Our financial system is crumbling this week.

[Leroy]

Ok, let me try this another way on the Buffet angle. He is paying 15% on capital gains, and I have no idea if he has other income or not.

So let's say I'm Warren Buffet and invest whatever in Bank of America or whatever. Where did that money come from? Either it was built under a higher capital gains rate or he earned it and paid taxes on that. Or he inherited it, which is possible. I'm not asking to make a point, just asking to understand the argument. And I have said that I want high income earners to pay higher tax.

The other thing that I'm curious about is the loopholes for millionaires and billionaires. Could someone tell me what they are? The only one I can think of is depreciation, which in my mind is a legitimate expense. Don't give me the mortgage deduction because unless I'm wrong anybody that makes a million a year doesn't get it. I've never done a return for someone that makes that much but most deductions are phased out at certain levels.

[cpebbles]

Capital gains is on gains, not in the money he invests. He has capital to invest to make money. I and most of the rest of the workforce have training to use to make money. The only reason to tax him lower is if you honestly believe that businessmen will protest against taxation by not making sound investments. Obviously it's not corporate taxes driving jobs out of America, it's the availability of exploitable workforces.

[cpebbles]

The other thing that I'm curious about is the loopholes for millionaires and billionaires. Could someone tell me what they are? The only one I can think of is depreciation, which in my mind is a legitimate expense. Don't give me the mortgage deduction because unless I'm wrong anybody that makes a million a year doesn't get it. I've never done a return for someone that makes that much but most deductions are phased out at certain levels.

The carried interest loophole. Basically, hedge fund managers get to have their salaries paid at the capital gains tax rate. Considering the highest-paid manager made $4.9 billion last year, that's a pretty big deal. It makes zero sense even if you buy into the reason for low capital gains taxes, but the GOP won't budge on closing the loophole.

BTW, Dodd-Frank closed the bigger loophole, where executives were paid the deferred compensation that makes up most of their pay out of tax haven locales. That's a big part of why the GOP has been agitating to overturn it.

[docellis]

I hate everything.

[Freed Roger]

Ok, let me try this another way on the Buffet angle. He is paying 15% on capital gains, and I have no idea if he has other income or not.

So let's say I'm Warren Buffet and invest whatever in Bank of America or whatever. Where did that money come from? Either it was built under a higher capital gains rate or he earned it and paid taxes on that. Or he inherited it, which is possible. I'm not asking to make a point, just asking to understand the argument. And I have said that I want high income earners to pay higher tax.

.

A typical person who makes a wage, is taxed on that wage and spends almost every penny of his/her net, which is taxed as well.

A person who inherits money -a sizeable portion comes free of tax via gifting or wills then can invest that money and has plenty of income to live on. That money can be in tax free investments (munis) or in tax favoreds such as long term capital gains or qualified dividend income.

Sure, this person pays tax on consumption, but the bulk of this persoon's money sits untaxed as opposed to the average person that gets taxed on 100% of wages and the bulk of their spending that they need to make to survive.

So the person who never works a day in their life and just inherits money and invests it is rewarded. The person who works is not.

an economist may call this scenario the marginal utility of the dollar. Thus it makes sense to tax peoples inheritances, and tax peoples property and money they sit on, instead of rewarding them for their trickling down on the rest of us.

[slide_into_first]

If the stock market continues to go down, eventually gold mining stocks will stop acting like gold and start acting like stocks. Something is wrong with Tower Hill Mines THM- it looks like a top is forming- compare its chart to Keegan Resources KGN, especially on a down week- KGN went up, THM went down.

[longhornbaseball]

This is a good article on the real debt crisis.

http://www.marketwatch.com/story/massiv ... genumber=1

[SHOW]

You want to fix this economic crisis? You want to put people back to work? You want to light a fire under the economy?

There’s a way to do it. Fast. And relatively simple.

But you’re not going to like it. You’re not going to like it at all.

Default. A national Chapter 11 bankruptcy.

The fastest way to fix this mess is to see tens of millions of homeowners default on their mortgages and other debts, and millions more file for bankruptcy.

I told you that you wouldn’t like it.

I don’t like it much either. It sticks in the craw that people got to borrow all that money and won’t have to pay it back.

But you know what? The time to stop that was five or 10 years ago, when the money was being lent.

It’s gone.

And mass Chapter 11 is, by far, the least obnoxious solution to our problems.

That’s because the real cause of our economic slump isn’t too much government or too little government. It isn’t red tape, high taxes, low taxes, the growing divide between the rich and the poor, too much government debt, too little government debt, corporations, poor people, “greed,” “socialism,” China, Greece, or the legalization of gay marriage. It isn’t, in short, any of the things all the various nitwits say it is.

It’s the debt, stupid.

We’re hocked up to the eyeballs, and then some. We’re at the bottom of a lake of debt, lashed to an anchor. American households today owe $13.3 trillion. That has quadrupled in a generation. It has doubled just in the last 11 years. We owe more than any other nation, ever. And for all the yakking about how people are “repairing their balance sheets,” they’re not. From the peak, four years ago, they’ve cut their debts by a grand total of 4%.

And a lot of that was in write-offs.

More than a quarter of American mortgages are underwater. Many are deeply underwater. In states like Nevada and Florida the figures are astronomical.

The key thing to understand is that most of that money has gone to what a fund manager friend of mine calls “money heaven.” Most of these debts will never, ever be repaid in real money. Not gonna happen.

Think how corporations handle this kind of situation.

It happens all the time. Banks and bondholders find they have lent, say, $1 billion to a company whose assets and earning capacity will only repay, say, $300 million. What happens? Does the company soldier on with $1 billion in debt it can never repay? Do the stockholders send back their dividend checks? Do they sell their homes to pay off the bonds?

Not a chance. The company goes through Chapter 11. The creditors ‘fess up to their blunder, they face up to their losses, and they fix it. They write down the loans and take the equity instead. The balance sheet is cleaned up, and the company starts again.

Why not homeowners?

Most of the objections to this idea are well-meant, but misinformed.

A fund manager I asked raised the issue of “moral hazard.” Why should anyone pay their mortgage if some people were getting a pass, he asked?

The answer: For the same reason GE and Verizon kept paying the coupon on their bonds while Lehman Brothers defaulted. You want to keep your credit standing. And you want to keep your equity.

If a company defaults, the stockholders get wiped out. If a homeowner defaults, the bank takes the home. I like keeping my home, as well as my savings, and my credit rating. Most people are the same.

Some will say the financial impact would be terrible. But the banks would just be facing up to reality. And a lot of these mortgages are already trading at distressed levels.

Some will say, “why should people get away with borrowing imprudently?” The response: Why should the banks get away with lending imprudently?

There’s no point telling people not to borrow money. They always will. I have yet to see a Wall Street executive turn down free money. I have yet to see a company in an IPO say, “Don’t give us so much money!” People like money. They will take as much as they are offered.

In a free economy, the people who are supposed to ration the loans are the lenders. Banks are supposed to lend carefully and responsibly. What else are they paid for? Accepting deposits? You could hire people on minimum wage to do that.

Some will say, “it’s immoral” for borrowers to default. Alas, most of these people are being inconsistent. They are usually the first ones to defend a company when it closes down a factory and ships the jobs to China, or pays the CEO $50 million for doing a bad job, on the grounds that “this ain’t morality, pal, this is business!”

But when Main Street wants to do the same thing, they start screaming “Morality! Morality!”

We don’t live in an economy based on morals and fairness.

T Mobile doesn’t charge me what’s “fair” each month. They charge me what’s on the contract. Your employer doesn’t pay you more if you need more. He pays you your economic value. Did Dick Grasso give back his bonus? Bob Nardelli? Dick Fuld? We operate in an economy based very firmly on contracts, and nothing else. Companies, and the wealthy, live by the letter of the law.

American mortgage contracts allow for default. Half of the states in this country are “non-recourse,” which broadly speaking means you can send in the keys and walk away from a bad loan. The other half are sort of “semi-recourse.” The bank can come after you for any shortfall, but only in a limited way. Broadly speaking they can’t touch retirement accounts and basic assets. You can typically keep your car, personal effects, often things like life insurance.

Most of the people who are deeply underwater don’t have that much anyway.

And the banks knew this. When they were lending $500,000 to a bus driver with $1,000 in his checking account, they knew that their loan was only guaranteed by the value of the home.

If they didn’t know it, they should have. Their incompetence is not our problem.

It’s tempting to say, “if someone borrows money, they should repay it.” Generally speaking, I agree. I pay all my debts. But while that makes sense when applied to any individual, it doesn’t work so well when it’s applied to everyone.

We have tens of millions who cannot repay their debts. But they are all trying to. That sucks huge amounts of money out of the economy. And that means these people cannot function properly as consumers or workers. That’s the reason people aren’t coming into your restaurant. It’s the reason people aren’t taking your yoga class. It’s the reason they haven’t hired you to redo the kitchen.

And so tens or hundreds of millions of perfectly responsible business owners and employees are also suffering from this slump. That’s the reason we have a shortage of demand. That’s the reason no one is hiring.

Even worse: People who are underwater on their mortgage, but who do not want to default, cannot move to where the jobs are either. They are stuck with their home.

You want to break this logjam? Try Chapter 11 for the nation. Massive defaults. Clear the decks, clean the books.

What are the alternatives?

Government cutbacks, higher taxes, and a balanced budget? In a normal economy, fine. But in this situation, when the private sector is also slashing its spending, that could lead to absolute catastrophe. That’s what happened in the Great Depression. And our debt levels are worse than in the Great Depression.

Government borrowing? That’s the Keynesian solution. “The consumer can no longer borrow like a crazy person,” says the Keynesian, “so Uncle Sam has to do so instead.” It’s just transferring private madness to public madness.

Inflation? That’s probably the least bad alternative. But it’s just default by another name. And instead of taking money from the imprudent banks that caused the problem, it robs grandma’s savings.

Twice before, advanced economies have gone through what we are going through now — namely a massive hangover after a massive debt binge.

The first was the U.S. in the 1930s, the second was Japan in the 1990s.

The U.S. didn’t get out of it until the 1940s unleashed inflation and reduced the debt’s value in real terms.

Japan still hasn’t gotten out of it. They have deflation, while government debt has skyrocketed.

The correct moral hazard is to punish the banks who lent imprudently by making them eat their own losses.

I told you that you wouldn’t like it. I don’t either. But the alternatives are worse.

[Joe Shlabotnik]

This is a good article on the real debt crisis.

Bingo.

[cpebbles]

The problem with that strategy being that it would just trigger another round of bailouts, and the executives who went to D.C. begging for it would reward themselves for saving their companies by diving into a swimming pool full of taxpayer money.

[vinsanity]

The other thing that I'm curious about is the loopholes for millionaires and billionaires. Could someone tell me what they are?

There's a couple I tend to hear about.

Capping payroll taxes at $106k. Someone who makes $300k pays a lower effective rate than someone who makes $250k because their payroll taxes are capped. I'm not sure where the tipping point is, but if you do make millionsin income, you're effective rate is lower than people in tax brackets lower than you.

Mortgage Interest Deduction. There's some argument for keeping it around, but I've heard capping it or removing the second mortgage deduction kicked around. Why does interest on your vacation home need to be deductible? This also works for anything with a bathroom and kitchen that could be used as a domicile. $10M Yacht instead of a second home? Interest is deductible.

If I recall correctly, there are 'qualified' dividends that are taxed as regular income. But if you have no income, those dividends can be paid out tax free.

And with such low capital gains taxes, a lot of these big CEO's and Hedge Fund managers are being paid in stock or having their gains tied to stocks so their income isn't income it's capital gains. Also, my understanding is that they can borrow against their brokerage accounts, essentially leveraging their investments instead of selling off stock so it's not income or capital gains.