Superfail

Who is surprised that the United States Congress Joint Select Committe on Deficit Reduction, or the so-called "Supercommittee", will fail to find consensus on mandated budget cuts of $1.5T over ten years?  What makes this failure all the more absurd is the fact that $1.5T over 10 years is WHOLLY INADEQUATE and wouldn't even begin to set upright the fiscal ship of state.

It will be interesting to hear the blame game on the national talk shows, but I think one observation is important here: on average, the members of this committee (and the ranking members of the House and Senate for that matter) have served for a LONG TIME.

For example, the Senate members of the committee have served for an average of 15.5 years (and, this average takes into account two freshman members who haven't even served a full year yet), while the House members have served and average of 13.3 years.

How could this degree of incumbency possibly contribute to Superfail, as people are starting to call this fiasco, you might ask?  Because anyone who has served in Congress for so many successive terms (an average of over three in the case of the Senators if you discount the freshman, and an average of nearly seven in the case of the House members) has obviously placed a higher premium on their own political survival than on making the courageous decisions that they are empowered and obligated by the U.S. Constitution to make.

What has been sadly lost in terms of an ethos in Congress is the notion of the elected official as a public servant who leaves a successful business, farm, medical practice, etc., for a short time in order to advance the public good and then returns to private life.  Because of the exponential degree by which Congress has amassed authority over the decades, our elected officials have become addicted to the power of their office and cannot abide to surrender the reigns, even when it is time for them to move on.  Instead, Congress has gradually become overwhelmed by career politicians who have mastered the art of survival at the expense of the political leadership and risk-taking that is sorely needed.

That is why I believe that the time is come to once again debate the idea of congressional term limits in order to inject fresh blood into the body politic.

If the members of the "Supercommittee" cared more about the future of this great nation than their own prospects for re-election, they would have reached an agreement and sent a message to the country that democracy DOES work.  Instead, they failed and we are all that much more cynical as a result.

S&P Flubs Another One

In an admitted "technical error", the international credit rating agency Standard & Poors downgraded French sovereign debt on Thursday, triggering extreme market volatility, before reversing the downgrade and restoring France's AAA rating.

This incident brings to mind S&P's downgrade of U.S. sovereign debt from AAA to AAa earlier this year.  At the time, S&P acknowledged that they had made significant mistakes in their longer-term fiscal projections, but that these errors did not substantively change the U.S. credit outlook, sparking outrage and cries of foul play from the Treasury Department.

Also, it is important to recall that S&P had maintained investment-class ratings on the mortgage-backed derivatives, called CDO's, literally up to the very moment that the market for these securities collapsed, leading to the demise of Bear Stearns and Lehman Brothers.  When challenged by a Senate panel as to their decision to grant CDO's an investment-class rating, when in reality they merited junk status, executives for S&P stated that their credit rating decisions are merely "opinions" that enjoy First Amendment protections. 

"Opinions shielded by the First Amendment"?  They have got to be kidding.  The posts on my blog, for which I receive no remuneration, are opinions shielded by the First Amendment.  Credit ratings are the result of professional analysis that the credit rating agencies are fee-contracted to perform, and these ratings are the basis on which important investment decisions are made.  If mistakes are made that result in money lost by investors who have paid a credit rating agency for their guidance, then the credit rating agency should be held be liable for civil damages.

I strongly urge Congress to enact legislation regulating the credit ratings agencies and providing for a mechanism by which they can be held legally accountable for their malfeasance.

Eat The Rich

There seems to be a serious backlash against the rich afoot these days in America. Statistics are bandied about as to the degree of polarization of wealth, such as that the top 1% in terms of net worth surpass the bottom 90% COMBINED. While this statistic is stark in its imagery, there has always been a certain degree of polarization in wealth in this country, so this is really nothing new.

What is different at this time is that the U.S. fiscal deficit and national debt are off-the-charts out of control and have to be brought down soon. And, who is in a better position to make a down payment on our children's future than the ones with all the money?

Therefore I believe we should consider the following policy changes:

1. Restore the Clinton-era tax brackets and tax capital gains as regular income. Capital gains are currently taxed at a preferential rate of as little as 15%; since the aforementioned 1% receive 99% of their income in the form of capital gains, they are enjoying a huge tax advantage in spite of their wealth. If we restore the Clinton-era tax structure and tax long-term capital gains as regular income (short-term capital gains should carry a 5% penalty on top of the long-term rate), the capital gains tax rate for the 1% will jump to 39.6%, yielding a huge windfall for the cause of deficit reduction.

2. Keep the Estate tax intact. There has long been a campaign afoot to eliminate the estate tax, but the fact is that this tax is a big winner for the Federal government. Additionally, there is plenty of evidence that large sums of money that are inherited tend to have a corrosive effect on the next generation, which is why many of the super-rich decide to give away their wealth before they pass on.

3. Enact a 2% National Sales Tax for the express purpose of debt reduction. The simple truth is that there is a huge segment of the population that pays nothing to the Federal government in the form of direct taxes. A 2% sales tax will give everyone skin in the game, including those who pay no income tax.

Of course, if Congress uses this added revenue as an excuse to postpone fiscal discipline, all will be lost.

Therefore, these taxes must be enacted only AFTER significant spending cuts have been enacted. Current expectations are that the budget will be cut by $2T over 10 years, but that is wholly inadequate and will barely budge the needle.

If consensus can be found to reduce federal outlays by $4T over ten years, coupled with sensible entitlement reform and my tax proposals, our country will restore its greatness and the resulting confidence boost will drive productivity gains for decades.

Athens Is Burning

While we watch scenes of street protesters lobbing molotov cocktails at riot police, one begins to wonder how did the world ever imagine that the Greeks would go along with the proposed austerity measures?

Apparently, it was the perception of many, including former Goldman Sachs CEO and Governor of New Jersey, John Corzine, that the wealthy members would bail out the weaker members of the Euro zone.

However, they obviously forgot that European nationals have a long, storied history of disdain for one another, so the idea that they could come together in a caring, sympathetic way to aid a struggling member of their currency union was naive from the start, nor do I think it is a good idea in any event.

The European Union is, above all, a currency union designed to remove currency cost from cross-border transactions, and to aid in payment clearing by a centralized bank.  The EU does not have the kind of authority or control at the Parliamentary level to ensure that member states adhere to fiscally conservative guidelines; the "solution" put forth by France and Germany (major salary cuts, benefits cuts, etc.) is, at best, a suggestion and has no teeth whatsoever.  The only thing that the European Central Bank can do is to stop buying Greek government debt, which will force the default that the austerity proposals are designed to avoid.

Therefore, I view Greek default to be inevitable.  Who suffers the most in the case of Greek default?  Those with significant exposure to Greek sovereign debt, of course, but Greek debt is a drop in the bucket for many  of these creditors, and the IMF and European Central Bank may come to their aid to preserve a portion of their principal in any event.  Of course, the Greeks are headed for a rude awakening when they have trouble borrowing to meet their huge budget shortfall and see the value to their newly minted drakma deposits diminish by 1/3 or more relative to their previous euro valuation.

However, a Greek default will be the best solution for all concerned.  It will put an end to Greece's debt-fueled binge.  In the end the Greeks will benefit in that they can begin putting their fiscal house in order and the investors in Euro Zone debt can finally be disabused of the notion that European sovereign debt is somehow more valuable if the party to the debt is a member of the European Union.