Archive for August, 2007

Housing And The IRS (August 27, 2007)

Posted in Housing, Taxation on August 27, 2007 by

Taking the first of what may be a dozen steps to address the housing collapse cannot be done until the extent of the addiction is admitted.  Looking up and around and conceding the truth might create panic.  The monthly mortgage payments must be made this month, and next month, and next month, and next month, and next month, and next month, and next month, . . . . . . . . . . . . and then they are adjusted upwards and must be paid the next month, and next month, and next month, and next month, and next month, and next month . . . . . . . .  and yet there is little money to make the payments.  There are no easy solutions.

The Internal Revenue Code should be amended to eliminate the tax on debt forgiveness.  Few taxpayers realize that a debt forgiven either by the action of the creditor or a foreclosure or the like is still considered taxable income by the IRS.  The New York Times recently ran an article discussing the tax provision and its consequences for taxpayers who have lost their homes.  Individuals either must file bankruptcy at the right time or prove insolvency.  Eliminating the tax would perforce reduce tax revenue, although the provision is not taxing what most individuals generally and reasonably regard as income.

Pursuant to section 121 of the Internal Revenue Code, if a taxpayer lived in a “principal residence” for two out of the five year period before it is sold, the taxpayer can exclude up to $500,000 of gain if married and filing a joint return or up to $250,000 of gain if filing a separate tax return.  There should be some consideration to changing the residency requirement to five out of the ten year period before the residence is sold.

The mortgage interest deduction is the last major tax relief for the middle class.  The interest deduction for other consumer purchases was eliminated years ago.  Taxpayers simply refinanced their homes, used the funds for consumer purchases and took one obese mortgage interest deduction.  (See the e-ssay dated February 7, 2005 entitled “The Microeconomics of Suburban Subsistence”).  The deduction phases out at higher income levels.  Revisiting and fine tuning the deduction seems prudent.

These suggestions are not adequate.  There are no easy solutions.

Bumper sticker of the week:

It will get worse

More Exuberant Irrationality (August 20, 2007)

Posted in Economics, Federal Reserve on August 20, 2007 by

Last Friday, the Federal Reserve lowered the “Discount Rate” it charges commercial banks for the money it loans directly to them by a substantial half a percentage point.  The Fed also suggested that it might take more action to cushion the economy from tightening credit.  The “Discount Rate” is not the same as the Federal Funds Rate (FFR) which is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.  The Discount Rate is the rate charged by the Fed to a bank; the FFR is the rate charged by one bank to another.  Banks typically do not borrow from the Fed, so the Discount Rate does not usually impact the economy as substantially as the FFR.

As a professor, the Chairman of the Fed, Ben Bernanke, studied the impact of illiquidity on the Great Depression.  He also has stated that the Fed should be concerned primarily about “price stability” or in popular parlance should set rates to avoid inflation.

Junkies crave junk.  The purveyors of junk bonds/stocks (collateralized mortgage loan obligations and the like) are seeking a bail out from the Fed.  Bernanke’s concern should be the impact on the economy not on those who were and are part of the problem.  The concern should be with Main Street not Wall Street.

The meeting of the Federal Reserve Open Market Committee (FOMC) on September 18 may be the most important gathering since Bernanke began his term.  The underlying economy is unsound.  [See the e-ssay dated January 30, 2006 entitled “Greenspan’s Legacy – Apres moi, Le Meltdown”].  The dilemma is that there is both stagnation [see the e-ssay dated August 7, 2006 entitled “The Fed: Deal With ‘Stag’; Deal with ‘flation’?”] and inflation [see the e-ssay dated July 16 entitled “Back Door Inflation”].  Reducing interest rates will encourage inflation and promote more debt.  Raising interest rates will both contain inflation and attract private funds.  Tough call.

Bumper sticker of the week:

I want to be irrationally exuberant again

F-22s: A Toy Recall? (August 13, 2007)

Posted in China, Military on August 13, 2007 by

The Air Force recently took delivery of a new expensive toy, the F-22 Raptor fighter jets.  America rules the military skies.  That is not stated boastfully.  That superiority should shape policy.  American air military superiority is so overwhelming that the Fly Boys note:  “If it flies, it dies.”  They also note that the current fighter, the F-15, has never been shot down in combat.  The world’s troublemakers pose and impose a threat to civilian commercial and private aircraft, but not to American air military superiority.  America can control the sales and distribution of its military aircraft.  The current fleet of F-15s can be upgraded with new avionics and radar and is more than capable of sustaining the air superiority.  Perhaps these new toys should be recalled and the resources used for national defense.

The new high-tech airships almost fly themselves, although they carry two pilots: a man and a dog.  The man rewards the dog with a bone; the dog bites the man if he touches the plane’s controls.


Those Chinese.  When a Chinese toy manufacturer did not get the lead out of the paint, the toys were recalled.  He was so dishonored that he committed suicide.  By contrast, after delays and cost overruns in the production of unnecessary hardware, American military toy manufacturers give themselves bonuses and stock options.

On the other hand, with the Army and the Marines debilitated by Bush’s War, America may need to enhance its air superiority and maintain and expand its naval capabilities.  There are growing concerns that nation-states may present conventional military challenges in the future.  Despite the delays and cost overruns, these expensive toys may turn out to be a prescient purchase.

Bumper sticker of the week:

Don’t worry what people think

They don’t do it very often

Kids As Consumer Durables (August 6, 2007)

Posted in Consumerism, Society on August 6, 2007 by

The latest effort to “keep up with the Jones” apparently requires one to breed a brood.  A program on NPR observed that some stay-at-home moms are not satisfied with two kids.  They look around at their friends (competitors?) sporting a litter in tow.  To affirm their life decisions, they are having three or four kids.  Two kids, two cars.  More kids; more cars.  The reasons to have children are admittedly more complex than just competing with one’s neighbors.

Americans are consumed by their compulsion to keep up with the Jones.  However, today the compulsion requires one not only to keep up with the Jones but also to vanquish them.

Bumper stickers of the week:

My larger covey of kids can beat up your covey of kids

All seven of my kids are on the honor roll at Benedict Arnold Middle School