Clean Government

John McCain has been complaining about Barack Obama’s tax plan because he wants to “spread the wealth around”.   So what is wrong with that?

The gap between the wealthy and the middle class has continued to widen with the advent of the Bush tax cuts in 2003 and most economists agree this has not been good for the economy, as evidenced by the record debt and budget deficits we are now experiencing.  According to a story by the мебели стара загораAP, a recent Gallup poll showed that 68% of Americans believe that wealth should be more fairly distributed, 51% think the wealthy should be taxed more heavily, and 49% believe we have become a nation of haves and have-nots.

I am surprised there isn’t even more overwhelming public demand for increasing taxes for the wealthy.  A lot of this has to do with peoples’ fundamental belief in fairness and the fantasy that they themselves might someday be wealthy.  While this belief is admirable, it is as unfounded as it is naive.

Obama wants to roll back the Bush tax cuts for the wealthy, which went from 39.6% to 35% between 2000-3.  Not only does raising this rate back to 2000 levels seem reasonable, but considering the top tax bracket was 70% as recently as 1980 and reached a high of 91% in the 1960s, this is a bargain for the wealthy.  This would explain why you don’t hear too many wealthy people complaining, and instead have folks like Warren Buffett publicly advocating Obama’s plan.

Significant reductions in tax rates for the wealthy have not benefited the middle class.  The widening wealth gap is evidence of that, and the public has been duped by the mirage called trickle down economics.  When will the public realize that it needs to look out for the middle class.  The wealthy can take care of themselves.  They always do.

According to the LA Times, Todd Palin spent quite a bit of time representing his wife in various matters, especially when it came to trying to get his ex-brother-in-law fired.  Troopergate is getting more and more interesting.

Sarah Palin, who is officially the Governor of Alaska and fancies herself as a government reformer, continues to question Barack Obama’s ties to a domestic terrorist when he was eight years old.  Yet both she and her husband failed to cooperate with a bi-partisan ethics investigation of Troopergate, after initially promising their cooperation.  Apparently this was done with good reason, since the investigation concluded that she had abused her power as governor.

But did she really?  According to the investigation, it was Todd Palin who initially contacted Trooper Wooten’s boss, Walt Monegan and continued to pressure him to fire Wooten.  He also was a regular attendee at cabinet meetings and involved in high-level discussions with police unions, mining interests, Native American issues, and even the privatization of a dairy near the Palins’ hometown of Wasilla.

Maybe Sarah Palin didn’t abuse her power because Todd Palin is really in charge.  Either that, or she is far from being the government ethics reformer she likes to portray herself as.

The blame game for the $700 billion mortgage bailout is shifting into high gear, with Congressional hearings conducting a show trial with the CEO’s of Lehman and AIG. All of these folks have high-priced attorneys and lobbyists protecting their interests, and in many instances the golden parachutes they took with them. Who will represent the homeowners?

As the story goes, the government began pressuring Fannie Mae, Freddie Mac, and banks to increase loans to low-income borrowers, including minorities. These entities acted as a conduit by packaging pools of these loans to large institutional investors, underwritten by large Wall Street investment banks like Bear Stearns, Merrill Lynch, Goldman Sachs, and Lehman. Since many low-income borrowers didn’t have the cash to make a deposit or the income to make the mortgage payments, these loans were obviously riskier. To underwrite the increased risk, insurance giant AIG jumped in by protecting the investors against defaults.

Everybody made huge profits because of one factor – leverage. They were able to package, sell, and insure billions of dollars of these loans with minimal amounts of collateral, which translated into enormous returns on investment. But leverage is a two-way street. If real estate values increase, profits will be large. If they don’t rise, and defaults increase, the losses would be substantial. Because the real estate market was strong, competition to invest in subprime loans became over-heated, and lenders did not increase pricing or tighten underwriting standards to compensate for the increased risk.

It is clear that many loans were made to people who couldn’t afford them. But who is to blame for that? Lenders, investors, investment banks, or insurance companies who were making obscene profits and taking huge risks, or honest Americans, many of whom are people of color, trying to live the American dream. I fear Wall Street will turn the homeowners into scapegoats, and claim more than their fair share of the bailout funds.

Now that we have bailed out significant portions of the real estate, banking, and securities brokerage industries, what’s left? The New York Times provided an interesting glimpse into the bailout of AIG, the world’s largest insurance carrier, which has gone almost unnoticed given the massive $700 billion bailout of the real estate industry.

Basically AIG took an enormous gamble that home values funded by subprime loans would not fall, and made tremendous profits by not having to pony up significant capital against future claims on the insurance it was writing to protect investors of these loans.  By highly leveraging this bet, profits would be great if home values continued to increase, but catastrophic if they went down.

While the downside of tightening credit if the real estate bailout does not happen is somewhat difficult to quantify, a failure of AIG or worse yet the entire insurance industry, is absolutely clear.  First there are the policyholders, who assume that their lives, health, homes, cars, and businesses are insured against significant losses.  Then there are the shareholders, many of whom are institutional investors managing pension funds and mutual funds which are owned by us.  Other stakeholders include companies, especially those in the financial services industry, that invest in the stocks and bonds issued by insurance companies.  These companies provide jobs and income that keep the economy going.

Now that we’ve seen several large banks and investment banks become insolvent, and one large insurance company, it begs the obvious question.  How many more insurance companies can we expect to fail and request a taxpayer bailout?

I’m not sure which failure is more significant – the failure of our banking and brokerage industries or our government. The fact that the public is willing to face the potential collapse of our economy rather than trusting our President and Congress to fix the problem is a public trust failure of epic proportions.

Let’s reconstruct the story. Less than three weeks ago President Bush tells us the economy is strong. Even as Congress agrees to bailout Fannie Mae and Freddie Mac, Presidential wannabe John McCain tells us the “fundamentals” of the economy are strong. Now they are telling us our economy will collapse and throw us into a “once in a hundred year” depression tomorrow if we don’t do something today.

Well, today came and the sky did not fall. And I’m still waiting to find those weapons of mass destruction in Iraq.