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- THE FRIDAY LETTER -
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| http://www.gilder.com/ | Issue 374.0/February 27,
2009
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HEADLINES:
- The Week / Are the Mark-to-Marketeers Wrong?
- Friday Feature / Don’t Nationalize;
Suspend Mark-to-Market
- Friday Blogger Bonus / The Coming Blue
State Collapse
- Readings /
The Week / Are the Mark-to-Marketeers Wrong?
Gilder Telecosm Forum Member (2/24/09): Any insight on Bernanke’s
refusal to suspend mark to market? He must be aware of the history of and
problems with mark to market.
PAUL McWILLIAMS, Next Inning Technology Research
(2/24/09): I think the
"crisis" was created by short sellers, possibly with political
interests, who leveraged the rule in September by shorting assets that were
used as collateral and, as a result, creating huge and predicable margin calls
in the finance sector.
GEORGE GILDER, Gilder Telecosm Forum (2/24/09): My only insight is that the economists in Washington are
all trying to avoid the Japanese trap of pretending their banks were solvent
for a decade when they were not. It is a conservative accounting impulse to
recognize reality and not allow the banks to perpetuate delusory balance
sheets. I think the mark-to-marketeers are wrong, that mark-to-market creates
not a purchase on reality but a depressionary delusion. But it would help if
someone would cogently refute the Japanese precedent.
PAUL McWILLIAMS, Next Inning Technology Research
(2/24/09): Here's a step that
would actually increase tax revenues and stimulate the formation of capital.
If your business is down and aggregate demand is slack, what do you do; raise
prices or lower prices (have a sale)? I know your answer, but our government
doesn't agree.
Of course, you lower prices in hopes that higher aggregate revenues will help
you meet fixed costs and maintain enough market share to where you are well
positioned when demand improves.
Cisco’s John Chambers estimates that if the government would have a
"sale" by lowering the cost of repatriating foreign profits it would
collect roughly $37B in federal income taxes and, by my estimate, slightly more
in state income taxes. In the process, it would bring about $700B into the U.S.
for investment. Personally, I'm inclined to trust Chamber's numbers - CSCO
currently has about 90% of its liquid cash equivalent assets trapped outside
the U.S.
The Senate discussed including this in the stimulus package, but summarily
decided against it. You see, according to Senate math, 35% (the full tax rate
for repatriated foreign profits) times near zero repatriation would cost us
over $200B. In other words, 35% of nothing, according to Senate math, is
greater than 5.25% (the proposed temporary discounted rate for repatriation) of
something.
Read more from George Gilder and Paul
McWilliams by logging on to the Gilder Telecosm
Forum (http://www.gildertech.com/), and by subscribing to Paul’s monthly Next Inning Technology Research
newsletter.
|
The Gilder Telecosm Forum To
learn how to join this powerful network of talented, tech-savvy investors and
thinkers online daily to debate, discuss, and decode new and emerging
technologies and share valuable and actionable investment advice, visit www.Gildertech.com today. |
Friday Feature / Don’t Nationalize;
Suspend Mark-to-Market
BRIAN WESBURY, Chicago
Daily Observer (2/23/09): I have
been accused of beating a dead horse when it comes to my support for either
suspension of, or targeted relief from, market-to-market accounting.
And I suppose after writing
thousands of words, producing videos and giving speeches about the issue, some
might be tempted to let it go. But, I can’t do that, especially when the
government continues to spend trillions of dollars and is coming very close to
bank nationalization.
This is a real shame.
Suspending mark-to-market accounting could fix major problems at no cost.
Unfortunately, many people dismiss this issue without really understanding its
impact on the economy.
The history seems
clear. Mark-to-market accounting existed in the Great Depression and
according to Milton Friedman, who wrote about it just 30 years after the fact,
it was responsible for the failure of many banks.
Franklin Roosevelt suspended
it in 1938, and between then and 2007 there were no panics or
depressions. But, when FASB 157 went into effect in 2007, reintroducing
mark-to-market accounting, look what happened.
Two things are absolutely
essential when fixing financial market problems – Time and Growth. Time
to work things out and growth to make working those things out easier.
Mark-to-market accounting takes both of these away.
Because these accounting
rules force banks to write-off losses before they even happen, we lose
time. This happens because markets are forward looking. For
example, the price of many securitized mortgage pools is well below their value
based on cash flows. In other words, the market is pricing in more losses
than have actually, or may ever, occur. The accounting rules force banks
to take artificial hits to capital without reference to the actual performance
of loans.
And this affects
growth. By wiping out capital, fair value accounting rules undermine the
banking system, increase the odds of asset fire sales and make markets even
less liquid. As this happened in 2008, investment banks failed and the
government proposed bailouts. This drove prices down even further, which
hurt the economy. And now as growth suffers, bad loans multiply.
It’s a vicious downward spiral.
In the 1980s and 1990s, there
were at least as many, and probably more, bad loans in the banking system as a
share of the economy. The difference was that there was no mark-to-market
accounting. This gave banks time to work through the problems. At
the same time, the US cut marginal tax rates and raised interest rates, which
helped lift economic growth. Time and growth allowed those major banking
problems to be absorbed (even though roughly 3000 banks failed); without
creating an economic catastrophe.
In Japan, during the 1990s,
the government allowed banks to operate without ever even recognizing bad
loans, which certainly bought time. However, Japan increased taxes, which
undermined growth, creating an economic catastrophe. The real problem
with Japan was not zombie banks, it was that there was no growth. After
all, foreign banks were allowed to lend in Japan, but stayed away because the
economy was not vibrant.
Suspending mark-to-market
accounting is a cost free way to buy time. It does not allow banks to
sweep bad loans under the rug. Bad loans are still bad loans and banks
cannot hide from them. Not suspending it, while at the same time
interfering in the economy with massive stimulus bills and bank
nationalization, is a recipe to undermine both time and growth and therefore
hurt the economy even more.
Comment on This Article: http://www.cdobs.com/archive/featured/don%E2%80%99t-nationalize-suspend-mark-to-market,2898
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Friday Blogger Bonus / The Coming Blue State Collapse
RICH KARLGAARD, Digital Rules blog (2/26/09): Here's a quick and dirty
guess: Upper-middle-class families in blue states--those President Obama calls
"the rich"--will soon be paying 20% more a year in state and federal
taxes. If you pay $100,000 off of a $300,000 income now, look for $120,000 in a
couple of years.
Federal income taxes are
going up, and deductions are going down. That much we know. What we don't know
yet--but I would bet money on it--is if the 7.65% Social Security and Medicare
tax ceiling will be lifted from $102,000 to $150,000 or so.
Taxes are headed up at the
state and local level too. Residents in blue states like California and New
York will be socked hardest.
Take California. Its top
income tax rate is the nation's highest at 9.3%. More appalling, it kicks in at
only $47,056 a year. Make too much gold in the Golden State--a million a
year--and you are pinched by a 1% surcharge. California also has a 7.25% sales
tax, but that's just a base. "Local supplementary taxes are allowed up to
9.25%." Capital gains get no preference. They are taxed like ordinary
income.
For all that, California
spends more than it takes. The state is on the verge of bankruptcy and just
passed a budget with $12 billion of new taxes.
The trend of higher taxes has
not escaped California taxpayers. For each of the last five years, California
has led the nation in the outflow of its residents to other states. Since 2004,
California has lost about a million and a half people from taxpaying
households. At the same time, the state has taken in two million people, mostly
non- or minimal taxpayers who are newborns or immigrants, legal and illegal.
I focus on California because
I live there. The same trend is at play in other high-tax, high-cost blue
states such as Massachusetts, New York and New Jersey.
How will this play out? Well,
consider:
1. Home prices are highest in
the coastal blue states and remain that way despite the recent losses. In
California, the percentage losses are uneven. Silicon Valley residential real
estate is down only 15% to 20% from the peak--and less for those little sub-$2
million houses. I'm not kidding. A modest three-bedroom, two-bathroom house of
2,500 square feet in Palo Alto still sells for $1.5 million to $2 million. The
income it takes to buy such a house, which is a middle-class house by size and
amenities, is what Obama and the tax collectors are now calling
"rich." Palo Alto may be extreme in its home prices, but the same is
true in all blue-state upper-middle-class suburbs. It takes a "rich"
income (north of $250,000) to live a middle-class lifestyle if one is still
raising children and paying a mortgage in these places.
2. Jumbo mortgage loans (more
than $417,000 nationally and $625,000 in high-house-price counties) are often
required to buy a house in urban blue states. Too bad for the blue-staters.
Mortgage interest rates on jumbos are about 1.5% higher now than for regular
conforming loans.
3. Inflation--when it
restarts (likely five minutes after the economic recovery begins, as it did in
the 1970s)--will push droves of upper-middle-income earners into higher tax
brackets, as it did in the 1970s.
4. An upper-middle-class
income--an income I would define as middle class but with the bonus of freedom
from day-to-day worries about grocery and doctor bills, car and mortgage
payments, and education and vacation costs--only begins at the point
defined as rich by President Obama in many urban blue states. On the other
hand, $200,000 might be upper-middle-class in Atlanta or Denver, $150,000 will
get it done in Des Moines and Spokane, and $120,000 should do the trick in
Fargo or Fayetteville.
A reasonable conclusion is
that America could see a huge outflow of educated, upper-middle-class families
from the high-tax urban blue states to more congenial places. (I wrote about
this in my 2004 book, Life
2.0, but I'm convinced today's circumstances will accelerate this trend.)
If I were investing in real
estate, I would look at Washington state (no state income taxes but a vibrant
economy and educated populace), both around Seattle and Tacoma and in the east
around Spokane; and Texas (no state income tax), particularly in the high-tech
areas of Dallas and Austin.
Check out Rich’s Digital Rules blog and comment on this article:
http://blogs.forbes.com/digitalrules/2009/02/the-coming-blue-state-collapse.html
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Readings /
Dell’s Net Income Plunges 48%
http://www.nytimes.com/2009/02/27/technology/companies/27dell.html?_r=1
Why Computers Can't Kill Post-Its
http://www.forbes.com/2009/01/21/postits-digital-tools-tech-intel-cz_lg_0122postits.html
IDC: Cloud Computing
Implementations to Double by 2012
http://www.byteandswitch.com/document.asp?doc_id=172466
Bartz Remakes Yahoo’s Top
Ranks
http://online.wsj.com/article/SB123566810152084487.html
The Notebook Effect
http://www.wired.com/gadgets/wireless/magazine/17-03/mf_netbooks
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