Go get them, Dean. These bank bailouts are just a backdoor way of "trickle-down" economics. Instead of the Republican way of tax cuts to the rich, Larry Summers (let's face it...the real author of this economic policy) is doing it directly with subsidies or welfare to the wealthy on Wall Street.

It should be perfectly apparent to everyone at this point that the people designing economic policy in recent decades had no philosophical commitment to "free markets," they were trying to design policies that had the effect of redistributing income upwards

Indeed. But why is it that this is lost on most of your liberal colleagues?

don't forget fractional reserve lending! the biggest form of welfare know to man.

legalized counterfeiting.

I feel like obama's economic team is just rubinomics all over again. am I wrong?

Nice job Dean, I couldn't agree more.

When the MSM comments on the free market, they almost always trot out the usual suspects (AEI, HF) to support their case. The ensuing amount of bogus logic tossed about usually makes my head hurt.

So I just substitute "corporate" for "free market" in these cases, and find that I am good-to-go!

> wrote, don't forget fractional reserve lending! the biggest form of welfare know to man.

One of the biggest, but hardly the biggest.

The biggest form of welfare known to man is private landownership without concomitant heavy land value taxation.

Just wanted to say HI. I found your blog a few days ago and have been reading it over the past few days.

why would one expect the powerful people who make the rules regarding banking ( or anything else ) make these rules such that their power would or could be diminished ?

it seems to me as if any thinking otherwise is futile and frustrating - at least it has proved such for me.

i have ideas, from somewhat of a cultural/spiritural perspective - yet, given our
cultural climate i do not see
any hope prior to a further collapse of the "establishment".

i guess it just takes one spark, yet we/america are so entrenched in our current corporate run system it seems as if it would be akin to lighting a cigarette while scuba diving.

we can't even get health care together !!!

It should be perfectly apparent to everyone at this point that the people designing economic policy in recent decades had no philosophical commitment to "free markets," they were trying to design policies that had the effect of redistributing income upwards.

This is like Alexander Solzhenitsyn's discussion in "The Gulag Archipelago" about corrupt Communist Party officials who continued to try to pursue even more wealth despite already having plenty of wealth already. Ordinary people just couldn't understand or make the connection that EVEN THOUGH they were ALREADY WEALTHY, they wanted still MORE. It just didn't register with everyday folk.

REGULATE 2BIG2FAIL DOWN2 2LITTLE2CARE, call Pelosi @1-202-225-0100. BANKruptcy Court works.

I think that we are slowly moving toward the point where we wish that we had ripped the band-aid off quickly. The Gov actions taken so far have slowed the decline and made it less severe but we might have been recovering by now. Is 25% unemployment for 6 months and then a rapid rise to full employment better than 10%+ unemployment for five years. Well IMO for the weakest employees among us the latter is worse because they may be out of work for a long time. You can lean of family and friends for only so long.

wrote, don't forget fractional reserve lending! the biggest form of welfare know to man.

One of the biggest, but hardly the biggest.

The biggest form of welfare known to man is private landownership without concomitant heavy land value taxation.

Add:

Limited liability corporations
copyright
patent

But to take the devils advocate roll:

There are rational reasons (mostly to encourage risk taking) for all of the listed welfare for the rich and BTW the rich pay most of the taxes. So it is more the prudent rich bailing out the imprudent rich.
The worst thing the bailout is that it will probably not work and it saved some very corrupt wall street firms, that I think we would be better off without.

"don't forget fractional reserve lending!

One of the biggest, but hardly the biggest."

At least anyone has a shot at the various other forms of 'welfare'. Fractional reserve lending is exclusive to the Federal Reserve shareholders. If I "created" money, loaned it out, and charged interest on it, I'd go to jail.

patient wrote, At least anyone has a shot at the various other forms of 'welfare'.

That's just saying that slaves, through the sweat of their brow, can earn enough to buy their freedom and then start buying other slaves.

I don't for a minute disagree with your point about the privileges granted to banks. I'm just saying that the privileges granted to landowners are, in terms of size, much worse. Furthermore, land is something no human being can do without, and is fundamental to our existence.

floccina wrote, Limited liability corporations
copyright
patent

Right. "Intellectual property rights" are also a state-granted privilege. Again, not as "big" as land ownership in the absense of substantial land taxes, but very similar in the sense that all are economic rents in the most textbook sense and impinge on liberty in very similar ways (although land is obviously more fundamental).

floccina wrote, There are rational reasons (mostly to encourage risk taking) for all of the listed welfare for the rich and BTW the rich pay most of the taxes.

Handing land rent to landowners doesn't encourage any risk taking at all. In fact, it discourages it: land is often hoarded for speculative gain, instead of being put to productive use (which might entail risk, like investing in true capital like buildings).

Furthermore, "the rich" don't necessarily pay the bulk of taxes. People with moderately high to high income do. "Rich" is defined by assets, not income.

@Liberal,
Seattle is a better Natural port than New York harbor and no other natural factor favors NY much but the value of land around New York is higher due human inputs. In your scheme would land around Seattle be taxed higher than around NY?

Handing land rent to landowners doesn't encourage any risk taking at all. In fact, it discourages it: land is often hoarded for speculative gain, instead of being put to productive use (which might entail risk, like investing in true capital like buildings).

I think that you are right I should have noted that as the one exception.

Furthermore, "the rich" don't necessarily pay the bulk of taxes. People with moderately high to high income do. "Rich" is defined by assets, not income.

Unspent invested wealth (I am sure that yo would point out other than land, and I think that it is a good point) is a benefit to everyone and is not competing with other's money for goods and services. If you define rich as those who consume more then the rich do pay most taxes.

@Liberal
BTW "not as "big" as land ownership "

But in the USA land is still very cheap. Around where I live land is very cheap but if I pave a road to some land price shoots up.

I am very interested in this idea that you presented (taxing only land). I like it but I see problems with it also.

Dean,

Free market fundamentalist behave in a manner analogous to muslim fundamentalists. Muslim fundamentalists seek and readily find support in the mosques just as the free market fundamentalists in the banking industry seek and find support in Congress and in Treasury.

Of course, the free market fundamentalists in government are able to identify their free market fundamentalist cronies in the banking industry much more readily than the unwashed certified public stenographers of the NYT.

Given the culture of greed in the corporate world, it should have been obvious that letting banks underwrite mortgages, COLLECT THE SUBSTANTIAL UNDERWRITING FEES, AND THEN PASS ON THE RISK TO THE SECONDARY MARKET, was going to produce exactly what it did produce: collapse of both housing (because appraisals were unrealistically high to justify these irresponsible loans by exaggerating the equity) and of the banks who bought these mortgages essentially from borrowers who had not been adequately, if at all, vetted. (this is NOT Monday morning quarterbacking, I have questioned that practice for two decades)
Rather than legislate a lot of regulations, the enforcement of which one can never be sure, would it not be simpler and LOGICAL, JUST FOR A CHANGE, to outlaw secondary markets for mortgages.
Let the bank that collects the fees take the risk. That might shrink liquidity for awhile, but tit would also reduce the number of borrowers who don't qualify for a bona fides loan.

What do you say?

@floccina:

The value of land arises from three factors:

1. the natural qualities provided by nature

2. the opportunities and amenities provided by society

3. the services and infrastructure provided by government

Seattle is perhaps superior in terms of #1, but far inferior as for #2 & #3. This is why land prices are much higher in NYC. But note: in the case of #1, #2, or #3, the benefit is internalized by the landowner; this is a privilege that's granted to the landowner by the government, and it ought to come with an obligation to return that value to society. By making land value the primary basis of taxation, you not only are able to reduce taxes on actual production, but simultaneously remove an unjust privilege (subsidy).

Actually, the bailout is consistent with "free market" ideology. The banks followed the logic of the market, which is that some companies lose in the struggle of all-against-all and get bought up by the stronger companies. Thus, monopoly is a tendency of mature capitalism! As an added bonus, the enterprise becomes so large it has influence over the state, hence it gets its people into decision making positions and advocates its interest over that of mere citizens. But the conquest of the state by capital is simultaneously the conquest of capital by the state, a tendency with an obvious anti-democratic end. "Most states have armies. In Prussia, the army has a state." How long before this becomes true of finance capital in this country?
Tom

Actually, the bailout is consistent with "free market" ideology. The banks followed the logic of the market, which is that some companies lose in the struggle of all-against-all and get bought up by the stronger companies. Thus, monopoly is a tendency of mature capitalism! As an added bonus, the enterprise becomes so large it has influence over the state, hence it gets its people into decision making positions and advocates its interest over that of mere citizens. But the conquest of the state by capital is simultaneously the conquest of capital by the state, a tendency with an obvious anti-democratic end. "Most states have armies. In Prussia, the army has a state." How long before this becomes true of finance capital in this country?
Tom

Given the culture of greed in the corporate world, it should have been obvious that letting banks underwrite mortgages, COLLECT THE SUBSTANTIAL UNDERWRITING FEES, AND THEN PASS ON THE RISK TO THE SECONDARY MARKET, was going to produce exactly what it did produce

But one could guess that due to greed on teh part of investors this would not happen.

Actually, the rich paying most of the taxes, a frequent canard needs to be rebutted. In 2009 it is estimated that Social Security (FICA) and Medicare taxes will bring in 898,000,000. FICA is currently capped is a flat rate 7.65% on the employee and 7.65% on the employer, on the first $106,500 of income. Above that you stop paying FICA so the upper middle class and above skate on this tax for all income earned above $106,500. Now the Medicare tax is not capped, but it is a flat rate, from the first dollar earned to the last of 1.45% on the employee and and 1.45% on the employer to the last dollar earned. Only to the extent that the rich have so many more dollars do they pay any more taxes. When you had in the preponderant of state and local taxes, such as sales taxes, use fees, and property taxes, either directly paid or indirectly through rent, etc. then one would say that the relative burden of taxation in the U.S. is regressive, which is to expected since there has been an oligarchy ruling the country, with the exception of a 12 year period from 1933 to 1945, since at least 1876.

Amen, brother.

Furthermore, land is something no human being can do without, and is fundamental to our existence.

floccina wrote, Seattle is a better Natural port than New York harbor and no other natural factor favors NY much but the value of land around New York is higher due human inputs. In your scheme would land around Seattle be taxed higher than around NY?

No, NY would be taxed higher.

Note that the name of the tax is "land value tax."

The tax is on land value, meaning appraised market value.

Rick Kane wrote, Actually, the rich paying most of the taxes, a frequent canard needs to be rebutted.

The #1 reason it's a canard is that the income tax falls on income, whereas "rich" is most properly defined in terms of assets (wealth), not income.

People who work for a living have a tremendously high ratio of income/assets compared to those who clip bond coupons.

"Fractional reserve lending is exclusive to the Federal Reserve shareholders. If I "created" money, loaned it out, and charged interest on it, I'd go to jail."

Banks have been creating money, loaning it out and charging interest on it LONG BEFORE the Federal Reserve came along. They do so because they are seeking to make profits and are doing so by meaning consumer demands for loans.

There are three big problems with these "Austrian" notions on fractional reserves being the root of all evil:

1. It relies on equilibrium concepts which "Austrian" economics rejects out-of-hand elsewhere in its analysis of capitalism.

2. It assumes that it is possible for capitalist banks not to act like, well, capitalists. That seems unlikely, unless there is substantial regulation to prevent it (something "Austrian" economics dismisses out-of-hand for every other industry).

3. The "Austrians" LOST the theoretical battles of the 1930s. First Sraffa, then Kaldor (twice!) destroyed von Hayek's theory.

Yes, credit expansion can make a crisis worse -- but credit expansion and the crisis have their roots in capitalism as a system.

I would suggest you read up on Minsky's ideas -- Steve Keen has a good article on Minsky (google Steve Keen Minsky)

Rick Kane wrote:

In 2009 it is estimated that Social Security (FICA) and Medicare taxes will bring in 898,000,000. FICA is currently capped is a flat rate 7.65% on the employee and 7.65% on the employer, on the first $106,500 of income. Above that you stop paying FICA so the upper middle class and above skate on this tax for all income earned above $106,500. Now the Medicare tax is not capped, but it is a flat rate, from the first dollar earned to the last of 1.45% on the employee and and 1.45% on the employer to the last dollar earned. Only to the extent that the rich have so many more dollars do they pay any more taxes.

SS is either a welfare program or a forced retirement program. If it is a welfare program it should not pay more to those who made more money in their work lives than to those who paid less, the cap should be removed etc. If it is not a welfare program but a retirement program then it should not be considered part of the tax burden any more than my IRA contributions are considered a tax burden.

I am strongly in favor of welfarizing SS and Medicare and elimination of the taxes FICA and Medicare taxes. They should be paid out of general revenues and everyone should get the same amount on their SS check. But that is not the system that we have.

Now I agree with you on local taxes which are pushed up on the poor through sin taxes and the tax on stupidity which are the state lotteries all of which our poor people loving democrats in local government love and push.

Never the less the bailouts will be paid for by the income and corporate taxes the great bulk of which are paid buy the rich.

@liberal

It had to be income at one time. Now if you are talking about capital gains I agree and capital gains should be taxed as income but indexed by inflation.

In this country one can get rich with a moderate income by saving a lot.

floccina wrote, It had to be income at one time. Now if you are talking about capital gains I agree and capital gains should be taxed as income but indexed by inflation.

So what if it had to be income at one time?

For example, increase in land values is very lightly taxed. That increase underlies a huge amount of the wealth of the extremely rich.

The main point is that taxation, particularly progressive taxation, is partly based on the general tax principle of "ability to pay." Clearly wealth, not income, is the proper measure of ability to pay.

Taxing income rather than wealth is just a ruse to tax people who work for a living and avoid taxing the truly rich.

Anarcho wrote, Banks have been creating money, loaning it out and charging interest on it LONG BEFORE the Federal Reserve came along. They do so because they are seeking to make profits and are doing so by meaning consumer demands for loans.

So? People were stealing long before the first systems of law were created. That doesn't mean stealing is OK.

The point isn't that the Austrian theoretical edifice is valid. Stopped clocks being correct twice a day, and all that. The point is that fractional reserve banking is a gross violation of fairness because it entails an implicit gift from the government---i.e., the citizenry---to the banks.

floccina wrote, If it is not a welfare program but a retirement program then it should not be considered part of the tax burden any more than my IRA contributions are considered a tax burden.

That's correct, except that (a) you have a "property interest" in your IRA, so the government cannot take it away from you tomorrow, unlike SS where all the government has to do is change statute, and (b) the implicit return on SS contributions is small because those contributing to the SS system are paying off the so-called "implicit debt" (the fact that initial recipients got huge returns, which is tied in with the fact that it's not entirely prefunded).

@liberal I agree as far as land goes because land is often held in a non productive state but other capital's value comes from its ability to generate income and in generating income it helps everyone not just the owner's. Therefore it is good to encourage capital formation especially of those who do not spend. A guy once said the military and police courts should be funded through property tax and everything else through a sales tax. That seems right to me.

floccina wrote, I agree as far as land goes because land is often held in a non productive state but other capital's value comes from its ability to generate income and in generating income it helps everyone not just the owner's.

It's not just that land is often held in a nonproductive state (which it sometimes is, in order to reap a capital gain). It's that the landowner, in the role of landowner, contributes nothing to production.

Why? Because the land is there already; the landowner didn't produce it.

For things like mineral wealth, it's obviously true.

And it's true for valuable urban locations (e.g., places in Manhatten). The community as a whole creates the land value (via demand for sites that are better situated), but the landowner has nothing to do with this.

Capital (which includes improvements of land, particularly buildings) is another matter entirely.

Taxing land is both efficient and fair. Efficient, because increasing the tax on land value won't create disincentives, because the landowner isn't creating the land. Fair, because the landowner didn't contribute the land.

With capital and labor, it's both inefficient and not so fair.

(There are other examples beyond landowning, in particular anything involving an "economic rent", including e.g. electromagnetic spectrum and other natural resources, but also government granted monopolies like copyright and patent.)

A guy once said the military and police courts should be funded through property tax and everything elsethrough a sales tax.

Yes and no.

The portion of property tax falling on improvements (e.g. buildings) isn't efficient and fair in the same way land value taxation is. And sales tax is just a way to tax the working poor.

Beyond taxing economic rents as much as possible, taxing wealth is reasonable. It passes both the "ability to pay" and "beneficiary pay" principle. (Beneficiary, because without government, those massive fortuntes would vanish rather quickly.)

"The point isn't that the Austrian theoretical edifice is valid. Stopped clocks being correct twice a day, and all that."

If you are trying to explain why the current crisis has happened and how to stop it happening again, it is useful to understand how it happened.

Demonising fractional reserve banking fails to understand, firstly, how a modern credit/money economy works; secondly, ignores the underlying sources of the problem in the exploitation of labour by capital.

Credit expansion is a symptom of this root cause, inherent in capitalism.

"The point is that fractional reserve banking is a gross violation of fairness because it entails an implicit gift from the government---i.e., the citizenry---to the banks."

The point is that fractional reserve banking has evolved to meet the needs of the economy, trying to abolish it would not work and would quickly destroy the economy. Attempts by Thatcher and Reagan (inspired by Monetarism) to control the money supply failed, simply because the money supply, credit, is endogenous in nature. Trying to control that will fail, and as the early 1980s shows, will also harm the economy.

There are options of course, such as turn banks into mutuals (co-operatives or credit unions) and abolish the stock market along with wage labour, for example, or abolish money.

However, to direct your fire to just an aspect of banking fails to get to the root of the problem and, ultimately, make much, much worse if outlawing credit expansion were tried...

better to get rid of capitalism and try libertarian socialism.

The simplest and most straightforward argument agaist Austrian, or Monetary school of economics, in my opinion, is simply "human behavior."

Any system of economic thought that completely ignores how the participants of the economy behave (AG & AD) is quite preposterous and shouldn't even be considered a serious school of thought.