Financial Baseball

While discussing synthetic CDOs one of my colleges suggested that they reminded him of fantasy baseball.  He said that creating synthetic CDOs is like creating a virtual baseball team, and that betting on this virtual team is like writing credit default swaps on synthetic CDOs.

I liked the analogy and thought it might be helpful in explaining some of the details of the sub-prime mortgage crisis.

Applying this analogy to credit rating agencies who gave AAA ratings to crappy securities is like creating a fantasy baseball team that is rated to be as talented as the Yankees but is actually made of mostly minor league players.

Bailout for the rest of us

I was amused to hear that even the porn kings are asking for a bailout, if only in jest.  I’ve gotten a lot of feedback about my original bailout blog, and the feedback has been fairly consistent:

  • Thumbs down on general stimulus and tax-loss deductibility changes.
  • Thumbs up on the interest and stocks proposals (for the “average Joe”).
  • Suggestions for real, meaningful infrastructure improvements.

I’ve already addressed the infrastructure feedback, to a degree, in a green power blog article.    I’d like to expound on the ideas that got  good feedback and traction:

  1. Make the first $2500 of interest earned in FDIC-insured vehicles (e.g. savings accounts) in 2009 exempt from federal tax.
  2. U.S. Stocks (including ETFs) purchased in 2009 and held for over 18 months would be exempt from capital gains up to $20,000.  Additionally, after 12 months, dividends on such stocks would be tax-free up to $2500 per year… indefinitely.

Idea #1 was the most popular.  In particular readers seems to really like the middle-class and low-income appeal of the idea.  For example seniors commonly have literally some money in the bank.  In addition to Social Security, they common rely heavily on interest income.  A $2500/year break on interest would be very helpful to seniors.

Similarly idea #1 would be, perhaps, the most realistic investment incentive for low-income people.   The are many more low-income people with savings accounts than stock portfolios.  It is easy to open a bank savings account with $100, and sometimes even $10.   And while there are many “unbanked” low-income earners, there are many more who do use banks or credit unions.   Further, since the first $2500 of interest would be tax free there is less risk of an April 15th-surprise lurking around the corner come tax season.

Idea #1 would, of course, benefit the middle class.  With inflation eating away at the value of our hard-earned dollars every year, why should we have to pay taxes on our meager interest incomes as well?  Getting rid of this insult-to-injury tax on the first $2500 of interest income would be a godsend.

Idea #2 is also very middle-class friendly… at least for the investing class.  If part of the government’s goal is to bolster the stock market, I cannot think of a more powerful way to realistically achieve such a result.  I could invision a veritable surge of stock buying with the one-time lure of tax-free dividends for life (up to $2500/year) and the prospect of up to $20,000 of tax-free capital gains.  Sure the capital gains paperwork for the 1040 would be a bit messy… but more much more so than it already is.  And the the dividend paperwork… that would be easy.

So, Congress, and President-elect Obama, I urge you to consider these common-sense proposals.   Please encourage savings and new investment — from the bottoms up.  Help reward the savings of America’s low-wage workers.   Reinvigorate and reward middle-class savings and investing in 2009.

And, readers, thank you for your feedback.  Keep it up!  It keeps me blogging.  Cheers!

Simple and Clear

The current government-sponsored bailouts disappoint to such a degree they are becoming self parodies.  Among the disappointments:

  • Very expensive.  Not billions, but trillions of taxpayer dollars are on the line.
  • Opaque.  Which companies have how much?  For what?  Under what terms?
  • Only marginally effective so far.  LIBOR is down somewhat, but is much lending really reviving?
  • Tops-down.   Rewarding failure, mismanagement, even incompetence and neglect of duty.

Rather than ladling trillions more into the same troughs, maybe we should consider a different approach that has the following properties:

  • Relatively inexpensive (billions not trillions).
  • Transparent, simple, and clear.  Can be explained in few sentences.
  • Bottoms-up.  Rewarding ordinary Americans who save and invest.

While there likely many ideas that meet these properties, here’s my stab at a legislative solution.

  1. Make the first $2500 of interest earned in FDIC-insured vehicles (e.g. savings accounts) in 2009 exempt from federal tax.
  2. The deductibility of investment losses against earned income would be doubled to $6000.
  3. U.S. Stocks (including ETFs) purchased in 2009 and held for over 18 months would be exempt from capital gains up to $20,000.  Additionally, after 12 months, dividends on such stocks would be tax-free up to $2500 per year… indefinitely.
  4. A simple $1000 stimulus rebate to everyone who paid taxes in 2008.

These measures would be retroactive to Jan 1, 2009 if the legislation passes after that date.  I believe these measures would be simple and effective.  They would result in more money for lending and turbo-charge the stock market.  The wealth-effect from increased stock market prices would spur capital investment.    A psychological boost would likely ensue as everyday Americans realize that the “bottoms-up bailout” is going primarily to themselves and their neighbors, rather than wall street and corporate board rooms.

Well, this is likely just some wishful thinking.  I hope it stimulates some different thinking.  I am ever hopeful for the USA, based on the character of our people and our tradition of creativity and entreprenurial action.