March 10, 2008 by Tom Armstrong.

A government bailout of a government sponsored entity? This Barron’s article begins:

IT’S PERHAPS THE CRUELEST OF ironies that in the U.S. housing market’s greatest hour of need, the major entity created during the Depression to bring liquidity to housing, Fannie Mae, may itself soon be in need of bailout.

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March 10, 2008 by Tom Armstrong.

This piece ends with:

You probably can sense where I’m going. Today’s economic and financial crisis would resolve itself more quickly and efficiently if the government got out of the way. Yes, there would be pain. Some banks would fail. Others would clamp down on credit to atone for the years of lax lending standards. Homeowners-in-name-only would become renters. Housing prices would fall until speculators found value.

That’s not going to happen. The bigger the mess, the more urgent the calls for a government solution, the more willing government is to oblige.

We want laissez-faire capitalism in good times and a government backstop against losses in bad times. It’s a tough way to run an economy.

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March 10, 2008 by Tom Armstrong.

…but that’s not deterring New York. This article in the NY Post explains:

THE State Assembly Majority announced yesterday that it’s considering a dramatic increase in state personal-income taxes that will come down hardest on New York City residents and the key industries that are the engine for economic growth across the state.

In the face of what promises to be a sustained national recession, and in the absence of doing anything to curtail state spending or raise revenues sensibly, the measure would hike personal-income taxes 1 percent on households earning more than $250,000, 2 percent for those over $500,000 and 3 percent for those over $1 million.

This translates into a combined city-state income tax of 11.5 percent to 13.5 percent. Add in federal taxes, and the burden approaches 50 percent. It’s outrageous.

Taxes in New York City already are nearly 50 percent more than in any other US city. Adding to that burden as we go into a recession is an admission by some legislators that they have no plan for the state and city economy.

This approach is also a money-loser for the state. Gov. Arnold Schwarzenegger last week said that half of California’s $14 billion deficit is due to people and business leaving the Golden State because of high taxes.

Continue reading here.

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March 10, 2008 by Tom Armstrong.

The Inequality Myth in today’s WSJ is splendid.

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March 10, 2008 by Tom Armstrong.

This WSJ opinion today on public policy and the misallocation of scarce investment resources. 

The Presidential election is still eight months away, but it is already affecting investment decisions. That’s the import of a Journal story last week noting that heavyweight investors Wilbur Ross and Bill Gross are making a big bet on bargain-priced municipal bonds that have been dumped by hedge funds facing margin calls.

 These fellows are no political fools. Hillary Clinton and Barack Obama are both promising to raise taxes enormously — on capital gains, dividends and high-earning Americans. That would make such tax-free investments as munis more valuable as demand for them increased relative to taxable vehicles. Whatever his other motives, Mr. Ross confirmed the tax point by saying that “There’s a high probability that personal tax rates will go up” and thus make muni bonds more valuable. Mr. Ross is something of a specialist at investments that anticipate political intervention. During President Bush’s first term, he bet heavily and successfully on trade protection, buying bankrupt steel companies and investing in textiles.

We don’t begrudge Messrs. Ross and Gross for responding to such political incentives, though if we hear either of them lobbying for a tax increase in the next year, we’ll know why. As for the larger society, steering marginal investment dollars into the hands of politicians won’t do much for wealth creation. And this is only the first of the ways investors would try to game higher tax rates.

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