Will a Tax Cut Solve the Crisis?

From Economix:

With hardly anyone noticing, [Mr. Paulson] pushed through very technical and obscure changes to tax regulations that provide a “tax subsidy” for acquirers of troubled banks. Just as automakers stimulate car sales through rebate checks, the Treasury is providing a form of tax rebate to acquirers of troubled banks. Everyone can thank Hank Paulson and his stealth tax-driven fiscal stimulus for the astonishing news that Wachovia was being acquired by Wells Fargo and not Citigroup. It was Mr. Paulson’s tax subsidy to Wells Fargo that provided the fiscal grease to make this deal happen. Pundits who point to the deal and proclaim that the “free markets work without government help” don’t understand the motivating effect of several billion dollars of tax benefits to Wells Fargo.

[Note: The Wachovia deal with Wells Fargo is on hold until legal questions are resolved.]

Update: See fred, in comments.

Comments

[James Kroeger]

Unbelieveable. Paulson figures that the way to prevent the economy from slipping into depression is for the government to give billions of taxpayer dollars to rich bankers who will feel so comforted by the free money, they will then feel like taking risks again, at the same time that property values are continuing to decline. Yep. Hopefully, this will help non-Republican economists like Prof. Thoma to see that it really was insanely stupid to agree to a bailout plan that was conceived by the same people who were responsible for creating the whole mess.

Giving money to bankers is just another way of trying to enable the whole corrupted mess to continue for a while longer---until the next bailout is urgently requested---at the expense of the taxpayer. Sure, throwing billions at people who failed spectacularly is going to buy some time, but not much.

Mark, banking is not some kind of profound science that can only be trusted to profit-lusting risk takers. However much you may want to look down on the managers of China's banking system, it has nevertheless made it possible for the Chinese people to experience one of the most dramatic and dynamic periods of economic growth in all of history. They managed to accomplish this feat without the profit motive driving 'financial innovation.'

Congress needs to perform bypass surgery. If it were to create a taxpayers' bank, it would be able to provide the Main Street economy with all of the loanable funds it might require while the private banks are undergoing their 'shakeout.' Once the smoke clears, the taxpayers' bank could be re-privatized, if that is what Congress would want to do. Would they actually do such a thing?

If a taxpayers' bank provided mortgage re-financing [on emergency-favorable terms], small business loans, big-ticket consumer loans, and loans to non-financial corporations, in a Post Crisis world the surviving privately-owned banks [and insurance companies?] would perhaps compete with each other for the more risky segment of the market---at their own risk---providing adventurous rich people with a way to gamble with their money accumulations.

Or maybe not.

[fred]

I've written extensively about this on Naked Capitalism (I'm a tax lawyer).

Please be aware that this Notice (I believe it's 2008-83, or close enough) is absolutely ultra vires. IN ENGLISH that means there is no authority for it and it is likely void.

Without putting everyone to sleep...

The two main kinds of regulations are legislative and interpretive. Legislataive regulations are those which implement Congressional delegation to the Secretary. A statute will literally say, "The Secretary shall by regulation set forth..."

The other kind is interpretive, which means what it sounds like (there are also proecedural, but that's not important here).

Section 382 was always absolutely clear: You cannot acquire NOLs (net operating losses) by acquiring a corporation; the change in control kills your ability to do that, or largely kills it.

A few weeks ago the Service issued a Notice to allow Fannie and Freddie to maintain their NOLs notwithstanding the change in control by declaring in the Notice that in their case, the acquisition by the US govt of the equity position was not a change date (kind of like saying blue is not blue in this case).

Now, however, on Tuesday, the Service issued a Notice that legislated away the language in 382 that said "corporation" and basically stating that for now, "corporation" means "corporation except a bank."

There is no delegation of Congressional authority for this.

This is DIKTAT.

This should be grounds for impeachment, but in any event I believe it likely that this Notice must follow APA (administrataive procedures act) requirements and can be attacked on those grounds.

I have no doubt that Citi is getting this advice.

WHY ISN'T ANYONE ENRAGED THAT THE EXECUTIVE BRANCH NOW PURPORTS TO HAND OVER $30,000,000,000 WITHOUT ANY LEGAL AUTHORITY...

(I believe Wachovia has $74B of loan losses which Wells can now use entirely, instead of about $1B per year over many, many years; I would imagine on city, state, and federal levels, where applicable, and adjusted for the time value of money, the value of this tax break IS ABOVE THE $15B Wells is paying.)

IN OTHER WORDS, TREASURY HAS JUST PAID, OR IS ABOUT TO PAY, WELLS FARGO $15,000,000 TO ACQUIRE WACHOVIA FOR FREE.

Where is the outrage?

[James Kroeger]

Where is the outrage?I'm feeling it.

It's welling up pretty strongly.

I am astounded that so many non-Republican economists really don't give a damn about economic justice.

[Ryan]

Is there any reason why you would assume non-Republican (whatever that means) economists would care about economic justice?