Friday, February 6, 2009

How Bad Will It Get?

In This Issue:
- On The Edge

 - Paul Krugman

- Why Geithner Was Worse Than Daschle

- Tarp Fund Is Misleading the Public

- Interesting Letter to the Herald by Doug Darlington

- Yellow-headed Blackbird, Celebrating Spring in Baker County

- Convict Bush & Cheney


No Comment at this point....

On The Edge

 By Paul Krugman

February 06, 2009 "New York Times"

--- A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.

It's as if the dismal economic failure of the last eight years never happened - yet Democrats have, incredibly, been on the defensive. Even if a major stimulus bill does pass the Senate, there's a real risk that important parts of the original plan, especially aid to state and local governments, will have been emasculated.

Somehow, Washington has lost any sense of what's at stake - of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.

It's hard to exaggerate how much economic trouble we're in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world.

Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving - a good thing in the long run, but a huge blow to the economy right now. Developers of commercial real estate, watching rents fall and financing costs soar, are slashing their investment plans. Businesses are canceling plans to expand capacity, since they aren't selling enough to use the capacity they have. And exports, which were one of the U.S. economy's few areas of strength over the past couple of years, are now plunging as the financial crisis hits our trading partners.

Meanwhile, our main line of defense against recessions - the Federal Reserve's usual ability to support the economy by cutting interest rates - has already been overrun. The Fed has cut the rates it controls basically to zero, yet the economy is still in free fall.

It's no wonder, then, that most economic forecasts warn that in the absence of government action we're headed for a deep, prolonged slump. Some private analysts predict double-digit unemployment. The Congressional Budget Office is slightly more sanguine, but its director, nonetheless, recently warned that "absent a change in fiscal policy ... the shortfall in the nation's output relative to potential levels will be the largest - in duration and depth - since the Depression of the 1930s."

Worst of all is the possibility that the economy will, as it did in the '30s, end up stuck in a prolonged deflationary trap.

We're already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s, and there will be much more of that if the economy continues to weaken.

As the great American economist Irving Fisher pointed out almost 80 years ago, deflation, once started, tends to feed on itself. As dollar incomes fall in the face of a depressed economy, the burden of debt becomes harder to bear, while the expectation of further price declines discourages investment spending. These effects of deflation depress the economy further, which leads to more deflation, and so on.

And deflationary traps can go on for a long time. Japan experienced a "lost decade" of deflation and stagnation in the 1990s - and the only thing that let Japan escape from its trap was a global boom that boosted the nation's exports. Who will rescue America from a similar trap now that the whole world is slumping at the same time?

Would the Obama economic plan, if enacted, ensure that America won't have its own lost decade? Not necessarily: a number of economists, myself included, think the plan falls short and should be substantially bigger. But the Obama plan would certainly improve our odds. And that's why the efforts of Republicans to make the plan smaller and less effective - to turn it into little more than another round of Bush-style tax cuts - are so destructive.

So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.

It's time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation's future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.

Paul Krugman is professor of Economics and International Affairs at Princeton University and a regular columnist for The New York Times. On October 13, 2008, it was announced that Mr. Krugman would receive the Nobel Prize in Economics. He is the author of numerous books, including The Conscience of A Liberal, and his most recent, The Return of Depression Economics. 

© 2009 The New York Times
Why Geithner Was Worse Than Daschle
by Donald L. Barlett & James B. Steele
February 4, 2009 | 8:44am

The Pulitzer Prize-winning reporting team—and authors of The Great American Tax Dodge—on the breakdown of America’s tax system—and why Timothy Geithner’s lapses were far more egregious than Tom Daschle’s.

The tax troubles of some of President Obama’s Cabinet nominees have exposed one of Washington’s dirty little secrets: Tax avoidance, error and fraud are out of control.

The terms "taxpayer error" and "taxpayer mistake" have become convenient ways to describe the complete breakdown of the American tax system. By our own rough estimate, as much as $600 billion—more than two-thirds of the government’s stimulus package—is lost each year as a result of tax fraud and avoidance.

Geithner actually acknowledged years ago that he owed the taxes—but didn’t pay them until he was nominated for
TheTreasury job. That hardly counts as a mistake.

But don’t look for Congress to order the IRS to begin collecting. For a quarter-century, lawmakers have toiled tirelessly to discourage enforcement of the Internal Revenue Code. Thomas F. Daschle and Treasury Secretary Timothy F. Geithner are the latest poster boys for the success of that campaign.

But their offenses were not equal. Despite the fact that Geithner sailed through the confirmation process—while Daschle went up in flames—Geithner’s tax troubles were actually far more egregious. People tend to give Geithner a pass, because the overall amount he owed was smaller and it just involved Social Security and Medicare, rather than income tax. But Geithner actually acknowledged years ago that he owed the taxes—but didn’t pay them until he was nominated for the Treasury job. That hardly counts as a mistake.

Daschle, for his part, failed to count as income the value of a car and driver he received from a New York private-equity firm, InterMedia Advisors, during 2005-2007. He also overstated charitable contributions and understated income from InterMedia, which paid him $1 million a year. Daschle filed amended tax returns last month reporting $128,203 in additional taxes and $11,964 in interest. The revised tax returns were submitted after President Obama announced that he intended to nominate Daschle to be secretary of Health and Human Services.

Geithner’s situation was nonetheless a bigger ethical lapse. As an employee of the International Monetary Fund in 2001 and later years, Geithner was responsible for sending a check to the IRS to cover his own payroll taxes. He didn’t do so. What he did do was submit a request to the IMF for reimbursement of those taxes. And he collected.

According to the Senate Finance Committee, Geithner “filled out, signed and submitted an annual tax-allowance request with the IMF that states, ‘I wish to apply for tax allowance of US federal and state income taxes and the difference between the ‘self-employed’ and ‘employed’ obligation of the US Social Security tax which I will pay on my Fund income.’” In other words, Geithner—now charged with making sure Americans obey the tax laws—was given money by his employer to pay his taxes, but then didn't pay them. Not until, that is, he decided to become Treasury secretary.
Geithner dismissed his actions as “careless mistakes.” Whatever the case, the “mistakes” were not detected until he was a candidate for the top job at Treasury. That’s when he paid, years late, $34,023 in self-employment taxes that he owed and $8,679 in interest, for a total of $42,702.

Tom Harkin, the Iowa senator, was one of only three Democrats disturbed enough to vote against Geithner’s confirmation. As he put it on the Senate floor: “How can Mr. Geithner speak with any credibility and authority as America’s chief tax-enforcement officer?”

Geithner has plenty of company. Hundreds of thousands of other Americans—quite likely several million—also are ignoring or avoiding their payroll-tax obligations. Their ranks have swelled as a result of the government’s outsourcing of contracts for the wars in Iraq and Afghanistan. But contract employees everywhere often are paid through companies operating abroad that do not withhold the taxes deducted from the paychecks of most working Americans. For its part, Congress has made sure that the IRS lacks the resources required to collect those taxes, as well as income taxes.

Beginning with the Reagan revolution in the 1980s, Congress deliberately stymied tax-law enforcement. It refused to authorize adequate funding. It slashed enforcement efforts. It killed effective programs in place since the 1960s, like the Taxpayer Compliance Measurement Program. Under that program, IRS subjected a select number of returns to intensive audits to determine the extent of taxpayer fraud and error so as to better allocate enforcement resources. But in 1995, after three decades, lawmakers finally marshaled enough support to terminate the TCMP audits. It did so by starving the agency for funds. In a related development, when lawmakers forced the canning of thousands of IRS agents, a jubilant Senator Charles E. Grassley, Iowa Republican, said that it would mean fewer “agents looking through your files.” In other words, taxpayers who cheated could continue to do so with impunity—at the expense of law-abiding citizens who paid the taxes they owed.

How bad is it? The giant Swiss bank UBS maintains secret accounts for 19,000 Americans who have failed to report their existence as required by law. Those accounts hold $18 billion.

The Swiss are resisting efforts to force disclosure. Even if the account holders are identified it would mean little. As longtime Washington tax lawyer and analyst Martin Lobel puts it, “nothing much is going to happen.” That’s because the IRS lacks the resources to pursue that many tax cases.

Donald L. Barlett and James B. Steele are contributing editors at Vanity Fair and have been writing about taxes for nearly four decades. Barlett and Steele have won virtually every major national journalism award including two Pulitzer Prizes and two National Magazine Awards. They are the authors of The Great American Tax Dodge, How Spiraling Fraud and Avoidance Are Killing Fairness, Destroying the Income Tax, and Costing You, and six other books.

See also Democracy Now for February 6, 2009:
February 6, 2009

Regulator Says Bailout Fund Is Misleading the Public

WASHINGTON (Reuters) — Watchdogs monitoring the government’s bank bailout called for an overhaul Thursday, with one accusing those running it of misleading the public, while senators slammed the program as chaotic and poorly managed.
Under the $700 billion program meant to stabilize the financial system, the Treasury Department has so far spent nearly $300 billion to bolster financial institutions and automakers in exchange for preferred shares and warrants.

But in buying those securities, Henry M. Paulson Jr., then the Treasury secretary, misled the public about how it was going to price them, said Elizabeth Warren, a Harvard law professor and head of an oversight panel for the bailout, known as the Troubled Asset Relief Program, or TARP.

“Treasury simply did not do what it said it was doing,” Ms. Warren said at a hearing before the Senate banking committee. Many members of the panel condemned management of the program, which is barely four months old.
The program proceeded “in a chaotic, unorganized and ad hoc manner,” said Daniel K. Akaka, Democrat of Hawaii.
Neil M. Barofsky, another watchdog for the program, told the Senate committee his office was turning to criminal investigations. “That’s going to be a large focus of my office,” he said.

On projections by some analysts that TARP may need more money soon, Senator Evan Bayh, Democrat of Indiana, said, “There will be no additional funding for this program without airtight assurances that it will be better managed.”
The Obama administration plans to unveil a strategy on Monday aimed at reviving the credit markets, helping struggling homeowners and lifting the economy out of recession.

Tighter TARP management is expected to be a part of that package. A preview of that came Wednesday when the White House announced a $500,000 annual cap on executive pay at companies receiving TARP money.
The Bush administration began TARP in response to an alarming slowdown in global capital markets set off by a housing slump that undermined mortgage-backed bonds carried on the books of major financial institutions.

Congress approved the $700 billion program after Mr. Paulson said it would be used to buy broken bonds and clean off banks’ balance sheets. But days after that approval, Mr. Paulson changed the focus to buying preferred shares in banks.
Ms. Warren, head of TARP’s Congressional oversight panel, told the banking committee that after three months on the job, her panel was still not getting enough answers from Treasury. She described the bailout as “an opaque process at best.”
Ms. Warren said she plans to release a report on Friday that calculates Treasury put about $254 billion into financial institutions in 2008, but got only $176 billion in value.

“That’s a shortfall of about $78 billion,” she said, adding that Mr. Paulson “was not entirely candid” in his description of TARP’s bank capital injection program.

Mr. Barofsky, the independent TARP inspector general at Treasury, raised concerns about potential fraud in one of several programs financed by bailout money, the Federal Reserve’s Term Asset-Backed Loan Facility. “Treasury should consider requiring that some baseline fraud prevention standards be imposed,” Mr. Barofsky said in his first report to Congress.
He told the committee the government had collected more than $271 million in dividends from its TARP-financed bank shares and said the department needed a strategy for administering its holdings.

A Treasury spokesman said the department would adopt many of Mr. Barofsky’s recommendations.
Treasury holds $279.2 billion in preferred shares from 319 financial institutions, paying dividends of 5 to 10 percent, according to Mr. Barofsky’s report.

The government also received common stock warrants from 230 institutions, most of which are now out of the money. The largest positions in warrants include the American International Group, Bank of America, Citigroup and General Motors.
Get back to basics, America
Can Spring Be Far Away? I Hope Not. . . .

Birders are spotting tundra swans and white-fronted geese across Oregon this last week. Spring is just around the corner--well almost.

Yellow-headed Blackbird, Celebrating Spring in Baker County
Convict Bush & Cheney

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