Many will argue that the bailout or the rescue plan adds a tinge of socialism to our markets. I agree, but let’s be clear, Treasury and the Feds have taken pains to construct the capital injections in the banking system carefully and have put in ‘outs’ for the banks receiving the Fed dollars to buy the Feds out and thereby convert to private enterprises that they truly are. I also commend the congress to insist on adding the option of taking equity stakes in the banks to the rescue plan proposed by the Treasury. Sometimes extraordinary measures need to be taken to preserve the capitalist system we have in our country, a system that has proven over the long term as the best way to ensure prosperity for its citizens.
Socialist model has also been discredited by the world events over the last 100 years. It is a failed system, more and more people around the world understand that it is a failed system. Sadly, it appears (if the polls can be believed) that we are on the verge of selecting a candidate to be the next President of the United States whose proposals if implemented will move the American economy towards greater socialism and less free enterprise.
Here is an opinion column from WSJ that dissects the Obama campaign’s claims of giving tax cuts to 95% of all Americans. Yes indeed, Obama’s 95% figure includes about 32% of those households that do not currently pay any income taxes due to the level of their incomes (adjusting for the credits currently available to them). Under Obama’s plan, approximately 44% of the households will not owe any taxes to the government due to the increase in the number and the amount of tax credits available to them. In fact a large number of households not paying any taxes will receive checks from the IRS. The remaining 5% of the ‘rich’ households will see significant tax increases. The ‘rich’ business owners are expected to accept the tax increases (read lower profits and lower reinvestment in job creating activities) in the name of patriotism. The proposal also provides a real dis-incentive for a ‘poor’ employed worker to work harder or improve him/herself by enacting a significantly high marginal tax rate (in the form of disappearing credits)
Welfare being such a dirty word, Mr Obama’s genius is to couch it in the form of tax ‘reform’
Here is another article that discusses Obama’s tax proposals as a form of income re-distribution. Granted that this article is from a right leaning website but in this election (more than ever before) it is important to listen to all sides of the story rather than just imbibe what the campaign PR machine pours.
Christian Science Monitor weighs in as well
I have written earlier about how I feel that Obama’s tax proposals are counterproductive to the long term growth of US economy. Any tax regime that penalizes success and rewards mediocrity does not belong in a great capitalistic society that America has built over the last century.
Now is not the time for a socialist experiment!
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Amen to that! Love your comments!
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Thanks Veronica! This is something that I feel strongly about and hope good common sense prevails
I’m not looking forward to an Obama presidency. Aren’t the people supporting him not being bothered with his past associations with the likes of Ayers and Jeremiah Wright–people who hates this country to the point of bombing its buildings and its people or publicly denouncing and cursing it? I just don’t get it. I guess they all want to be taken care of by the government under socialism and don’t give a whit about his character?
Tasha
tashabud’s last blog post..Winter Stories – Part 1
@Tashabud, it seems that the mainstream media has by and large already chosen him as the next President and therefore the press coverage we all get is strangely biased. Most people believe what the media tells them
The free market economy has taken a hard knock recently and only government has the ability to inject enough capital to keep the financial system afloat at the moment.
I was surprised that Bush was prepared to sign up for what really is a socialist experiment, but it is the only option when investors have lost confidence.
As an outsider (British), I am amazed by how so many Americans vote on image over substance and I think that the support for Obama is largely media led. McCain hasn’t done himself any favours though, by choosing Hitler’s long lost niece as his running mate though!
John Green’s last blog post..World Markets Continue Free Fall
is it socialism to want to level the playing field?! No, I don’t thinks so. McCain’s wife is heir to the Budweiser fortune. I know I am not. Most of us aren’t. it is a sad fact that most of the country’s wealth is in the hands of a chosen few,try 5% of the population. The poor get poorer and the rich get richer and the middle class get taxed up the A@s! Obama wants to tax the rich who quite frankly can afford it far more than a working class slob like me. Redistribution of the wealth is a term meaning to lessen the wide rift between the rich and poor in this country which is called social injustice. NOone is saying give money to those who don’t work or deserve it. One is saying to give to social programs that help the poor.
“If one has strength let the weak light their candles to it” Not hand one a fish but teach them how to fish! That is called fairness in a an otherwise cruel uncaring world!
-Artzstuf
-More info on this topic can be found on my blog,thanks for reading and as always “keep the faith!”
@John Green, you mostly echo my thoughts.
@Ann, to answer your question, it is not socialism to level the playing field. But Obama does not propose to level the playing field. What he is saying is that doesn’t matter how bad you play, you do not need to worry since the government almighty will level the SCORES at the end of the play. I am sure it may be considered fair by many, but it is an insult to every hard working, talented and successful player who may just say ‘why bother’ and hang up their boots
On the other hand, a successful business person reinvests in the business and creates new employment opportunities. He or She does this for purely capitalistic reasons but in the process chooses the actions that benefit the society the most. What you are expressing is a dis-belief that the capitalist system works and you would rather the government be in charge of re-distributing wealth. Unfortunately, that system has not worked in either the Soviet Union or China or Cuba or North Korea, so I have no reason to suspect that it will work better in USA.
I favor policies that reduce the use of social programs by creating new employment opportunities, over the policies that seek to expand social programs by efficiently killing the job growth machine. The first one is the pro-growth, pro-America, non-populist agenda. The second one of course is the Democratic Party agenda.
The bailout may have injected ultra-short term confidence but overall it was a very bad long-term economic move. This socialist bailout will extremely backfire and just ensured over a decade of economic and financial problems. I agree with you on your Obama point of view and that the support is widely led by an extremely biased media.
Financial bailouts have never worked and the sophisticated approach would have been the one Russia and South Korea have chosen in the late 90’s. They did not bail out their financial system, they allowed it to crash and today their economies severely outperform the global economy and will continue to do so.
Yes, there are different problems in each country but government intervention in free markets and socialistic bailouts have never and will never work. The markets should have been allowed to weed out those who do not deserve to survive the crisis which has been caused by those who would fail. After that the system cold have been rebuilt much better and much stronger.
Just look at the pathetic companies who already failed like Bear Sterns and Lehman…Merrill and AIG should have been wiped out as well and plenty others.
There needs to be less regulation BUT effective regulation and not the stupidity which the SEC, the Fed and the Treasury display. The ban on short selling backfired just like this bailout and additional bailouts will do.
Apollo’s last blog post..It was just a matter of time…
@Apollo, I appreciate the concerns about the bailout but I am slightly more circumspect about it. FDIC is allowing the weak banks to fail. To me the Feds and Treasury are acting as just another Sovereign Wealth Fund. You would note that they are not handing out money for free (aka stimulus checks). What they are doing is taking stakes which is similar to say, Dubai or Singapore investing in one of the financials in US. As long as the US keeps its stake as non-voting and gets the hell out when it is no longer needed, I think we will be fine. Of course, whether they do this remains to be seen. If US had a SWF and had invested in, say, ING, and lets say the Dutch SWF invested in Citi, I dare say the accusations of socialism would not have come up. I also think it is quite unfortunate that the label of ‘bailout’ has stuck. Maybe they should have just called it a show of confidence in the long term health of American financial institutions and that would have gone over much better in the media
Semantics aside, I readily agree that the markets should have been allowed to function without government intervention for its long term health. Short term issues however, trumped all the free market considerations and thankfully we will never know how bad things would have gotten absence the Fed/Treasury intervention
As for shorting, I do not short but I do not think shorting is bad. However, illegal naked shorting needs to be eliminated along with the use of CDS or other tools to artificially drive a company out of business. So yes, I agree that limited regulation needs to be there but needs to be effective.
You are right, naked short-selling needs to be eliminated but regular short-selling should not be restricted as it is counter-productive. Yes, I agree that if there would have been a U.S. SWF which would have invested in any foreign company the word socialism would have not flashed across screens BUT this has only been done to rescue failing banks hence the term socialism. Another point worth to consider if it is really intelligent to sacrifice long-term economic health for a short-term boost of confidence among the least professional investors and retail investors. In the end of the day different opinions on a topic is the essence of what makes the markets function. If we would all share the same point of view the markets would not be able to function.
I think they could have called the bailout anything they wanted but it remains an act of socialism and as you said time will tell how long this will last.
Another point I disagree with is that we will not see how bad things would have gotten without the intervention in free market capitalism as now the overall impact will be drastically more negative and the crisis will be prolonged.
Sure, time will tell but by then it is too late to react and profit from it.
Apollo’s last blog post..More and more earnings reports come in…
@Apollo, we have a great discussion going on here. Being long time bloggers, we do have our distinct points of view. I guess regardless of what we think, some actions have been taken. Now the question is, how to best profit from them. Any ideas?
There are many in this country who wish they could work but can’t. I am completely disabled due to an injury at work and a severe car accident. Does this mean I should live in the street?! No! I don’t choose to appease those who think I am on welfare and a burden to society who don’t believe it is our duty to take care of our own who can’t. That is not socialism but ..having a heart. It is our civic duty to help others who can’t help themselves. Anyway, America is not a democracy and has had threads of capitalism for decades. It is a dog eat dog world out there and survival of the fittest. It is our duty if we have been blessed to live in the richest country in the world to help the less fortunate. I don’t lose sleep at night because i choose to share my wealth with others who are not as blessed as myself. You see I work from home although I am on disability, making wearable art and art. I am very grateful that there are social programs like food stamps,medicare,medicaid and social security that can help me and others like me. I do not consider this money welfare but something I paid into when I did work full time before my injury, for many years! Yes there are always those who know how to play the system and choose not to work but instead crank out babies who also live on the government rolls,sadly but.. I am not one of those. I do believe it is the governments ‘ responsibility to be paternalistic with regard to it’s citizens who are most vulnerable. In fact it is how we treat such unfortunates amongst us, on how our country’s image will be judged!
A Cindy McCain being made to pay some taxes on the 100 million dollars she has will not break her but.. it will a poor working class slob like myself! That is what we call leveling the playing field and redistribution of the wealth, not a handout but giving a hand like McDonalds,lol…Perhaps since McDonalds realizes it with it’s McDonalds’ house charities, is why they are so successful in the stock market,well that and they are always open,quite reasonably priced with their dollar value meals, are ofcourse world wide,convenient with their irive thru windows and quite tastey!!.
-Artzstuf
@Ann, I sincerely Thank You for this discussion and you raise some good points. I will give you my perspective. This response can be long so please bear with me.
a. You are touching on the question “What is the role of the Government” and I agree with you that the role of the government is to ensure that the basic rights and opportunities are available to all citizens. I agree that the government should implement this basic responsibility through programs and policies to help ALL of its citizens. And I completely support those programs and policies.
However, the question is whether to target these benefits directly to the relevant group of people or as in Senator Obama’s case, implement this via the tax code which will award some of these benefits to the undeserved while at the same time have other consequences that actually hurt the American economy. While we are debating which tax proposal does more to help the ‘working poor’ there is something that the McCain campaign is either unable to communicate or they get bogged down in the Obama spin machine. Please read this article on Financial Times.
b. Increase in corporate taxes on “rich corporations or small businesses” may sound good but consider who really pays for it. Do you think Wonder Bread will simply absorb these extra taxes as a cost of being patriotic? Nope, one of two things will happen. Either Wonder Bread will determine that extra tax makes the business uneconomical if absorbed and there fore they will slow down growth and hiring (or if the situation is really bad, cut production, lay off employees or even go out of business), or alternatively, they will raise the price of bread and pass on the tax increase to the consumers. In either of these situations the price of bread will go up. Who pays the price for bread? Does it hurt the “rich” more than the “poor”? I took the example of Wonder Bread, but the story will be similar in all the items that common folks consider necessities like, gas, utilities, groceries, rent, etc. Consider this too, the increase in price of bread reflects higher taxes that will now be paid by the farmers, trucking companies, bread makers, grocers, etc. And who suffers the most when companies start laying off employees? The rich or the poor??
Also take a note of the fact that the corporate income taxes in US are the 2nd highest in the developed world and is already a great disadvantage to American companies competing in the global market. Do you think making this situation even worse will improve our economic well being? Do you think making America the most expensive place to do business will help jobs come back to America??
c. Cindy McCain pays her taxes. And she helps many working slobs pay taxes as well by employing them in her business. I have nothing other than respect for all the hard working Americans who start and run businesses and create jobs in America. And I respect all working Americans who dream of a better future by working hard and doing right. But I have no respect for those that believe that these people should be punished for their success so the government can take care of ‘not fortunate’. I would rather these businesses given incentives to grow and continue to succeed and take care of ‘not fortunates’ by creating new job opportunities. Government’s role should be to level the playing field by providing conditions of equal opportunity. Beyond that it is an individual’s job to take the opportunity and make something of it based on their hard work and talent. Government’s job should not be to redistribute wealth.
Now if you contend that we should provide more opportunities to disabled or working mothers should be allowed more time to spend with their kids, etc, I will be in complete agreement. But that is not what is at stake with Obama’s tax plan.
Thanks for your patience
@Ann: I don’t know where you get ‘the U.S. is the richest country in the world’ info from and maybe you get the biggest debtor nation confused with wealth. I agree with you that there are those who depend on health and they should get help but Arohan made some great points.
The U.S. has become extremely non-competitive on a global scale and only Japan has a higher corporate tax rate and they don’t exactly have a healthy economy but have suffered after they bailed out their financial system in the late ’90s.
Their is a right way to do it and a wrong way…you just need to look at the big picture rather than focus on a small piece of the puzzle.
To increase taxes has the opposite effect just like Arohan stated so you may get what you wish for but are you prepared to pay the price?
@ Arohan: I agree with you Arohan and you make some great points. You gave a great and quick explanation of what an increase in the corporate tax rate will result in. I favor a flat tax…15% income tax…8% corporate tax and 3% capital gains tax (those who claim they could care less about capital gains tax may want to look at what they have the majority of their retirement nest egg in).
In respect to you your last response directed at me:
You are right, actions have been taken and there is nothing we can do about it so if you can’t fight it you may as well profit from it. When it comes to ideas on how to accomplish that there are so many opportunities out there in the markets right now that it is almost pathetic to find something which will fit each investors portfolio.
You are right, we do have a nice discussion going here…
Apollo’s last blog post..Bank of Canada tinkers with rates…
@Apollo, you are right, the opportunities are aplenty. It is mouthwatering to see so many good companies selling at such low valuations. Frankly, buying any random portfolio of 10 stocks today will likely return way over the historical S&P performance in the next 5-10 years. And if one chooses the 10 stocks wisely than one would do really well indeed
The problem however is two fold:
a. Picking the stocks that will give the biggest bang for the buck, and
b. Finding capital to deploy
However, it is likely and probable that the valuations will remain attractive for some time to come so there is really no hurry. Besides, if Obama wins the presidency than I may want to tilt my investments towards more international names
@Arohan: Personally I could care less about P/E ratios and valuations. One thing I do not do is compare a portfolios performance to the S&P 500 or any other benchmark as a matter of fact because that just sets the bar extremely low. Sure, over 80% of the worst professional investors don’t even manage to beat the S&P 500 but there is a reason why they run a lousy excuse of a portfolio.
Compare it to the following:
Lets assume that you want to give high jump a try. Now you set the bar at 6 inches which is ridiculously low. All you have to do is fall an trip and you may cross that bar. Now you jump 2 feet (which is still very very low) and applaud yourself as you extremely outperformed your expectations.
Judging a portfolio’s performance based on any benchmark is equal to bury expectations in the ground. There are so many opportunities out there but there have always been and there will always be regardless of what happens (election, crisis, meltdowns, etc…). Most companies are still overvalued at current prices. The performance of equity markets should have no impact at all on any (sophisticated) portfolio as opportunities are created on both sides of the spectrum…it does not matter if there is a bull or bear market…long or short position.
I hope your portfolio yields the desired results.
Apollo’s last blog post..Bank of Canada tinkers with rates…
@Apollo, we do have different investing styles. For me, valuations are very important. Now to clarify, when I say valuations, I do not imply PE ratios, although it may be a part of it. In fact, I have found and invested in stocks with good results that were running temporary losses (so no PE ratio) but were attractively valued based on what I thought their prospects were in the future. Many different aspects are looked at before I make my valuation call and even then it is mostly a very subjective call.
Another way to say this is an undervalued stock for me is the one that is currently attractively priced based on what I think its real price should be.
I agree that S&P 500 is a low benchmark and this was mentioned just as an illustration for the valuations today. I have no benchmark. I am not answerable to anyone except myself. My only goal is to maximize my profits. And I do not know if the message comes through as clearly in my blog postings as I would like, but I would be the first to step forward and say that EMH is bunk.
Good luck to you as well!
@Arohan: You mentioned one reason why I dislike value investing. You said that you classify a stock as undervalued when it is attractively priced based on what you THINK the real price should be.
You think but you do not know so it is more of an educated guess that you take.
Just to throw in another point of view for you to probably disagree:
Equity market movements are over 95% predictable so to me there is no reason to take an educated guess. Successful portfolios are not build on what you think but on what you know.
I enjoyed the discussion Arohan and value your point of view.
Take care.
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