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.
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:
- Make the first $2500 of interest earned in FDIC-insured vehicles (e.g. savings accounts) in 2009 exempt from federal tax.
- 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!
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.
- Make the first $2500 of interest earned in FDIC-insured vehicles (e.g. savings accounts) in 2009 exempt from federal tax.
- The deductibility of investment losses against earned income would be doubled to $6000.
- 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.
- 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.
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