Saturday Reads Around The Internets - Warren & Consumers Be Damned

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Welcome to the weekly roundup of great articles, facts and figures. These are the weekly finds that made our eyes pop.

 

Privatization Gone Wild

Matt Stoller takes on the selling off America in his piece, the public pays for privatization:

America used to be a country that built things — using public and private resources. Great works of infrastructure provided jobs and returned an incredible social investment. It is inconceivable to imagine the modern economy without the vast investments in infrastructure made by preceding generations — everything from rural electrification to developing the Internet.

So why aren’t we building more of it? One way to think about the question is: Why did we build infrastructure in the first place?

The answer is complicated. We need to look to the political coalitions behind our immense public works and ask which coalitions today support the current infrastructure rhetoric. Seen through that lens, the real trend in infrastructure today is not building more of it but privatizing what exists.

After all, building infrastructure implies the ability to build things here and being able to use the power of taxation to finance them. Privatizing infrastructure requires the ability to securitize revenue flows. Which one do you think modern America does better?

Privatization takes inherently governmental functions — everything from national defense to mass transit and roads — and turns them over to the control of private actors, whose goal is to extract maximum revenue while costing as little as possible.

Republicans have long advocated this in the name of free markets — saying that privatizing government services reduces the size of government. Democrats express more mixed support, but they sometimes go along for the privatizing ride.

 

Number of the Week

The Wall Street Journal has a new number of the week. Seems the average household still needs to get rid of $26,172 in debt in order to return to the 1990's levels. The reason people's debt has dropped? Many are defaulting on their mortgages and loans.

 

What are Households anyway?

In the Federal Reserve's flow of funds report, we find households is actually a residual category. Zero Hedge asks how come households sold $1.1 trillion, annualized, in U.S. Treasuries for Q1 2011.

Either we have just gotten yet another confirmation of just how worthless the Flow of Funds "household" plug category is, or there is something very, very wrong with conventional wisdom. According to a detailed breakdown of the Z.1 from Goldman Sachs the biggest seller of US Treasurys to the Fed in Q1, at an annualized rate of $1.1 trillion, were... US Households. We have to wonder how this news makes even remote sense when confronted with the ongoing dumping of stocks by retail investors. On the other hand, if indeed the Fed is correct then the entire paradigm of retail jumping into the safety of US paper may have to be reevaluated. And not only that, but if this activity has continued into Q2, it may present even greater risks for the Fed's unwind of QE2: should households persist in their Treasury dispositions with only dealers left to pick up the pieces.

 

AIG Sinks Maiden Lane II Auctions

Naked Capitalism comments on AIG tanking credit markets:

Federal Reserve auctions of mortgage securities that the central bank assumed in the rescue of American International Group Inc. are fueling a selloff in credit markets as Wall Street rushes to hedge against losses on stockpiled debt.

Declines in credit-default swaps indexes used to protect against losses on subprime housing debt and commercial mortgages accelerated this month, reaching almost 20 percent in the past five weeks as the cost of the insurance climbs, according to Markit Group Ltd. The plunge this week started infecting everything from junk bonds to the debt of financial companies. -- Bloomberg

 

Senator Grassley Investigating the SEC

According to Business Insider, Senator Chuck Grassley is investigating the SEC and....they just refused to give him information.

SAC was being used a case study by the Senator's office, as he is concerned with how the SEC handles insider trading probes and referrals.

But the SEC has rejected Grassley's request "to disclose how they have handled referrals they received of suspicious trading at hedge fund SAC Capital," according to the WSJ.

The regulator "cited confidentiality in rejecting the request."

Grassley responded that the SEC's response is "isn’t what I asked for, and it's not an acceptable response."

 

The Obama Administration Does Something?

The Obama administration slapped the wrists of banks improperly foreclosing on people. Huffington Post:

The Treasury Department will temporarily withhold payments to the nation's three largest mortgage companies for failing to comply with the Obama administration's signature foreclosure-prevention effort, perhaps finally making good on a 19-month-old threat, officials announced Thursday.

Bank of America, Wells Fargo and JPMorgan Chase, which collectively service about half of all home loans, abused homeowners and violated the rules of the Making Home Affordable (MHA) program, Treasury said. The initiative aims to lower monthly payments, reduce loan balances or enable distressed borrowers to sell their homes before they're seized by awarding a series of incentive payments to banks, investors and homeowners when foreclosures are averted. Treasury is only withholding pay to the three banks.

The three were found to need "substantial improvement," the agency said in a statement. Cumulatively, they received $24 million in government incentive payments last month.

$24 million is peanuts.

 

Anyone But Warren

No surprise, Obama is seeking anyone but Elizabeth Warren to head up the Consumer Financial Protection Agency. The usual excuse is 40 GOP Senators will block her nomination, which is probably true.

The Republicans have taken the stance that they are not prepared to be bound by the law, meaning Dodd Frank, despite the fact that most of what is promised to do was kicked over to studies and rulemaking, which assured it will be watered down to nothingness. 44 Republican Senators wrote a letter saying they won’t approve of any nominee from either party unless the CFPB is gutted reformed. And they are trying to block a recess appointment through the use of a “pro forma” sessions, as they did over the Memorial Day break and presumably will over the July 4 holiday.

What was your must read article this week?

 

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Comments

Must read: Tax Holiday for MNCs

Extension of the payroll tax holiday? Not likely: this proposal is for the big money.

My suggestion for a must-read starts with an eight-month old, but still very relevant, Bloomberg article on tax loopholes, examining how international transfers of profits often allow huge multi-nationals to avoid most, if not all, income taxes.

Bloomberg (October 2010): Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes (by Jesse Drucker)

But how does this come into current reading? Here's how:

TruthOut article by economist Ellen Applebaum (Center for Economic and Policy Research) relates details of corporate tax-avoidance practices to current lobbyists' push for "Tax Holiday" legislation.

This is a red flag for what Congress is up to currently!

truth-out.org (June 2011): No Tax Holiday for Multinational Corporations (by Dr. Ellen Applebaum)

Excerpted from the Applebaum article for review purposes:

 

Companies continue to owe taxes to the US government on these overseas earnings - technically, the taxes have only been deferred. But the taxes don't come due until the profits are brought back to the US - that is, repatriated. And companies do want to repatriate these profits.

A dozen large multinationals have joined the "Win America Campaign" to lobby for a tax holiday, so US companies can bring foreign profits home. In 2004, when Congress last declared a tax holiday, much of the $900 billion that corporations held abroad was repatriated at a reduced tax rate of just 5 percent. Today, US corporations hold roughly $1.43 trillion overseas. The demand for a tax holiday clearly indicates that parking profits overseas is a tax-avoidance strategy, not a business necessity.

The push for a tax holiday has bipartisan support in Congress ...  Treasury opposes a tax holiday as a stand-alone measure although it might consider it as part of a broader tax reform package.

 

So that's what the current Congress is preparing to enact as "reform" and as a "win" for America?

This tax holiday for profits of multinational corporations may well be the ransom to be paid for not shutting down the government and precipitating a U.S. government default crisis.

Here's a question: how much of increased profits and dividends will be invested in the U.S.A.?

Comparing the 2011 payroll tax holiday with the likely result of the tax holiday for MNCs:
 

  • Maybe it was structured as stimulus money, but the payroll tax holiday was basically a $100 Billion hit to Social Security trust funds.
  • MNC tax holiday may result in something like a short-term $70 Billion gain for the federal budget, maybe $100 Billion including consequent taxes on dividends, but at what cost in loss of future revenue ... maybe $250 Billion?

"No more kicking the can down the road." --- John Boehner (R-OH), Speaker of the U.S. House of Representatives

Hmmmm. Okay. Let's see what happens.

Maybe kicking the can down the road is the best we can hope for in the current politico-economic situation.

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