Tax iVoidance

Said Cook, to the Senate's seniority:

"Though gadgets remain our priority,

While profiting scads

From iPhones and -Pads,  

We skirt every taxing authority."

Non-Negotiable

Said Obama: "I think that it's lowdown
To set up a Debt Ceiling showdown.
Though the House GOP
May well disagree,
It's a road I intend not to go down."

Battle lines have been drawn over the increase in the federal debt limit, which must happen by March to avoid a government shutdown and likely default.  President Barack Obama gave a press conference yesterday in which he pledged not to negotiate with the House GOP over the debt ceiling increase, saying that such crisis-fueled, eleventh-hour bargaining is no way to run the government.  The crux of the President's argument is that the Congress cannot refuse to incur the debts for the spending it has already approved; he likened it to beginning a diet by walking out on the rich meal you've just had, without paying the check. 

For their part, Republicans clearly intend to use any available leverage to force a reduction in federal outlays, regardless of default risk: House Speaker John Boehner, while acknowledging the economic harm that would come from a default, said: "The American people do not support raising the debt ceiling without reducing government spending at the same time."

However, the Washington Post's Greg Sargent thinks the Senate Democrats may hold the trump card: if the House passes a bill with both a debt ceiling increase along with big Medicare and Social Security cuts, the Senate could simply amend the bill by stripping out the cuts, and send it back.  Sargent believes that the Senate GOP is more politically realistic, and would not filibuster the amendment.

Bottom line: at this point, it's too soon to say that America has passed the era of banana republic politics.

Kicking The Can Down The Cliff

Under watchful regard of a nation
In Twenty-Thirteen celebration,
Congressional members
Took leave of December
By rigging the rules of taxation.

With many a jubilant *clink*,
The deficit promised to shrink,
But much is depending
On questions of spending,
And soon we'll be back at the brink.

The prospects are less than appealing
For the next round of Washington dealing,
Especially if
There's a new Fiscal Cliff
When Treasury hits the Debt Ceiling.

As everyone knows, the US Congress passed an emergency measure on New Year's Day to avert the worst of the automatic tax hikes that were to take effect under the "Fiscal Cliff" provisions that it enacted after last year's debt ceiling fight. For those who want to know what the latest tax deal means for them personally, Matthew O'Brien has a couple of helpful charts in The Atlantic. The bottom line is that, while everyone's tax rates and payments are now less than they would have been under the full Fiscal Cliff, most Americans will see another 1.5% of their income going to taxes, and the well-to-do will feel 3-8% poorer. Ironically, some of the most fortunate taxpayers are those whose income is between $200-500 thousand. They have mostly avoided marginal tax rate increases, which apply to income above $400,000 ($450,000 for joint filers) and will not pay more in alternative minimum tax, which has been permanently "patched".

Those who may have worried that a bipartisan agreement on taxation signals a change in the ways of Washington will be reassured to know that the deal has preserved an impressive array of obscure tax breaks for special interests, as the New York Times reports.

However... the thornier questions of cutting expenditurses (or at least, reducing their long-term growth) have been pushed off by a month, as has the always-explosive question of raising the Federal debt ceiling. Another high-stakes political standoff is therefore guaranteed, which means that the celebrated tax deal is actually not much to celebrate.

Lesson of the Year

In 2012 I concluded
That my vote for the House is deluded,
Since the shape of my district
Regrettably IS tricked
To keep the opponent excluded.

As we count down the hours of 2012 with no deal reached in Washington on the basic questions of government revenues and expenditures, many wonder how it is possible for the Congress to remain so deadlocked in the face of a clear electoral outcome for the nation as a whole. The answer is, in part, that members of the House of Representatives do not answer to the nation as a whole, or even to the whole of their own districts. Rather, because most Congressional districts are gerrymandered to ensure the continued representation of the incumbent party, the typical house member feels most beholden to the extreme elements in that party who participate most intensely in the primary election.

In 2013, we must resolve to undo this gerrymandering, as a first step toward truly representative government.

Overheard at the White House Last Weekend

"Mr. Speaker, I surely desire
That the deadline will not just expire,
But I get my way if
We fall off the cliff
And rates on the rich revert higher."

In the continuing effort to reach a long-term deal to restrain Federal budget deficits and avoid the looming fiscal cliff, President Barack Obama and House Speaker John Boehner met at the White House this past weekend. At the same time, pundits on the Sunday morning talk shows pointed out the President's negotiating advantage: Although the fiscal cliff represents a package of tax hikes and spending cuts that supposedly nobody wants, the Republicans want them less then he does. That's because the reversion to the higher marginal tax rates paid by the rich during the Clinton administration, against which Congressional Republicans have attempted to hold the line, will happen automatically if no deal is reached. This dawning realization may portend a higher likelihood of both a dive over the "cliff" and a resolution more to the President's liking.

It's Beginning to Look A Lot Like...

It's beginning to look a lot like Cliffmas
Evvvv'rywhere you go.
They're intractable on the Hill,
The President's stronger still,
He's setting his toboggan in the snoooww...

It's beginning to look a lot like Cliffmas;
Soon the bells will chime,
And the posturing will be worst
On January First,
When we're ouuut o-o-of tiiime.

The President and his Republican Congressional opposition continue to sing from different hymnals on the major issues of taxation, while trying to reach a long-term deficit reduction deal that will avoid the "Fiscal Cliff." On a related note (see what I did there?), Matt Miller hypothesizes an Endless Cliff in the Washington Post:

It seems almost certain that any new deal that is struck, either before January 1 or some time afterwards, will involve some minor near-term “action” or “down payment” combined with the creation of a new fiscal cliff of unpleasant consequences to be triggered sometime in 2013 if a broader deal on tax and entitlement reform is not reached.

This, because a divided Washington needs “a forcing device” to instigate action.

But what will have changed later in 2013 to produce a different outcome? Arguably nothing. And so we have the prospect of another deal with illusory progress later in 2013, along with the creation of the next forcing device. Which eventually forces the next sham deal and the creation of the next forcing device.

It's beginning to look a lot like only a major political disruption - such as Congressional district un-gerrymandering, a Democratic sweep of the next midterm elections, or the complete removal of money from politics - could stand in the way the Endless Cliff Hypothesis becoming reality.

(Embedded music track powered by mp3skull.com)

No Cliffhanger

A pundit, politically touting,
The conventional wisdom was flouting,
When he roundly dismissed
The Fiscal Abyss
As "Over, except for the shouting."

The Business Insider's Joe Weisenthal declares that today's stock market is in the throes of a "Morning Money Ben rally." That's because Politico's Ben White has made the gutsy call that the fiscal cliff is already over. Swimming against the current of mainstream media coverage of this supposed January 1 cliffhanger, Mr. White points out the essential difference between the political situation today and that which prevailed during the Debt Ceiling debacle:

Nearly every signal from Republicans suggests they understand they have lost the war over taxes going up on the wealthiest Americans and are just trying to figure out how to get the least objectionable deal that includes real spending cuts and a trigger for tax and entitlement reform. It’s clear from polling that the GOP will get the blame if taxes go up on everyone on Jan. 1 and any subsequent damage to the economy and markets will fall squarely at the party’s feet. Republicans are no longer ignoring such polls.

In a somber counterpoint to Mr. White's analysis, Mr. Weisenthal reminds us that the greater political difficulty for President Obama this time may lie on his own Democratic side, in getting Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi to play ball in the field of Social Security and Medicare cutbacks.

Rhyme & Reason on the Fiscal Cliff

If rational ladies and chaps
In Congress agree to put caps
On deductions from taxes,
Then revenue waxes,
With deficits waning, perhaps.

But merely increasing the revenue,
For sustainable budgets, would never do.
Our care for the aged
Must now be re-gauged,
If balance long-term we endeavor to.

To establish a little more surety
For Medicare and Social Security,
We must compensate
For our slowing death rate
By raising the age of maturity.

The Congress may not be remiss
In horsetrading that against this,
For to hope there is reason
That Washington's seizin'
Escape from the Fiscal Abyss.

Over the weekend, Dr. Goose was seized by optimism when he read Greg Mankiw's latest blog post regarding the resolution of the fiscal cliff. In a post entitled "How To Raise Tax Revenue From The Rich Without Increasing Tax Rates," Prof. Mankiw writes:

According to the Tax Policy Center, if we cap itemized deductions at $50,000 and keep tax rates as they are today, we would raise $749 billion in tax revenue over ten years. Moreover, according to the TPC's distribution table, 96.2 percent of the extra revenue would come from the top quintile, with 79.9 percent from the top one percent.

This elegantly simple modification to the tax code, which was also floated by Mitt Romney during his presidential campaign, could be the core of a compromise on the federal budget. The quid pro quo would be a reduction in the growth rate of spending by "gradually but significantly increasing the age of eligibility for Medicare and Social Security." Of course, there's more to it than this, and the devil, as always, is in the details, but it does give one hope to see a simple framework on which reasonable people can come together.

In a related point, I like the term "austerity bomb" as a more descriptive alternative to "fiscal cliff" for describing what will happen if no budget deal is reached.

Post-Election Analysis

The super PACs failed in their mission
To win with financial munition.
Though pols who would carry
Find cash necessary,
It's not a sufficient condition.
* * *
The House GOP had consistently
Obstructed Obama insistently,
But now they're at pains,
Having garnered no gains,
To avoid going cliff-diving fiscally.
* * *
The nation would like to see whether
The parties can now work together
To right our finances,
Or what are the chances
That partisanship rules as ever?

The results of the 2012 US elections have provided rich fodder on which political junkies of all stripes may chew. The New York Times reported this morning that wealthy sponsors of conservative super PACs got no return on the investments that they made in such vehicles as "American Crossroads." Co-founded by Karl Rove, this super PAC, along with the affiliated "Restore our Future," collected about $300 million, seemingly for naught. Haley Barbour, the former Mississippi governor and Republican party chairman who helped raise money for the two groups, consoled himself that their spending helped keep the race as close as it was.

House Republicans seem to be chewing a little more thoughtfully these days, as evidenced by their newly cooperative rhetorical stance with regard to the "fiscal cliff." Speaker John Boehner struck the new tone in remarks at the Capitol: "Mr. President, this is your moment. We’re ready to be led — not as Democrats or Republicans, but as Americans. We want you to lead, not as a liberal or a conservative, but as president of the United States of America." Of course, many have already predicted such conciliatory talk, followed by a reversion to partisanship, so we must be cautious in our expectations.

Republicans in the News

The Scottish historian Niall
Said Obama had lost his appiall.
This caused a brouhaha
With Dems who said: "Ah ha!
The figures you cite are not riall."

Senatorial candidate Akin
Found his cervical knowledge mistaken.
"We must shut this thing down,"
Said Rove, "or he'll bring down
Our chance for a Senate retakin'."

"Obamacare's taking from Medicare,"
Said Ryan, "Which brings you unsteady care."
He hopes, in all fairness,
The public will care less
For ACA than they already care.

Sermon on the Fiscal Mount

In Congress, there's no more finessing this:
Our budget is bound for the precipice.
The free ride is ending
(Low taxes, high spending),
Though Washington's slow in addressing this.

With the US in fiscal distress so,
We could levy more from the noblesse, though
The mean millionaire
Pays more than their share,
(If billionaires still somewhat less so).

Some say for the deficit's end,
We must simply rein in what we spend,
Though cutting back solely
Would undermine wholly
The programs on which most depend.

It's time for the US community
To realize that none have immunity;
To fix our finances,
The most likely chance is:
In sacrifice, we may find unity.

The preceding limerick homily, in this summer of the Fiscal Cliff, was inspired by David Wessel's column in The Wall Street Journal, in which he points out that there are no easy, scientific solutions to the question of "tax fairness," and by extension, deficit reduction. Mr. Wessel's figures demonstrate that, while taxes on the rich have come down over the last 30 years, so have those on everyone else. Somewhat sparingly, he does mention that the super-rich - the 0.1%, the Forbes 400 - do pay less than the "merely" rich because of their reliance on income from dividends and capital gains, which are taxed at only 15%. The aforementioned inequity notwithstanding, it appears insufficient to look for deficit reduction only by "asking the rich to pay their fair share," as it does only by "cutting out-of-control spending." In other words, we can't solve our fiscal problems only by asking the other person to take the hit.

Hat tip to Barry Ritholtz for highlighting the key facts of Mr. Wessel's column.

Fed Chairman's Senate Testimony

Said Bernanke, in Congress to testify,
To the Senators: "Gents, it is best if I
Admonish this hearing
The fiscal cliff's nearing
Which brinksmanship must be arrested by."

Federal Reserve Chairman Ben Bernanke gave his semiannual testimony to the Senate Banking Committee yesterday, and painted a bleak picture of the economy's prospects. Among the familiar litany of economic ills are high unemployment, a weak housing market due to tight credit standards and poor creditworthiness, and a slow business investment outlook. Unfortunately, it appears that the additional tools at the disposal of the Fed are limited in scope and liable to cause unwanted side effects. The Chairman reminded the senators that another economic danger - the so-called "fiscal cliff" of expiring tax cuts and automatic federal spending reductions set for January - is outside of the Fed's purview and squarely in the hands of his Congressional interrogators. Alarmingly, they as yet show no signs of applying the brakes before the sputtering recovery is driven over the precipice.

No Pain - Or Gain

While bankers are prone to complain
That hedging is hard to explain,
It's fairly alleged
That you aren't really hedged
If you're also expecting a gain.

One of the many talking points employed by JPMorgan Chase CEO Jamie Dimon in his closely watched Senate testimony this week was that "this particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis. I consider that a hedge; what it morphed into, I will not try to defend." The Chief Investment Office's loss - $2 billion and rising - on its London Whale position was simply well-intentioned risk management gone bad. In this, Mr. Dimon deliberately muddied the waters and his senatorial inquisitors failed to impose any clarity on the discussion. Anytime you say "I expect this position to make a profit if X happens," you are making a bet, not a hedge. The fact that market turmoil is expected to trigger the profits does not remove it from the realm of speculation. The only one who is truly hedged is the one who can say: "My results are locked in regardless of what the market does."

Dimon's Congressional Testimony

A high-ranking finance professional
Who was called to a hearing Congressional
To give his account
Of a massive amount
That was lost, made a searing confessional:

"My Office of Risk Diminution
Found a newfangled hedging solution,
Which no one construed
Nor checked, nor reviewed,
Nor subjected to sound execution."

"But in spite of my solemn admission
(Which I make with humblest contrition)
That we bungled our bets -
We are hiring vets
And expanding our lending position."

"So before you propose regulation
To limit our trade fluctuation,
No federal commission
Could outmatch our mission
To aid the American nation."

J.P. Morgan Chase CEO Jamie Dimon has been called to testify before the U.S. Senate Committee on Banking, Housing and Urban Affairs, to answer for the infamous and still-growing loss from derivative positions in the bank's Chief Investment Office. For those of you too busy to review the full text of the CEO's prepared testimony, I humbly offer the foregoing summary in verse. The rest of you may draw some insightfully ironic enjoyment from Mr. Dimon's deft attempt to deflect criticism of the bank's errors and omissions, and to convince the Senators that the bank is its own best overseer.

JOBS Act

When streamlining stock regulation
With the goal of employment creation,
The access to mammon
May jumpstart the scammin'
By persons of low reputation.

Washington has descended to the point where, if you see bipartisan agreement on any economic issue, you have to suspect the worst. Such is the case with the so-called JOBS Act (Jumpstart Our Business Startups). In her Bloomberg column, Susan Antilla writes: "Though the JOBS Act was packaged as a plan to streamline rules to help small companies crank out jobs, even its cheerleaders have come up with scant evidence the law will boost employment much, if at all. In an election year when pragmatic politicians are laboring to come off as allies of deep-pocketed business donors, the JOBS Act is a slapdash attempt at securities-law deregulation, plain and simple."

Remember the ZZZZ Best carpet-cleaning company, one of the most notorious investment frauds of the '80's? One of the perpetrators of that fraud says: “I wish legislators would consult with people like me before they write something like this. I could tell them, ‘I know what your intent was with this wording, but we can get around it so easily, it cracks me up.”’ Mark Morze, a self-described reformed scammer who now lectures on how to guard against people like himself, gives his expert opinion that the JOBS Act has real potential for abuse.

Hat tip to Jordan Terry a.k.a. @The_Analyst.

That January Deadline

An economist whispered: "I fear
That the time for can-kicking draws near;
For tax cuts on income
And payroll (and then some)
Expire the first of the year."

Alan Blinder must hope that Congress doesn't want to "shoot the messenger." The Princeton economist and former Vice Chairman of the Federal Reserve reminds them and us that, in January 2013, deadlines loom for:

• the expiration of

the Bush tax cuts

the 2% payroll tax cuts

extended unemployment benefits

and

• the imposition of automatic spending cuts from the failed deficit reduction super committee.

Taken together, these falling cans - if not adroitly kicked further - would take 3.5% from America's GDP at one stroke. Time for those Congressional punters to start warming up...

Little Interest in Saving

Said Bernanke, waxing inventive
On another recession preventive:
"Though our savings must grow,
I'm keeping rates low,
So look for another incentive."

Federal Reserve Chairman Ben Bernanke is making life very easy for Jerry Stiller.  Mr. Stiller (pictured) is the lovable alte kocker who, as spokesman for Capital One Bank, brays happily that his client pays checking account interest "up to five times the national average."  Mr. Bernanke, testifying before the House Budget Committee on Thursday, noted that the fragile state of the US economic recovery dictates that the Fed hold rates to near zero through the end of 2014.  Corroborating the Chairman's testimony, the Capital One website promises to quintuple Dr. Goose's locally average checking account rates to a winning 1.00%. For the foreseeable future, it all adds up to little interest in saving.

State of the Union: Commando-In-Chief

"Though obstructionists threaten to ruin it,
Those who know what they say don't impugn it:
When I sound the attack,
Our economy's back
Like the Navy SEAL Bin Laden unit."

US Pres. Barack Obama, seeking to tie his military successes to hopeful signs in the economy, gave his economic-themed State of the Union address a military motif. The speech began with a salute to returning Iraqi war veterans, and ended with a tribute to the amazing teamwork of the Navy seal unit that killed Osama bin Laden. These twin martial references helped the president emphasize two key points: first, that there is much on which the President and Congress can work together as a team for the good of the American people; second, that there is much that I, as Commander-in-Chief, can order without you.

Corzine's Congressional Testimony

"A billion-point-two, evidently,
Has failed to be found, accidentally;
Though we foundered, it's true,
When our funding withdrew,
Our finances were fine, fundamentally."

Ex-MF Global CEO Jon Corzine told the House Agriculture Committee that he was "devastated by the enormous impact on many people's lives" when the giant futures broker went bankrupt. In his first public appearance since the firm's collapse, Mr. Corzine expressed regret but not remorse. MF Global's failure was, in his view, precipitated not by his misjudgment in holding a $6.3 billion leveraged position in European bonds, but rather the market's sudden lack of confidence in in the firm's balance sheet. Regarding the notoriously missing $1.2 billion in MF Global customers' funds, Mr. Corzine testified: "I simply do not know where the money is."

Not-So-Supercommittee

A supercommittee that tried
To conquer the party divide,
When it ground to a halt,
Found the other one's fault
Was the one thing that each could decide.

With a Monday deadline looming, the Congressional deficit-reduction supercommittee found itself unable to bridge the divide between the Republican and Democratic positions. Having apparently failed in their task of reducing the US federal deficit by $1.2 trillion over 10 years, there was nothing left for committee members to do but succeed at the "blame game." As a consequence, a "sequestration" process will be invoked, under which $1.2 trillion of automatic, across-the-board spending cuts will hit everything from defense to social programs. Is this perhaps the secret wish of the supercommittee members?