The Bright Coast

Progressive Thoughts from San Diego Alums on Law, Politics, and Culture

770 Point Drop in the Dow

Posted by progressivethink on September 29, 2008

Well here we go; this is what happens when politicians don’t act.  The market fell 770 points after the failure of the bailout bill in congress.  The bailout bill failure, which would have authorized 700 billion in money to buy distressed mortgage securities, resulted in a loss of 1.4 trillion today.  So by not authorizing the bill, we actually already spent the 700 billion.  The market is down 4.2 Trillion for the year in fact.  While there were issues with the bill (notably the lack of a provision allowing bankruptcy judges to rewrite mortgages), the longer we wait, the more risk of financial meltdown we incur.

Instead a bunch of libertarians on the Republican side are stuck in some laissez faire 1800’s mindset, with the belief that government should not intervene in the markets.  Socialism, they scream.. its unamerican!  Well, i’m pretty sure in the next month or so that this meltdown will start to affect the constituents in middle america.  Then people won’t be complaining about using government largesse to save the economy, protect jobs and allow us to continue the American way of life.  Let me paint a little picture… Banks are currently hoarding cash, as they need liquidity to cover losses in the mortgage securities.  This is filtering down into the greater economy as they no longer want to lend money to businesses as well as for home and car loans.  What short term loans they do make will be at very high interest rates. This is already occurring as we speak.  Once businesses cannot get short term credit, they will be unable to take out loans to pay payroll, or invest in their business.  This will force them to begin laying off employees – directly hitting the average American.

The contagion has now spread globally, with Asian and European markets taking a nosedive.  We began to see the effects in Europe as Fortis (a large Belgian institution) was partially nationalized, and a B&B a British bank collapsed and was taken over by the FSA.  It’s going to be a long road ahead; Congress MUST act.

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28 Responses to “770 Point Drop in the Dow”

  1. Anon said

    plagiaristicthink?

    brightcoast: if you’re going to accuse a writer of plagiarism, at least be assertive enough to leave a valid email address to reply to.

  2. Ken Wilson said

    It is an interesting picture you paint, but here is another. Repeal “mark to market”. That would take care of about 70% of the problem of illiquidity. The next step would be to repeal Sarbanes-Oxley, that law costs small businesses about $3 million to become a pubicly traded company. The repeal would allow for more competition which always benifits everybody. The next step would be to help businesses not by giving them a bailout, but by making them more competitive by reducing the second highest corporate tax rates in the world. You could induce investor confidence by repealing the capital gains tax. Allowing the free market to actually be free would solve the problems we are now experiencing. This was a problem of overregulation, not underregulation.

    And as to your “picture”, good businesses do NOT pay their payrolls by taking out loans, nor do they continue to pay dividends when claiming to be cash poor. Good business practice also demands that the majority of reinvestment comes from profit margins, not loans. The overused and abused interstate commerce clause was not intended to be used as a means of nationalizing the nation’s economy.

  3. Concerned citizen said

    Repeal Sarbanes Oxley? That’s a terrific idea! Especially considering it “benifits” everybody to do so! Come on now . . . oh wait, I forgot that the fundamentals of our economy are strong. Well, I guess we can repeal SOX, or perhaps we can just fire the chairman of the SEC? When in Rome…

  4. Anon said

    If you’re going to be a writer, don’t end a sentence with a preposition.

    brightcoast FYI anonymous, ending a sentence with a preposition is not grammatically incorrect as popularly believed…

  5. Anon said

    You’re certainly correct that there is no official rule about ending a sentence with a preposition. Dictates of style and grace may oppose this choice, but technically, you’re right.

    However, even the most ardent supporters of the practice acknowledge it is only proper in certain situations. For example, when strict adherence to the “rule” would be absurd (i.e. rephrasing “Look what he’s gotten himself into”) the “rule” may be ignored. However, extraneous prepositions are still wrong by all accounts. (i.e. “Where’s he at?”)

    Although debatable, your sentence probably contains an extraneous preposition, because it could easily be rewritten to read, “…at least be assertive enough to leave a valid email address for reply.” Let me know your thoughts.

    Can the site’s tagline include “grammar” now? 🙂

    brightcoast: well anonymous, I could have alternatively phrased the sentence thusly: “At least be assertive enough to leave an email address to which I may reply.” However, I am more inclined to allocating my time to more important issues than responding to passive aggressive posters. Additionally, I prefer to use Boost Mobile (TM) cell-phone speak as evidenced by the catchprase: “Where you at?”

    P.S. Where are your quotation marks?

  6. Anon said

    Ad hominem attack in just our third exchange? Good luck in the courtroom.

    brightcoast:I never said I wanted to be a litigator. And assuming arguendo that I did, I think the jury would go for it.

  7. Anon said

    What do you mean by where are my quotation marks?

  8. brightcoast said

    Sorry, your post was so similar to content on the website that I got the two confused. My bad.

  9. Ken Wilson said

    The Cost of Being Public in the Era of Sarbanes-Oxley, Foley & Lardner LLP, June 15, 2006.

    In addition to analyzing the increase in audit fees paid by public companies, the report presents the results of a survey of public companies on the effects of SOX. Of the 114 public companies to return surveys, 33 had annual revenue of $1 billion or more, 80 had annual revenue under $1 billion, and one company did not provide its annual revenue.

    84 percent of respondents overall felt that the company’s overall administrative expenses had increased “somewhat” or “a great deal” as a result of recent corporate governance and public disclosure reforms.

    82 percent of respondents felt that corporate governance and public disclosure reforms are too strict, and no companies felt the reforms are “not strict enough.”

    As a result of the new corporate governance and public disclosure reforms implemented since the enactment of the Sarbanes-Oxley Act in 2002, 21 percent of companies are considering going private, 10 percent are considering selling the company, and 8 percent are considering merging with another company. A majority of the respondents who said they were exploring the option of going private, selling or merging were companies with under $1 billion in annual revenue.

    34 of respondents percent agreed that the cost of Sarbanes-Oxley Act compliance has resulted in budget and/or staffing cuts in critical areas of the business.

  10. brightcoast said

    I’m sorry, you expect me to take seriously the report of a clearly interested party on the matter? How about a report from an independent group?

  11. Ken Wilson said

    The courts take iinterested party reports seriously all the time. They’re called amicus curiae breifs. You said you are in law school? Wow.

  12. Ken Wilson said

    And you have not addressed the other points in my plan, like reducing corporate tax rates so we no longer would have the second highest corporate tax rate in the world. Or eliminating the capital gains tax to increase investor confidence.

  13. brightcoast said

    I am well aware what the function of amicus briefs are, thank you. And I’m flattered you would compare me to a Supreme Court Justice.

    It seems to me corporations are having no problem making exhorbitant profits and paying their CEOs record high salaries, so I don’t see how a corporate tax rate reduction is necessary. I also agree with Senator Obama that the loopholes are so big that American Corporations end up paying one of the almost lowest rates in the world.

    How exactly would eliminating the capital gains tax increase investor confidence? How would that give investors the peace of mind to know that criminal behavior by corporations will go punished for breaches of fiduciary duty?

    Lastly:
    “84 percent of respondents overall felt that the company’s overall administrative expenses had increased “somewhat” or “a great deal” as a result of recent corporate governance and public disclosure reforms.

    82 percent of respondents felt that corporate governance and public disclosure reforms are too strict, and no companies felt the reforms are “not strict enough.” ”

    Who cares how they felt?

  14. Ken Wilson said

    Define “exhorbitant”. Is it not the idea of a business to make as much as possible? Do you begrudge lawyers charging $250 per hour, many people say that is exhorbitant. When businesses make bigger profits, they hire more people, grow the business, raise salaries, pay dividends and pay more taxes. It is a win for everybody. Loopholes like what? When the base rate is 35% it is an incentive to move to India (30%), China (25% +3% for foreigen based businesses), or Ireland (12.5%).

    Investors have to watch their buys and sells, because each transfer of money from a sale is taxed through the Capital Gains Tax even if the entirety of a sale is reinvested. That money was already taxed when the investor first made it from his job, then taxed again when investing, then will be taxed when bequeathed to his heirs. Investors would feel more confident about investing if they knew they would be able to keep more of their money.

    Also, the way businesses FEEL about a market climate makes a world of difference in how they respond to different situations in the world, be it a credit crisis, where to expand their business, the decision to pay dividends or not and how much, etc… The way a business feels can influence hiring, and layoffs, benifits, and pay. EVERYBODY should care that 84% of respondants felt that the cost of doing business went up in America. Want to see jobs stop going overseas, make the business climate FEEL nicer here.

  15. Anonymous said

    Ken Wilson letting his debate skills off the leash. Brightcoast…not so much.

  16. brightcoast said

    When you take the time to proofread your arguments, then I’ll take the time to respond to them. There is this wonderful tool called spellcheck. In the interim, here’s some nice reading for you: http://www.cbpp.org/4-9-02sfp.htm
    http://www.americanprogress.org/issues/2004/04/b45142.html

    Don’t pretend corporate tax loopholes don’t exist.

    And for future reference, the purpose of this blog is to discuss the law, not Introduction to Economics.

  17. brightcoast said

    P.S. anonymous, my BFF, I do actually have a real life outside of the blogosphere 😉

  18. Ken Wilson said

    I have two jobs will be attending USD Law in the Fall. I have a life too. I just happen to type quickly and would rather get my ideas up. It is nice to attack the style over attacking the content. I was a Political Science and History major, not business or econ, but anybody can educate themselves by doing a little research on their days off.

    You started it with a post on the state of the economy and possible support for the bailout.

  19. brightcoast said

    I started it, lol, that says it all. Looking forward to the next round. Maybe I can be your mentor next year 🙂

  20. Ken Wilson said

    That would be great.

  21. Ken Wilson said

    Those two links were interesting. How about this, amend the tax code so that all loopholes are closed, and the effective rate is lowered. Say make the rate a flat 20%. 20% of all earnings of a corporation would be taxed, period. The necessity of a billion page return would be eliminated, and transparency easily accomplished.

  22. brightcoast said

    I agree that we need some sort of tax reform so that the code is simpler.

  23. Ken Wilson said

    Would you agree to a similar reform in the personal income tax? Say 20% of total earnings, flat. No deductions, no loopholes. You make a $1,000 you pay $200, you make $1 mil, you pay $200,000 in taxes. Accountability could be easily enforced, people could do their taxes without expensive programs or lawyers or accountants. Think of how much money and time everybody would save.

    Or, if that seems unfair to the lower classes in your estimation, make it graduated but topped out at 20%. Still no deductions, still no loopholes. The Tax Code could be reduced to a single page. (That would make the tax law classes really easy. 😉 )

  24. brightcoast said

    Interestingly, I’ve thought about a similar plan based on the concept of tithing. My only issue with it is that it might be more difficult for those lower on the spectrum to be able to pay the same percentage as people who make $1 mil for example– which is where the graduated rate comes in. (Un)fortunately, I haven’t taken Tax yet, and I shudder at the thought, but it seems to me the code must have deductions, etc. for some logical reason, or else they wouldn’t be there.

  25. Ken Wilson said

    The deductions are put in to influence behavior. We pushed homeownership, so we gave a deduction for the interest paid on your home loan, thereby giving an incentive to buy rather than rent. That is just one example, I don’t believe that we should be trying to influence behavior by using the tax code.

    So, how about this. Everybody who earns 35K or less a year is exempt. Everybody else pays a flat 20% on total earnings.

  26. Anonymous said

    Then making between 35k and just under 45k makes no sense.

  27. Ken Wilson said

    I personally am in favor of a simple flat tax rate of 20%, no exceptions. I was merely offering up some alternatives to that plan for those who feel that it was unfair to the lower wage earners.

  28. brightcoast said

    20% is way too high to pay for people who make $45k a year. It’s probably even too high for those making $100k, especially if you take away housing deductions such as mortgages, people will have little if any purchasing power. (Especially if they live in California)

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