(By NCrissie B)
Writing for the Southern Pines Pilot, Walter Bull warns of the danger that President Obama poses for risk-takers:
The United States of America has traditionally been a nation of individual freedom and risk activities. That sets this country apart from most other nations and served as the foundation of a great, growth-oriented economic system that accumulated vast capital wealth. Successful risk-taking has yielded much higher returns than safe investments. Today, risk-taking is under assault by Obama’s tax proposals.
Ordinary income is income received as payment for employee labor or, in some cases, as payment for services. Capital investment, on the other hand, is made with funds that are generally made available after income taxes are paid. Capital investments are “risk” investments and serve as a storehouse for savings. Investment vehicles permit appreciation without taxation until liquidation.
Why would any owner of capital pay for a growth strategy when the rewards have been cut by politicians? The sound bite is popular in some quarters, but it is a recipe for stagnation.
It’s a familiar Republican argument. The wealthy are wealthy, the wealthy insist, because they take the risks. Ordinary workers don’t. Well, okay, ordinary workers take the physical risks. Like burning to death if an oil rig explodes around you. But Bull is writing about the economy and investors take the financial risks….
The BP ‘shakedown’
To hear Republicans talk, you’d think President Obama went to Al Capone University, rather than Columbia and Harvard. Consider Rep. Joe Barton (R-TX):
It is a tragedy of the first proportion that a private corporation can be subjected to what I would characterize as a shakedown, in this case, a $20 billion shakedown.
Congressman Barton was referring to the $20 billion escrow fund that BP set up in June of 2010, after the Deepwater Horizon explosion that April killed eleven workers and began dumping 53,000 barrels of oil a day into the Gulf of Mexico. That $20 billion fund was, in Rep. Barton’s view, $19.925 billion more than BP should have to pay under the 1990 Oil Pollution Act. That law, passed after the Exxon Valdez disaster, capped oil companies’ economic liability for spills at $75 million plus cleanup costs. Writing for the American Thinker, Raymond Richman suggested the BP escrow fund was an impeachable offense:
The president has no legal authority to create the escrow fund and no authority to compel BP to contribute to the fund. Forcing BP to agree to the terms of the escrow is ultra vires (i.e., illegal), beyond the powers of his office. Rep. Barton (R-TX) accurately described the slush fund as a “shakedown” (i.e., blackmail), a felony. If so, Pres. Obama has committed an impeachable offense. Congress itself does not have the authority to create the escrow fund retroactively. Congress will have no voice at all except to vilify any Republican who raises questions about it. All the ACORN employees who lost their jobs when the banks stopped paying “blackmail” to ACORN may be getting better-paying new jobs processing claims.
Tin foil haberdashery aside, the real issue was who should bear the risk of catastrophic oil spills, as Rep. Jeff Landry (R-LA) made clear while questioning offshore drilling company president Hank Danos during a hearing last April:
“Mr. Danos, you do a lot of work for shallow-water drilling contractors. Could you tell me if they remove the liability cap on the (Outer Continental) Shelf, the impact for those oil and gas contractors?” asked Landry, noting that most of those shallow-water companies are relatively small.
“My understanding is that if the liability cap was removed, that there would be more wells shut in and shut down, and less production in the Gulf of Mexico,” Danos said.
“So it would destroy the shallow water drilling industry,” Landry said. “Is that what it would do?”
“It could,” Danos said.
In short, the economic risks of offshore drilling are too great for the economic risk-takers who invest in offshore drilling companies. That risk should fall on government, or directly on the individuals who might be harmed. For Republicans, government should operate like a bank for individuals … and an insurance company for oil companies. And for banks?
The Emasculation of Wall Street
That is the title of a fascinating article by Gabriel Sherman in last week’s New Yorker, taken from a quote by banking analyst Dick Bove:
The government has strangled the financial system. We’ve basically castrated these companies. They can’t borrow as much as they used to borrow.
As Sherman explains, Bove is referring to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, a complex and much-maligned law that, surprisingly, is working better than expected:
Of course, described a little less colorfully, reducing the risk in the system at a cost of a certain amount of the banks’ profits was precisely what the government was striving for. All this has meant that Wall Street’s traders have found themselves on the wrong end of the market – a predicament that many of them have never seen before.
A few hours before Barack Obama delivered the State of the Union address, JPMorgan Chase CEO Jamie Dimon sat in a cream-colored chair in his 48th-floor office, talking about the changed reality on Wall Street. “Certain products are gone forever,” Dimon told me. “Fancy derivatives are mostly gone. Prop trading is gone. There’s less leverage everywhere. Mortgages are back to old-fashioned conservative mortgages – which is a good thing.”
Reducing risk may be a good thing for the economy, but it has been dismal for the banks. All across Wall Street, financial institutions are suffering their worst results in years. JPMorgan reported last month that fourth-quarter profits were down by $1.1 billion. Goldman Sachs reported profits fell by 56 percent, Bank of America saw its profits drop by 38 percent, and Morgan Stanley reported a 26 percent drop.
Between the Volker Rule that bars banks from proprietary trading, regulations that require clearer explanation of risks, and the loss of public confidence, a three-decade business model for banking has collapsed:
“We used to rely on the public making dumb investing decisions,” one well-known Manhattan hedge-fund manager told [Sherman]. “But with the advent of the public leaving the market, it’s just hedge funds trading against hedge funds. At the end of the day, it’s a zero-sum game.” Based on these numbers – too many funds with fewer dollars chasing too few trades – many have predicted a hedge-fund shakeout, and it seems to have started. Over 1,000 funds have closed in the past year and a half.
Reread that last paragraph again. Especially the first sentence. Then ask yourself why Republicans want to repeal Dodd-Frank.
Then ask yourself if both parties are the same.
(Crossposted from Blogistan Polytechnic Institute (BPICampus.com))