fair and balance in tax reporting

a friend of mine sent me this link to consider: http://finance.yahoo.com/banking-budgeting/article/106769/Do-the-Rich-Really-Deserve-Such-a-Bad-Rap

It actually gave me an opportunity to do a little research on what i think the 'real deal' is. What I mean by that is uncovering just exactly what the super rich people make in relation to how much they pay taxes, so after a little "research" i wrote back this message:

good article, but:

"Approximately one fifth, 20.58%, of all income was earned by the top 2.67%, those households earning more than $200,000 a year." from http://en.wikipedia.org/wiki/Household_income_in_the_United_States

If someone complains that 2.67% of the country pays 20% (or whatever) of the taxes and that's not fair, then they're not giving you all the relevant information to assess the facts. It is said that "there are three types of lies: lies, damn lies and statistics." To be fair and balanced in that statement/complaint, that those 2.67% also make 20% of the money.

The same page also says:

"Roughly one third, 32.5%, of all income in the US was earned by those households with an income over $150,000, approximately the top five percent."

and "The bottom 6.37%, however only earned 0.27% of all income."

I think that's a little more balanced.

***I cut some of the rest of the message out because it was the start of another argument/line of thinking. I didn't even mean to send it to him. Hope he didn't get confused from it.***


for instance, those 400 people they paid 1.77% of all taxes for the year, but i would also like to know what percentage of total income they earned.

Those 400 people made 105 billion total.

It's one thing if you pay 1.77% of taxes, but if you make 5% of the money, then that doesn't "add up"

Keynes on Stable Interest Rates

A good buddy of mine was recently critiquing my admonition that the Fed/Treasury or whatever should post its long-term interest rates. My position is that the volatility that the Fed creates to put the pedal and brakes on the economy (to fight inflation and deflation) actually create some of the volatility in the market (as in how the Real Estate boom was created due to the low interest rates the Fed used to battle the after-effects of the dot-com bubble.

I read an Austrian Economics blog that put up a post on this very subject. The funny thing about it is that it doesn't quote some quack of an economist to bolster its point. They quote Keynes himself, who many people attribute the policy of large government spending:

“A low enough long-term rate of interest cannot be achieved if we allow it to be believed that better terms will be obtainable from time to time by those who keep their resources liquid. The long-term rate of interest must be kept continuously as near as possible to what we believe to be the long-term optimum. It is not suitable to be used as a short-period weapon.” (“How to Avoid a Slump,” The Times, Jan. 13, 1937, p.13).

whaddaya think?

Spoiled Rotten and Piles of termite wood

Amidst my moaning and complaining about everything, i just saw this video from a blog that i follow that puts things back into perspective.



Glad to be alive.

Now that that spasm of gratefulness has passed: back to the moaning.

A few days ago i ordered the book Termites Turtles and Traffic Jams by Mitch Resnick. Resnick was a computer programmer who wrote a program that turned scientific thinking about a lot of things on its head. Basically he modeled how a particular single-celled amoeba was able to assemble into a smile mold and disassemble from one without some central coordinating cell. Before Resnick scientists tried to locate a 'pacemaker cell' that coordinated the creation and dissolution, much like the pacemaker cells in our hearts and the drummer in a band.

Resnick created a program called Starlogo in which you could program populations of cells with very different rules. He put in a few basic rules that

This is a round-about way to justify why i think there should be an income or wealth cap.

I was reading an excerpt from his book where he was talking about a different modeling project with termites and wood piles. He would change the rules of the little world, such as how many termites were in the arena, how many woodchips they would put in a pile and things like this. He was talking about the ramifications of the different rule systems when he put in a different criteria.

For the most part, these termites would make piles of wood. He could also implement a rule that said that termites could not take woodchips from a pile with 10, 25 or some number of chips already. This drastically changed how many piles were made and how fast.

When he talked of this, I'm not sure whether i thought it or he said it (my perusing on google books stopped) but I thought to myself why he could just put a cap on how many chips a pile can accrue!

Let's say there's 1000 termites and 2500 wood chips. The rules of how termites pick up chips and move them around i thought were just like an economy. People make money (pick up chips) and put them in piles (buy something at a business or into savings or investment accounts). If you say that termites cannot take from piles with more than 10 chips, then you could have a maximum of 250 piles. But there will always be some chips circulating so that limit will never be reached.

In this scenario, there will inevitably be one or two piles of chips with say 50 chips, which is large compared to other piles, and again extra large when compared to the piles of no chips had by some termites.

But if you make a rule that says no pile can grow larger than 30, then what's going to happen is that more termites will have more chips! I don't see any systemic reason as to why this wouldn't be feasible in the economy.

The argument i've hear so far is that a limit on wealth or income would stifle creativity and innovation. But those are individual characteristics, not characteristics of the system.

Already the government is supplying banks with loads of old, new and unmade money not for the survival of any one individual bank, but for the system. It's about time that we start look to literally level the playing field.

What's up with the root?

I miss that light-skinned black guy who used to come on BET news, what's his name? Courtney Malloy. He's so buried in history that it took me about eight searches to verify that this guy even existed. Apparently he was a columnist for the Washington Post. and pretty much all i got was this article on www.blackcommentator.com, which by the way is going out of business. But that was just a reference to an article that is no longer available on the washington post website.

Anyhow. What's my gripe? Well, I am a regular Slate reader. I especially like the column jurisprudence, there's something widly entertaining about how they cover the shenanigans of the supremem court. And perhaps only they can make what the Supreme Court does into shenanigans.

Back to topic.

I'm a regular Slate reader, and i want the same kind of poignant commentary about the world and life from a black perspective. They have a sister-site (can we call them sisters?) called The Root. But everytime i go to the root, i'm sadly disappointed. I don't know, i read the NYT, economist sometimes and a few other online rags that keep me up-to-date. however, whenever I read the root (no longer caps), I'm sadly disappointed.

Most of the stories they have are of the Chris Brown (W) vs Rihanna (L) tragedy. They talk about entertainment and sports. But is that all black people do?

Great, i want a black perspective. But sometimes that means I want an economist who is black, not just some random black guy talking about the economy (me, duh). I'd like a political commentator or seventy who are dissecting the politics of the day, mostly the way the mainstream media does, but who also has the compassion, wherewithal and sense to throw in something from a grounded multi-cultural perspective. I'd just as well like to see the Sino-American or Hindu-American (maybe not Jindal) viewpoint. But it seems that those viewpoints are so niche and pushed to the side, that they can't even be mainstream.

Maybe I'm just spoiled by NYT and Slate. I'm just upset that the Root doesn't have anyone that speaks statistics and translates them into english.

Nassim Taleb on bonuses

1. I was just saying that i was sick of the bailout. and this comes along.
2. I'm beginning to like this guy (Nassim) more than the wizard of omaha.

How Bank Bonuses Let Us All Down

by Nassim Nicholas Taleb

One of the arguments one hears in the compensation debate is that the bonus system used by Wall Street - as John Thain, former Merrill Lynch chief executive, put it - is there to "reward talent". While I find this notion of "talent" debatable, I fully agree that incentives are the heart of capitalism and free markets - but certainly not that incentive scheme.

In fact, the incentive scheme commonly in place does the exact opposite of what an "incentive" system should be about: it encourages a certain class of risk-hiding and deferred blow-up. It is the reason banks have never made money in the history of banking, losing the equivalent of all their past profits periodically - while bankers strike it rich. Furthermore, it is that incentive scheme that got us in the current mess.

Take two bankers. The first is conservative. He produces one annual dollar of sound returns, with no risk of blow-up. The second looks no less conservative, but makes $2 by making complicated transactions that make a steady income, but are bound to blow up on occasion, losing everything made and more. So while the first banker might end up out of business, under competitive strains, the second is going to do a lot better for himself. Why? Because banking is not about true risks but perceived volatility of returns: you earn a stream of steady bonuses for seven or eight years, then when the losses take place, you are not asked to disburse anything. You might even start again, after blaming a "systemic crisis" or a "black swan" for your losses. As you do not disgorge previous compensation, the incentive is to engage in trades that explode rarely, after a period of steady gains.

Here you can see that this mismatch between the bonus payment frequency (typically, one year) and the time to blow up (about five to 20 years) is the cause of the accumulation of positions that hide risk by betting massively against small odds. As traders say, they have the "free option" on their performance: they get the profits, not the losses. I hold that this vicious asymmetry is the driving factor behind investment banking.

If capitalism is about incentives, it should be about true incentives, those resistant to blow-ups. And there should be disincentives to remove the asymmetry of the free option. Entrepreneurs are rewarded for their gains; they are also penalised for their losses. Now, by comparison, consider that Robert Rubin, the former US Treasury secretary, earned close to $115m (€90m, £80m) from Citigroup for taking risks that we are paying for. So far no attempt has been made to claw it back from him - only UBS, the Swiss bank, has managed to reclaim some past bonuses from its former executives.

For hedge funds and medium-sized companies, the incentive problem might be a simple governance issue between private entities free to choose their contract terms. However, when it comes to banks and other "too big to fail" entities, the problem is severe: we taxpayers in our respective countries are funding these global monsters and are coughing up money for mistakes made by bankers who retain their bonuses and are hijacking us because, as we are discovering (a little late), banking is a utility and we need them to clean up their mess. We, in fact, are the seller of that free option. We should claim it back.

The Obama administration has been trying to set compensation limits for banks under the troubled asset relief programme. But this is insufficient. We need to remove the free option. Beware the following situations.

First, those who are taking risks even outside Tarp or society's protection can still be gaming the system - since their risk-taking can result in a collapse, with the taxpayer having to step in. For instance, Goldman Sachs, the US bank, might want to avoid the limits on executive compensation for its managers. That should be fine so long as society does not have to bail out Goldman Sachs (or, worse, its creditors) in the future.

Second, Vikram Pandit, Citigroup's chief executive, while claiming to want to earn one single dollar a year in compensation unless the bank returns to profitability, is still getting a free option given to him by society. He does not partake of further losses; we do.

Third, leveraged buy-out companies used the free option by borrowing heavily from the banks and taking monstrous risks: they get the upside, banks (hence we taxpayers) get the downside. These partnerships made fortunes in the past on deals that society will have to bail out. They too should have their past profits clawed back.

Indeed, the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses.

Finally, I was involved in trading for 21 years and I can testify that traders consciously play the free option game. On the other hand, I worked (in my other job as risk adviser) with various military organisations and people watching over our safety. We trust military and homeland security people with our lives, yet they do not get a bonus. They get promotions, the honour of a job well done and the disincentive of shame if they fail. Roman soldiers signed a sacramentum accepting punishment in the event of failure. This is prompting me to call for the nationalisation of the utility part of banking as the only solution in which society does not grant individuals free options to look after its risks.

No incentive without disincentive. And never trust with your money anyone making a potential bonus.

© 2009 The Financial Times