Congressional Democrats (and others, to be fair) have frequently referred to Fed Chair Bernanke’s expertise on the Great Depression as an argument for the proposed bailout plan from Treasury and Congress. Bernanke is a smart guy and an accomplished academic, but in the crisis at hand (which we recently argued is not a repeat of the Great Depression), we place more credence in economist Nouriel Roubini, who has been calling the credit crisis for some time. According to Roubini, the rescue plan as currently conceived is a "disgrace" and a "rip-off":
…the claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification. This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer – the common and preferred shareholders and even unsecured creditors of the banks. Even the late addition of some warrants that the government will get in exchange of this massive injection of public money is only a cosmetic fig leaf of dubious value as the form and size of such warrants is totally vague and fuzzy.
So this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the financial firms (not just banks but also other non bank financial institutions); with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession. Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money.
This makes us more confident in our assessment that the electorate (and the House members who listened to them) are "smarter" than the group of people who drafted the plan. Something needs to be done, but doing it poorly could be worse than doing nothing, as painful as that might be. Michael Lewitt apparently agrees with that argument. He echoes the advice we offered in a client note this morning, which is to breathe deeply and relax–the best thing to do in a panic. He also garners our admiration by quoting Thomas Kuhn.
On a side note, we also agree with him that the income gap (more properly the compensation gap) is a legitimate social concern. But we disagree with the rather simple prescription of higher marginal tax rates as the best way to rein it in. Consider that the gap accelerated in the 1990s following legislation that capped the deductibility of executive salaries at $1,000,000. That led to the expanded use of derivative compensation, which made the leverage gimmicks that Lewitt describes almost inevitable. He sounds to me like a Bill Gates or Warren Buffet, someone who seems to believe that, because they are willing to endure a much higher marginal tax rate, everyone else in their income bracket would be too. When the total tax burden on income is accounted for, it becomes exceedingly unlikely. That said, we think the income tax is the least of our tax code concerns. Complete overhaul would be nice, but short of that, we need to focus on the anti-competitive and distorting nature of corporate taxes.