-figure salary, I think you can afford to give up thirty bucks.

And those are just the average tax increases. Of those bottom 80 percent of households, 9 in 10 would experience no tax increase whatsoever.

Cory Booker says this debate is a “distraction,” but nothing could be further from the truth — $100 billion is too big to ignore. The spotlight is back where it belongs. This time, let’s keep it there.

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This op-ed was published in yesterday’s South Florida Sun-Sentinel.