Wednesday, December 9, 2009
The following paragraph is a result of a Wall Street Journal article today (12/9/09) highlighting the tax benefits available to tax-paying Madoff fraud victims as a result of new IRS "rules" issued in March 2009 for victims of Ponzi schemes.
How is it that the Geithner (whose personal income tax transgressions should have barred him from being Secretary of the Treasury) as overseer of the IRS can in essence rewrite the tax code without Congressional approval so that Madoff (and other Ponzi) “victims” are able to recover substantially more than they otherwise would have?
The special treatment for tax-paying Madoff investors is part of a general trend where increasingly the federal government more or less bails out large money losers, both individuals and companies, rather than let those who took their chances and lost bear the full economic consequences of their actions. Why should we taxpayers bail out home buyers and investors in their mortgages who made bad decisions? Why should we bail out investment bankers who are gambling with other people's money -- if they win they pay themselves outrageously, if they lose, their shareholders and the federal government will pay. Why should we bail out General Motors and Chrysler just because their employees are union members whose excessive compensation and restrictive work rules contributed to their employers inability to compete with the foreign auto makers who use non-union labor in the southern states to efficiently build autos here? Why should we bail out GMAC which got into trouble with mortgage investments of all things. Why should we bail out the shareholders and debt holders of banks and investment banks whose managements made very bad decisions? Why not use the S&L bailout formula of the 1980's -- shareholders and creditors were wiped out, depositors were protected, and the deposits were sold to solvent institutions or new investment groups.
It could be argued that some banks such as Citi were too big to fail due to the consequences that would result for the financial system. There were a handful of very large banks that might logically meet that measure and require a government rescue. However, it is this blogger's view that the regulators should never allow any bank to get itself into a size or risk profile that would make it possible to be too big to fail. Many of today's financial institution should be broken up and restricted to diversified low risk investments.
AIG's insurance subsidiaries were fire-walled off from the money-losing parent company. And yet we made a huge bailout of AIG and its ill-conceived credit default swaps to the benefit of foreign banks and investment banking firms like Goldman Sachs. Additionally, it is now known that Geithner paid those investment banks and foreign banks on the other side of the swaps at 100% on the dollar rather than negotiating a discounted settlement as he could have, given that their alternative was getting nothing in a bankruptcy.
The Bush administration started these balls rolling and the Obama administration continued these policies with renewed vigor. The huge deficits that are being rolled up as a consequence, and the huge (over $1 trillion) Fed purchases of low rate mortgages (in an effort to prop up the single-family home market) are going to cost all taxpayers for years to come.
All of the low rate mortgage assets now held by the government are going to have to be dumped on the market at huge losses when interest rates rise as they most surely will as a consequence of massive sales of government debt to pay for the ever-rising deficit, or alternatively, these mortgage assets will have to be financed with short-term borrowings of the federal government at increasingly higher rates until the mortages are paid off.
Why should we responsible taxpayers be forced to help our irresponsible brethren? Instead of devoting trillions of taxpayer dollars to fund these "rescues," the same moneys could benefit the economy more through such devices as tax breaks for small businesses and other employers that provide new jobs for the economy. In essence, Bernanke and the Bush and Obama administrations have gone out of their way to minimize negative economic impact now at the cost of negative impact in the future. Bush didn't want his "legacy" to be tinged with unemployement. Obama wants badly to be reelected. Bernanke is of the liberal school that any unemployment over a normal amount has a great cost, so he will do anything to keep down today's unemployment rate include mortgage our future.
