Our guest blogger is Michael Ettlinger, Vice President for Economic Policy at the Center for American Progress Action Fund.
The late-arriving proposal from a group of arch-conservative Congressional Republicans for dealing with the financial crisis is a disaster on two fronts. First, right now the credit markets worldwide are close to collapse and it may well not be long before we start seeing consequences in the rest of the economy where most of us work, use credit cards, buy consumer goods and purchase houses — with companies not making payrolls and all manner of credit disappearing. Congressional leaders were right in not passing the administration’s flawed bailout proposal precipitously, as the Center for American Progress discussed here.
But the responsible parties in Congress were moving the administration towards compromise, and it appeared that legislation that includes meaningfully addressing the underlying problem of home and asset values was very close. The last minute proposal by the defecting Republicans has, however, essentially put the discussion back to square one. That is a huge problem.
Also, the new proposal would be absolutely, totally and completely ineffective. Details are scarce at this point, but if reports are to be believed, its central components are:
1. Tax cuts for the rich and corporations (surprise!)
2. Insurance for mortgage-backed securities
3. Deregulation (sound familiar?)
Why each of these components would be ineffective is discussed below.
The phrase “breathtakingly hairbrained” comes to mind when considering the apparent tax cut proposal. We know that for the group authoring this proposal, tax cuts for the rich and corporations are the answer to every problem. But even the administration, which has relentlessly imposed that agenda for eight years, has recognized that the well was dry on that front for this crisis. But it gets worse. Not only is this another tax cut for the rich, it appears to be one that is dead-aimed at doing much more harm than good — abolishing the tax on capital gains.
Capital gains are the profits that investors make from the sale of assets. There are many reasons why eliminating the tax on these profits is a bad idea. But one of them shines above the rest at this particular juncture. The reason capital is not flowing into the market isn’t that investors are thinking “I don’t want to buy this asset, because if I make money on it I’ll eventually have to pay tax.” They’re not investing because they don’t think they’ll make money. In fact, if the tax on capital gains is affecting behavior at all right now it’s keeping investors from bailing out on a rotten market (because they don’t want to pay tax on their gains). Zeroing out the tax (especially zeroing it out temporarily as at least one senator has proposed) would cause an absolute fire sale on the market—with capital jumping at the opportunity to get out at no tax cost.
Mortgage Backed Security Insurance
The idea of insuring mortgage backed securities almost seems like a cynical ploy to pretend to be doing something when actually doing nothing. The idea is that the government would sell holders of mortgage backed securities insurance against losses—and that it would charge such premiums that the government wouldn’t lose money on the deal. That’s akin to selling homeowners insurance in New Orleans after the dikes broke. To actually not lose money the government would have to charge such high premiums that no one would buy the insurance. The only ones who might be willing to pay are those with the worst assets — so it’s hard to see how the government (and taxpayers) doesn’t lose on the deal.
What they propose on deregulation isn’t clear, but the fact that they’re even still talking about “deregulation” when it was slipshod regulatory oversight that got us into this mess shows a profound misunderstanding of what’s going on. One rumored target is the Sarbanes-Oxley regulations which, in fact, impose accountability on Wall Street — not something we want to do away with right now.
There’s also an accounting rule change that’s on the table. It would temporarily change the way holders of securities value their assets on their books: moving from using the asset’s current market value to a value based on what the holders claim the asset will be worth in the future (or alternatively a moving average which includes their value in the past). While looking at the longer-run value of assets can be useful for some purposes, changing the rules right now, in the middle of the crisis, is more likely to deceive or confuse investors than enlighten them–which is the last thing we need.
In short, these ideas have managed to derail a negotiation that was close to completion and prevented the nation from addressing the crisis in the financial markets as quickly as possible. If the proposals had any merit, one might question the timing and worry about the delay, but at least they would have made a contribution to the discussion. Instead House Republicans are returning to the same old policies that have lead to the sad economic shape the country is in right now — with markets in chaos, jobs being lost and incomes stagnant or falling.