developing policy for sustainable taxation in Ireland
The Irish Times reports that an Irish house price register will be established. It’s not a site value register, and it won’t cover non-domestic property, but it’s a start:
A NATIONAL house price register is to be set up for the first time by the Government following years of criticism at the lack of transparent information about the housing market.
It will form the basis of a house price index that would monitor the fluctuation in house prices.
Much interest has been generated in one possible solution to the crisis in the EMU. This involves the creation of a fund to support the monetary union – an EMF. Here is FT on the subject..
Taking uncertainty out of regime aims to prevent crises from gathering
By Ralph Atkins in Frankfurt
Published: March 9 2010 02:00 | Last updated: March 9 2010 02:00
Why has Germany suddenly proposed a European Monetary Fund? The turmoil over Greece’s public finances has shown Europe’s monetary union, which today has 16 member states, ill equipped to manage crises. The debt problems of one of the eurozone’s smallest economies have threatened the stability of the entire region because it was unclear what might happen in a worst case…
In conclusion they ask
Has Germany gone soft? Possibly. A big worry of some conservative policymakers is that an EMF would undermine the effectiveness of fiscal rules, which set limits on fiscal deficits, and that procedures for dealing with violators, as well as the eurozone’s “no bail-out clause”, which prevents collective liability for debts incurred by a member. But arguably an EMF would, in fact, toughen the environment for countries violating the rules. Today Athens can more or less assume that other countries would help out if it came close to default, because of the havoc that would be wreaked across the eurozone if they did not. An EMF would allow an orderly default, so there would be less chance of a comfortable bail-out. Will this solve the crisis in Greece? No, the debate on an EMF has only just begun and it could be years before such an institution is created. Greece’s difficulties will have to be dealt with under the current, uncertain, regime. (link to article)
Karl Whelan in Irish Economy is on to it too
There are lots of stories in today’s press about the German-backed proposal to introduce a new European Monetary Fund to help out EU states in difficulty. Setting up the fund would require a new treaty, which would take a long time. So, on the face of it, this isn’t about helping out Greece, though it could turn out that Greece becomes the “test case” for how an EMF would operate. (link to article)
This discussion is sure to run and run. Pity there is less interest in examining the Marshall Plan 2 solution which is a quicker cleaner fix.
Posted in News.
For a clear overview of the the zero sum game the government is playing see Robert Parenteau’s diagramme from Financial Perspectives from Kansas City..
…On the vertical axis we track the fiscal balance, and on the horizontal axis we track the current account balance. If we rearrange the financial balance identity as follows, we can also introduce the domestic private sector financial balance to the map:Domestic Private Sector Financial Balance = Current Account Balance – Fiscal Balance …
..Or to put it more bluntly, if European countries try to return to 3% fiscal deficits by 2012, as many of them are now pledging, unless the euro devalues enough, then either a) the domestic private sector will have to adopt a deficit spending trajectory, or b) nominal private income will deflate, and Irving Fisher’s paradox will apply (as in the very attempt to pay down debt leads to more indebtedness), thwarting the ability of policy makers to achieve fiscal targets. In the case of Spain, with large private debt/income ratios, this is an especially critical issue.
The underlying principle flows from the financial balance approach: the domestic private sector and the government sector cannot both deleverage at the same time unless a trade surplus can be achieved and sustained. We remain hard pressed to identify which nations or regions of the remainder of the world are prepared to become consistently larger net importers of Europe’s tradable products, but it is also said that necessity is the mother of all invention (and desperation, its father?). Pray there is life on Mars that consumes olives, red wine, and Guinness beer.
Rob Parenteau, CFA
MacroStrategy Edge
February 22, 2010
* This article originally appeared on NakedCapitalism
Posted in News.
….The government needs to do more than ensure bank recapitalisation. It needs a full exit strategy, which includes the ultimate withdrawal of the liability guarantee regime, presumably to be replaced by some more limited form of insurance for depositors. If regulation and supervision are strengthened, the risk of a future banking collapse is reduced – but never eliminated.
So there also needs to be bank resolution legislation, which would empower the Central Bank to take over the management of any bank deemed in danger of failure, and to restructure or wind down the institution.
Creditors other than insured depositors would see their claims satisfied to the extent feasible given the bank’s financial condition…
from The Irish Economy by John McHale
…I believe the more pressing issue is to have a resolution regime in place for the period after the current guarantee expires and before existing subordinated bonds mature. If the banks are insolvent, or at least incapable of reaching minimum capital adequacy requirements on their own, there should be a willingness to impose these losses on creditors, most likely as part of the debt-equity swap long advocated by Karl Whelan.
…It is obvious that the Irish banks will need very large amounts of new equity capital in the near future, given their NAMA-related loss crystallisation, along with prospective losses on their retained loan portfolios. This confirms the year-ago forecasts of Brian Lucey, Karl Whelen and others, and contradicts the contemporaneous claims of bank and government spokespersons that there would be no need for additional equity capital. It seems clear that the amount of new equity capital needed is equivalent to majority ownership (Lucey was quoted on Frontline stating that the newly issued equity might constitute 95% of total equity after issuance).
There are three ways to inject new equity capital into the two surviving[1] banks: 1) the government directly purchases more equity shares from the banks, 2) the banks try to raise the equity from existing shareholders using a rights offering, or 3) the banks accept a big block acquisition of equity capital from a large foreign institution probably a foreign bank. The Central Bank and Department of Finance should be pushing hard on the banks to use method 3, since this method is in the best interest of the Irish taxpayer and Irish economy…
Posted in Cost/Benefit, News, Prosperity.
Guardian article by Juliette Jowit
Report for the UN into the activities of the world’s 3,000 biggest companies estimates one-third of profits would be lost if firms were forced to pay for use, loss and damage of environment…
The cost of pollution and other damage to the natural environment caused by the world’s biggest companies would wipe out more than one-third of their profits if they were held financially accountable, a major unpublished study for the United Nations has found.
The report comes amid growing concern that no one is made to pay for most of the use, loss and damage of the environment, which is reaching crisis proportions in the form of pollution and the rapid loss of freshwater, fisheries and fertile soils.
Later this year, another huge UN study – dubbed the “Stern for nature” after the influential report on the economics of climate change by Sir Nicholas Stern – will attempt to put a price on such global environmental damage, and suggest ways to prevent it. The report, led by economist Pavan Sukhdev, is likely to argue for abolition of billions of dollars of subsidies to harmful industries like agriculture, energy and transport, tougher regulations and more taxes on companies that cause the damage.
Ahead of changes which would have a profound effect – not just on companies’ profits but also their customers and pension funds and other investors – the UN-backed Principles for Responsible Investment initiative and the United Nations Environment Programme jointly ordered a report into the activities of the 3,000 biggest public companies in the world, which includes household names from the UK’s FTSE 100 and other major stockmarkets.
The study, conducted by London-based consultancy Trucost and due to be published this summer, found the estimated combined damage was worth US$2.2 trillion (£1.4tn) in 2008 – a figure bigger than the national economies of all but seven countries in the world that year.
The figure equates to 6-7% of the companies’ combined turnover, or an average of one-third of their profits, though some businesses would be much harder hit than others.
“What we’re talking about is a completely new paradigm,” said Richard Mattison, Trucost’s chief operating officer and leader of the report team. “Externalities of this scale and nature pose a major risk to the global economy and markets are not fully aware of these risks, nor do they know how to deal with them. (link to article)
Posted in Environment.
Chris Cook argues for stimulation of the UK economy by issuance of money by government to find productive projects directly – bypassing the banks. The Irish government and electorate has ceded this power to the ECB under Maastricht, unfortunately. But the argument builds that the Irish government should join with fellow PIIGS to lobby the ECB to make a trillion euro distribution on a per capita basis to all EMU governments, as Marshall Auerbach suggests.
…In the 1930s, John Maynard Keynes’ friendly adversary, Sir Ralph Hawtrey, insisted that deficit finance would not normally be needed as a counter-cyclical weapon so long as the potentially unstable money supply was kept under firm control. However, in the event of poor control followed by an unusually severe depression like today, Hawtrey diagnosed what he called a “credit deadlock”, in which a collapse of confidence made banks fear to lend to the private sector and the private sector fear to borrow from the banks.
In such conditions he agreed that fiscal policy should come to the rescue to break the deadlock. But he also insisted that its effectiveness depended crucially on how the deficits were financed. If the private sector is frantically de-leveraging, as today, fiscal deficits lose much of their effectiveness if paid for by increased private saving.
Therefore what is needed is for government to expand the money supply (hence net monetary expenditures) by itself spending an adequate amount of newly issued money directly into circulation rather than borrowing from the existing (and declining) circulation. This borrowing from the private sector adds unnecessarily to the national debt.
Quantitative easing will not do the trick if the Bank of England’s net purchase of debt from the private sector largely ends up as increased bank reserves. That is why the money supply in circulation (this excludes bank reserves) has registered sluggish, sometimes negative, growth through our deep recession. And that is why recovery has been equally sluggish despite a soaring public debt...(link to article)
Posted in Prosperity.
Michael Hudson makes the case that Latvia – and other ex-Soviet states – whose people are now suffering under huge debt burdens could have been protected by land value taxes.
…There were almost no commercial banks in the Soviet Union. Rather than helping these countries create banks of their own, Western Europe encouraged its own banks to create credit and load down these economies with interest charges – in euros and other hard currencies for the banks’ protection. This violated a prime axiom of finance: never denominate your debts in hard currency when your revenue is denominated in a softer one. But as in the case of Iceland, Europe promised to help these countries join the Euro by suitably helpful policies. The “reforms” consisted in showing them how to shift taxes off business and real estate (the prime bank customers) onto labor, not only as a flat income tax but a flat “social service” tax, so as to pay Social Security and health care as a user fee by labor rather than funded out of the general budget largely by the higher tax brackets.
Unlike the West, there was no significant property tax. This obliged governments to tax labor and industry. But unlike the West, there was no progressive income or wealth tax. Latvia had the equivalent of a 59 percent flat tax on labor in many cases. (American Congressional committee heads and their lobbyists can only dream of so punitive a tax on labor, so free a lunch for their main campaign contributors!) With a tax like this, European countries had nothing to fear from economies that emerged tax free with no property charges to burden their labor with taxes, low housing costs, low debt costs. These economies were poisoned from the outset. That is what made them so “free market” and “business friendly” from the vantage point of today’s Western economic orthodoxy.
Lacking the power to tax real estate and other property – or even to impose progressive taxation on the higher income brackets – governments were obliged to tax labor and industry. This trickle-down fiscal philosophy sharply increased the price of labor and capital, making industry and agriculture in neoliberalized economies so high-cost as to be uncompetitive with “Old Europe.” In effect the post-Soviet economies were turned into export zones for Old Europe’s industry and banking services.
Western Europe had developed by protecting its industry and labor, and taxing away the land rent and other revenue that had no counterpart in a necessary cost of production. The post-Soviet economies “freed” this revenue to be paid to Western European banks. These economies – debt-free in 1991 – were loaded down with debt, denominated in hard currencies, not their own. Western bank loans were not used to upgrade their capital investment, public investment and living standards. The great bulk of these loans were extended mainly against assets already in place, inherited from the Soviet period. New real estate construction did indeed take off, but the great bulk of it has now sunk into negative equity. And the Western banks are demanding that Latvia and the Baltics pay by squeezing out even more of an economic surplus with even more neoliberal “reforms” that threaten to drive even more of their labor abroad as their economies shrink and poverty spreads. (link to article)
Posted in Local, News, Prosperity.
Marshall Auerbach and L. Randall Wray write in Economic Perspectives from Kansas City that Greece’s predicament was less unwittingly self-inflicted than deliberately perpetrated by those who stand to profit …
…Ok, if a literal armed attack on Goldman is too far-fetched, then go after the firm using the full force of the regulatory and legal systems. Close the offices and go through the files with a fine-tooth comb. Issue subpoenas to all non-clerical staff for court appearances. Make the internal emails public. Post the names of all managers and traders on Interpol. Arrest anyone who tries to board a plane, train, or boat; confiscate their passports; revoke their visas and work permits; and put a hold on their bank accounts until culpability can be assessed. Make life at least as miserable for them as it now is for Europe’s tens of millions of unemployed workers.
We know that the Obama administration will not go after the banksters that created this global financial calamity. It has been thoroughly co-opted by Wall Street’s fifth column—who hold most of the important posts in the administration. Europe has even more at stake and has shown somewhat more willingness to take action. Perhaps our only hope for retribution lies there.
Some might believe the term “banksters” is too mean. Surely Wall Street was just doing its job—providing the financial services wanted by the world. Yes, it all turned out a tad unfortunate but no one could have foreseen that so many of the financial innovations would turn into black swans. And hasn’t Wall Street learned its lesson and changed its practices? Fat chance. We know from internal emails that everyone on Wall Street saw this coming—indeed, they sold trash assets and placed bets that the trash would crater. The crisis was not a mistake—it was the foregone conclusion. The FBI warned of an epidemic of fraud back in 2004—with 80% of the fraud on the part of lenders. As Bill Black has been warning since the days of the Saving and Loan crisis, the most devastating kind of fraud is the “control fraud”, perpetrated by the financial institution’s management. Wall Street is, and was, run by control frauds. Not only were they busy defrauding the borrowers, like Greece, but they were simultaneously defrauding the owners of the firms they ran. Now add to that list the taxpayers that bailed out the firms. And Goldman is front and center when it comes to bad apples.
Lest anyone believe that Goldman’s executives were somehow unaware of bad deals done by rogue traders, William Cohan (see here) reports that top management unloaded their Goldman stocks in March 2008 when Bear crashed, and again when Lehman collapsed in September 2008. Why? Quite simple: they knew the firm was full of toxic waste that it would not be able to continue to unload on suckers—and the only protection it had came from AIG, which it knew to be a bad counterparty. Hence on March 19, Jack Levy (co-chair of M&As) sold over $5 million of Goldman’s stock and bet against 60,000 more shares; Gerald Corrigan (former head of the NY Fed who was rewarded for that tenure with a position as managing director of Goldman) sold 15,000 shares in March; Jon Winkelried (Goldman’s co-president) sold 20,000 shares. After the Lehman fiasco, Levy sold over $6 million of Goldman shares and Masanori Mochida (head of Goldman in Japan) sold $56 million worth. The bloodletting by top management only stopped when Goldman got Geithner’s NYFed to produce a bail-out for AIG, which of course turned around and funneled government money to Goldman. With the government rescue, the control frauds decided it was safe to stop betting against their firm. So much for the “savvy businessmen” that President Obama believes to be in charge of Wall Street firms like Goldman.
From 2001 through November 2009 (note the date—a full year after Lehman) Goldman created financial instruments to hide European government debt, for example through currency trades or by pushing debt into the future. But not only did Goldman and other financial firms help and encourage Greece to take on more debt, they also brokered credit default swaps on Greece’s debt—making income on bets that Greece would default. No doubt they also took positions as the financial conditions deteriorated—betting on default and driving up CDS spreads.
But it gets even worse: An article by the German newspaper, Handelsblatt, (”Die Fieberkurve der griechischen Schuldenkrise”, Feb. 20, 2010) strongly indicates that AIG, everybody’s favorite poster boy for financial deviancy, may have been the party which sold the credit default swaps on Greece (English translation – here).
Generally, speaking, these CDSs lead to credit downgrades by ratings agencies, which drive spreads higher. In other words, Wall Street, led here by Goldman and AIG, helped to create the debt, then helped to create the hysteria about possible defaults. As CDS prices rise and Greece’s credit rating collapses, the interest rate it must pay on bonds rises—fueling a death spiral because it cannot cut spending or raise taxes sufficiently to reduce its deficit.
Having been bailed out by the Obama Administration, Wall Street firms are already eyeing other victims (and for allowing these kinds of activities to continue, the US Treasury remains indirectly complicit, another good reason why one shouldn’t expect any action coming out of Washington). Since the economic collapse is causing all Euronations to run larger budget deficits and at the same time is raising CDS prices and interest rates, it is easy to pick off nation after nation. This will not stop with Greece, so it is in the interest of Euroland to stop the vampires now…(link to article)
Posted in News, Prosperity.
The latest edition of Wired Magazine has a feature on new hi-tech alternatives to credit card and cash payments. It’s interesting for its criticism of the credit card companies, arguing that they are charging increasingly exorbitant fees for a payments infastructure which is increasingly cheap to maintain.
“It seems really odd that credit card companies can continue to charge a tax on the economy,” says Aaron Patzer, founder of the financial management service Mint.com, which is now owned by Intuit. “Outside the US government, they are the only entity that has the power to levy a fee across virtually every transaction. Maybe that made sense in the early 1960s, when computer infrastructure was expensive and proprietary. But now, with cheap bits everywhere, the actual cost to do a transaction is pennies.”
This is an interesting point from the STN perspective – you could argue that credit card companies are using their position to impose a levy on payments – essentially a tax on exchange.
The rest of the article is interesting as well, mainly for its discussion on emerging monetary technologies and the potential to skirt around existing institutional limitations, reducing the ‘friction’ in the money supply.
Posted in Prosperity.
David McWilliams is looking for someone to shout ‘Stop!’ before it’s too late. Anyone? An article in the Indo recaps over how much debt the government is incurring on behalf of the taxpayer to support a series of schemes that “would financially incarcerate the Irish people for a generation.” McWilliams points out that one site in Athlone has deteriorated from €31m to €600,000, a decline of 98% according to Google calculator, implying that NAMA will lock the country into paying off this bad debt for a generation (at least!).
McWilliams is a fan of cutting the banks loose – sell them off to a European bank who can make a deal with the creditors as with any other bankruptcy. But it’s not so easy for the Government to see this, or indeed to see beyond their entanglement with the status quo.
The problem for us in Ireland is that the people who are drafting our laws locking us to the banks do not understand this, because they are not capitalists; they are legalistic functionaries, civil servants and bankers trying to hold on to their jobs. In short, they are consummate insiders with their interests vested in the old status quo who can’t see that the old status quo is the problem.
As a result, these insiders are all too happy to give the outsiders (the people) the bill without any thought of how we are going to raise this money. This is why the Finance Minister can come on radio and talk blithely of billions here and there without appearing to consider just how much money this is and how much we have to produce to earn these sums he is tossing about.
Listening to politicians and bankers/brokers using these figures is like witnessing demented generals in the last stages of a war moving imaginary armies on a map — battalions that have long been vanquished.
Posted in News, Prosperity.
