Democracy will cease to exist when you take away from those who are willing to work and give to those who would not.
Thomas Jefferson
Abraham Lincoln serves as an inspiration for our new president, as he does for millions of people who credit him with saving the Republic and freeing the slaves. Lincoln was indeed a great man, who left enough of a paper trail to document his greatness. But our founding fathers – Washington, Franklin, Adams, Jefferson, Hamilton – were arguably even greater, for it was they who created a republic worth saving.
Rick Santelli, a CNBC regular at the Chicago trading pit, takes a straw poll on the justice of bailing out people who added a new bathroom in a house they couldn’t afford in the first place. In the pit, the response is unanimously negative. The chorus of raspberries reflects a growing sentiment among people who play by the rules that they should not be forced to rescue those who knowingly took on more debt than their income could handle.
Those who think it is right to bail out borrowers who are over their heads say that the borrowers were victimized by villainous banks, that they didn’t fully understand adjustable-rate mortgages, that they were simply chasing the American dream, home ownership.
They have a point. Many if not most mortgagees didn’t understand the terms they agree to. Their parents never told them, as mine did, that you shouldn’t pay more than a week's wages for a month's rent. More’s the pity, they never learned that in school, either, because you never learn even rudimentary economics in school.
We are a nation of economic illiterates. What’s worse, most of our Congressional representatives, judging by their televised comments during recent hearings, don’t know a thing about derivatives, CDOs, LIBOR, option spreads, ETFs, etc. So, instead of asking intelligent questions of the witnesses, they rail against private jets, golden parachutes, and bonuses. There’s nothing like righteous indignation to show the folks back home how tough you are on the fat cats.
If you’ve been reading these blogs for a while, you know that I have been a stock-market bear for the last two years. Alas, today I am just as bearish as ever. There is no bottom in sight, despite the cheer-leading from the CNBC die-hards. Their arguments are all based on history: Recessions and bear markets last x months on average, the stock market always turns up six months before the economy turns, if you wait until you see the economy pick up you’ll miss out on the opportunity of a lifetime, blah, blah, blah.
Much as I appreciate history, in this case it is of no value. In previous recessions we were not in hock to China. In previous recessions we were not being impoverished by runaway entitlements. In previous recessions we had a world-class manufacturing base. In previous recessions we weren’t fighting an expensive war that had no end in sight.
President Obama, who deserves more support than he is getting these days, will soon start getting blamed, unjustly, for the spreading misery. He began his presidency with the nation in a sharp red-blue divide, and whatever he does to address the economic collapse is sure to enrage either the reds or the blues. Enraging the left is probably a safer course, because he has a deep reservoir of support there, but that would go against his instincts.
What should he do? Despite the popular shibboleth that “Main Street is more important than Wall Street,” the stock market is our best barometer of the national confidence in the economy. Consumer confidence has been destroyed, and as the consumer goes, so goes 70 percent of our economy. And the consumer is now seeing his or her 401-K and the dream of a comfortable retirement go down the drain with the stock market.
Like it or not, Main Street cannot recover unless Wall Street recovers.
Here’s an idea: Declare a moratorium on capital-gains taxes. Maybe a year, maybe two. There aren’t any gains anyway, so it won’t cost the Treasury much unless the stock market takes off. And if it does take off, it will be because risk capital has begun flowing again, and the risks have started paying off. As it is, the risk capital is all in Treasury bonds and mattresses, and that doesn’t help.
Cutting the capital-gains tax rate to zero, even for one year, would be controversial, but it would in keeping with Obama’s stated appetite for thinking outside the box. As for Congress, he could charm the Democrats, and the Republicans wouldn’t dare complain.
While the stock market would be a primary target of such a move, the elimination of capital-gains taxes might also invigorate the real estate market.
There’s a risk that the moratorium would ignite the stock market for a short-term rally with no economic follow-through. But I think the risk-taking current runs deep in this country, and that, once the flow is restarted, the economy would heal itself.
It won’t happen. For this president, eliminating the capital gains tax would be, not just outside the box, but outside the galaxy. Thus the economy and the stock market will continue south. I remain a bear.
