50 thoughts on “The Season for Rollbacks”

1. Agent#777 September 5, 2008 at 4:39 pm

   It goes further than that. Whether we were participants or not, it is as Jefferson warned us – the banks now own us. Paulson and Congress have seen to that.
2. George8 September 5, 2008 at 6:04 pm

   And the surging unemployment certainly will make matters much worse. I believe that we have not seen anything yet relative to what is coming to towns like Irvine etc. – the more desirable locations.

   PS: IR, the blog site is back to great speed today. Thanks.
3. Surfing in Newport September 5, 2008 at 6:12 pm

   Most of the asset deflation is happening with non-productive assets: securities, houses, land, etc… All that is happening is a transfer of wealth. This is why we will have a recession and not a depression. Overall wealth of a country comes from increasing the productivity of their citizens, not from asset inflation. To the extent that foreigners hold these non-productive assets, the transfer of wealth is actually a net positive to the U.S..

   What I find disturbing about our country is that we actually encourage the investment in speculative assets through the tax code: lower cap gain tax and exclusions for things like houses. Think of this way, when you make an investment in a machine for the factory floor or education for a better job, there are no tax benefits. In fact for most equipment, you don’t even get to write off the full cost of the purchase when it happens. In effect, the government has reinforced the positive feedback loop that creates bubble markets.
   1. Schadendude September 5, 2008 at 7:03 pm

      Surfing,

      I would only be a net positive for the US is we produced anything of value. 70% of our economy consists of services rendered to each other. Aside from medicine and food there’s not much industry left that makes things we can export other than raw materials.
      We should already be in the grips of a nasty recession, but of course it’s an election year, and recessions are bad for politics. So despite soaring inflation, the fed discount rate is 2%. The government has set your dollar holdings aflame. Will we sit by and watch them all burn ?
      Probably.
      1. Dejnov September 5, 2008 at 7:58 pm

         Part of the reason that investments are traditionally taxed at a lower rate is due to their speculative nature. The majority of investments ultimately end up losing money. Lots of part time and amateur investors don’t realize this. The main reason that you see many books touting the great returns possible within the stock market is due to the easy access of credit within the last two decades and asset bubble inflation that has occurred recently. Take out the last 20 years from the stock markets and the returns are much more modest.

         Factor in the current P/E ratio and the vast majority of investors notice that the markets are vastly over-valued. This phenomena isn’t limited to US and Euro markets only. We’ve seen the start of the correction in the developing markets also. Last year, one looking at the China stock market would have been aghast at the 40 P/E ratio it was sporting. Last time in the 1980s when a similar level of overvaluation was reached the correction was quite dramatic with the South Asian tigers losing anywhere from 80% to 90% of their price. We’re starting to see this again.

         I find it hilarious when others talk about manufacturing being nonexistent in America because I actually am in manufacturing. I understand that low-level manufacturing isn’t done here anymore and what I do would not normally be considered manufacturing (since we have small production runs and employ highly trained engineers), but it is manufacturing. I do agree that most manufacturing isn’t here anymore and I don’t actually foresee a trend where that would change. The price multiple for labor won’t support it. I don’t know if we “need” manufacturing per se, but a diversified group of products would allow the country to do better when tough times are upon us.

         In reading my last paragraph, I don’t want you to get the idea that I’m against or for manufacturing in this country. I do agree that it’s pretty much non-existent, but I don’t know if I’d consider it the end-all be-all solution to our current problems. In general, manufacturing is lower pay versus skilled service jobs and is usually the first cut when a company downsizes. There are going to be a lot of factories in China closing due to overproduction and I don’t think our unemployment will be nearly as scary as what China will be facing soon.

         Diversified production from agararian to manufacturing brought a huge growth in living standards and I believe the same will be seen from moving to a service economy from manufacturing. I think the bigger problem is the lack of efficient clearing of bad debts (due to the Treasury and Fed manipulation).

         Dejnov.
         1. Surfing in Newport September 5, 2008 at 8:58 pm

            Boy have you partaken of the kool-aid. The formal reasons given for lower taxation of long term capital gains is that:

            1) You’ve already paid taxes on that money…hmm same for an investment in education
            2) That you need to compensate for inflation…again goes for any investment
            3) That they want people to hold assets longer…but encouraging this decreases liquidity in the market and therefore makes it more subject to speculation.

            Risky investments are rewarded with higher average returns, not by lower tax rates.
            1. Dejnov September 5, 2008 at 9:16 pm

               Actually I don’t think I have drank any Kool-Aid at all. Far from it. History has shown that low taxation on investments has proven to be a strong long term boost to economies.

               In fact you can check it out yourself, the world bank has a listing of economies and the cost of doing business for each economy.
               (http://www.doingbusiness.org/)

               You’ll notice (with a litte perusal) that the strongest economies are ones with the lowest taxation rates on investment capital. (Hong Kong, America, Singapore, New Zealand, etc.)

               Hong Kong has changed since it went back to China’s hands (and their increased taxation), but the other examples still stand.

               In fact you can also see examples were countries have increased their taxation rates on investment capital and their economies have suffered because of that (France).

               Take a look. Do a little research.

               Dejnov.
            2. Surfing in Newport September 5, 2008 at 10:00 pm

               Okay, I took a look.

               Lowest tax rates: Maldives… that’s a hot bed of economic development… and that’s not the only 3rd world economy in the top 10.

               Seems as if protecting investors is more important. This makes sense. You can always factor taxes into your required returns, what’s more difficult is factor in the chance of getting ripped off.

               Think about it, what else are they going to do with the money? Spend it? Put it under the mattress?
            3. Dejnov September 6, 2008 at 12:12 am

               And remember, why do the Maldives (Cayman Islands) even exist… because of the high rate of taxation in other countries. Companies will go where they maximize their rate of return.

               Just like manufacturing to China, Microsoft’s latest dev lab in Canada, ExxonMobil’s general headquarters in Dubai, and Luxembourg and Monaco in France.

               Socialists like to state that everything can solved by allowing the rich to pick up a higher portion of the tab, and fail to realize that rich people have a choice also, they can decide to leave the dinner party, too.

               In a globalized economy, don’t expect less of this, expect more. If you aren’t the competitive choice, you probably won’t be chosen.

               Dejnov.
            4. Hormiguero September 6, 2008 at 3:37 am

               Actually, the Maldives are on the other side of the world from the Caymans. I’d imagine that they ‘exist’ because India didn’t want to bother with claiming them. “Socialists” and “Progressives” also tend to believe in the virtue of subsidized public education, which would probably include some Geography.
            5. Surfing in Newport September 6, 2008 at 7:14 pm

               Wow, don’t even know where to start on that thread.

               First, the cayman’s as a global headquarters. They may be doing that to avoid paying US taxes on their sweat shop profits. There are probably ways around that if it was actually that big a deal. Anyway, I don’t believe you should tax corporations.

               Second, Canada as a low tax nation??? They probably located it there because of tax incentives to do R&D in Canada and the low cost of health care. I’ve worked in Canada, it’s not a low tax nation. I could also be because they can no longer get enough Canadians into the U.S. because of Visa restrictions.

               Never said that I just want to soak the rich, my argument is that we shouldn’t give preferential treatment to long term capital gains. If you are saying that it’s the rich that are the only ones that enjoy this tax break, then why should the rich pay 1/2 the marginal tax rate of the median income worker of Irvine.
            6. Dejnov September 6, 2008 at 8:29 pm

               Hey Surfing in Newport,

               First of I want to apologize for sounding antagonistic in the last post. I wasn’t really angry or thought your comment was wrong, I think I was too excited and my post doesn’t reflect that. Emotion doesn’t translate well over the internet.

               I am pretty passionate about small government (you can tell I’m a conservative) and sometimes I get carried away with the argument. I have done a lot of personal research into small and big governments and have decided personally that I would rather see smaller government whenever possible as opposed to larger governments (anytime taxes are reduced it’s an incentive to reduce government).

               I’m not for, tax shelters, I do think that there’s a minimal amount of government required to provide basic services and whenever it is reduced below that you have problems. Whenever it gets too high, you also have problems. I am opposed to the zoning that exists for the City of Industry which basically employs people from the surrounding areas, but provides no services for them (a mini-tax shelter here in LA).

               I think my main point and more of a response to Schadendude also is that a lot of people blame the service economy and our move to that as a bad thing. I don’t necessarily support that viewpoint. History has shown that countries that have moved from agrarian economies to industrial economies have prospered, and the same will happen with the economies that move to service economies.

               America still does manufacturing, true most of it is severely threatened and what little that’s left could leave at a moment’s notice, but America still does manufacturing. Most of the manufacturing that has moved to China is low margin manufacturing and wasn’t extremely valuable to begin with. Cars, airplanes, factory equipment, and construction equipment are still manufactured within the US. The manufacturing that has moved to China is a lot of optional entitlement manufacturing that isn’t as necessary or technically complex (think Ipods, washers, stereos… all nice to have, but not necessary). In our current recession/depression you will see sales for a lot of those products reduced drastically. We won’t have to deal with the massive layoffs, China will. We don’t have nearly as big a problem with unemployment as China will. Look at their current stock market for indication. They are down more than 50% while we’re down 20%. In the last big bust (late 80s early 90s) the South East Tigers had a collective average stock market loss of nearly 90%. Thousands of people in Thailand, Laos, and yes China were laid off. Their unemployment broke single digits (I think high teens). America did not see nearly as big a problem (nor do I think we’ll see anything like that this time around either).

               I think that our move to a service economy does have some problems and may occur in fits and starts. I also think that the big problem is the definition of a service economy. Generally, I like to break down services into two general fields: titlement services (like real estate, creditization, etc.) where you pay a “service” fee to transfer capital, and production and process services (like servers, consulting firms, mutual funds, etc.) where you also pay a “service” fee to manage capital. I think that the latter is a true service economy and companies like IBM and Xylinx are at the forefront of this economy, and the former is more due to the easy credit situations that we’ve had for the last 20 years.

               Titlement services are an outcome of an easy credit time, while production and process services are more in line with what a service economy should be. As we go through this necessary downturn, you’ll see a reduction in the former and a natural increase in the latter. Which will make our economy stronger.

               Dejnov.
         2. Schadendude September 5, 2008 at 9:15 pm

            Hey Dejnov,

            Losing our manufacturing base is a problem insofar as it creates massive trade imbalances that deplete our national wealth and erodes the purchasing power of the dollar. The ‘service economy can sustain us’ fantasy is just that. The growth of such a sector is only beneficial if by and large we’re keeping the money circulating in the US. Unfortunately, much of the infrastructure, machines and tools that fuel the service economy are manufactured overseas, ensuring that a natural byproduct of service economy growth will be large-scale exportation of national wealth to other nations. In point of fact, our largest export these days is inflation, since the fed sees no problem printing dollars to replace those lost to foreigners. What happens when those foriegn holdings get repatriated or spent on the commodities open market ? Hyperinflation.
            There is a hidden cost to getting everything we’ve come to rely on so cheaply. The standard of living increase from ‘free’ trade is a temporary effect. Un(der)employment, loss of global purchasing power of the dollar and eventual reduction in standard of living are the long term effects. We’re beginning to see this now. The trend will accelerate.
   2. finsup September 5, 2008 at 7:16 pm

      Amen, Newport.

      In my opinion, the tax code (while not to blame for this mess) certainly encouraged it … through the mortgage interest deduction, 1031 exchanges, exclusion of capital gains on the sale of a house, etc.

      The tax code also encourages a “consumerist” economy, vs. a “savings and investment” type economy. Do you think this has anything to do with the housing and financial market crisis?

      I’ve recently become involved in the FairTax organization; I’ll include a short synopsis from their website. This might be a solution. I’d be interested to know if anyone else on this blog has any. (Solutions, that is.)

      “What is the FairTax plan?

      The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement, and, through companion legislation, the repeal of the 16th Amendment. This nonpartisan legislation (HR 25/S 1025) abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities. The IRS is disbanded and defunded. The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.”
      1. zoiks September 6, 2008 at 12:21 am

         Great, so those of us who’ve been saving and investing get Federally taxed twice: once as we earned and saved our money, and once more now when we spend it.

         Yeah that’s fair. Let’s just pile it on top of all the other fairness in American government.
         1. SeattleDave September 6, 2008 at 3:55 am

            I believe that as the Fair Tax in instituted, the income tax (and apparently all other federal taxes) goes away. So you don’t pay tax twice — only once when you spend the money.

            So…if you spend 600K on a spiffy Irvine home, does that mean you pay a “Fair Tax” on that 600K?

            p.s. Another name for the Fair Tax is a 23% (or 30%, I’m not sure about the math) National Sales Tax. What’s so “FAIR” about that?
            1. Bitter Renter September 6, 2008 at 4:08 am

               Note that zoiks referred to saved money. Money that was saved from income earned prior to a federal sales tax being implemented (other than in tax-deferred plans like 401(k)s) would be double-taxed when spent.

               Does the FairTax plan account for this at all? It would be nice if there were some sort of waiver of the sales tax for money that was already taxed. Not sure if it’d be practical to implement something like that, though. I guess the only way would be to give you a waiver up to the amount you had in bank accounts as of the time of implementation of the sales tax. That would mean wealthy people could avoid ever paying any tax again, though, which presumably wouldn’t fly.
            2. Bitter Renter September 6, 2008 at 4:16 am

               I suppose another way to do it somewhat fairly would be to phase out the income tax over a generation. That is, if you’re born the year the sales tax is instituted or later, you’re responsible for paying the sales tax. Otherwise, you continue to pay income tax.

               This way only inheritance money or money gifted from still-living relatives would be subject to double taxation. Of course it’d mean having to show your ID even when buying things with cash.

               With a sales tax system the government would also have to get more into your business whenever you bought something from another country, so they could charge you an import tax equivalent to the domestic sales tax.

               Grey markets not charging sales tax would also obviously be more of an enforcement issue with a federal sales tax system.
            3. SeattleDave September 6, 2008 at 4:22 am

               Another thing that needs to be accounted for is the tax treatment of the poor. Since they don’t pay income tax to begin with, I don’t see how a 23% sales tax does them any good. You can’t “exempt” the poor from paying the tax when they purchase something. You can rebate them money, but that will involve some lag time. What’s so “FAIR” about that?
            4. Bitter Renter September 6, 2008 at 4:29 am

               Note the quote from FairTax: “a prebate to ensure no American pays federal taxes on spending up to the poverty level”. That’s prebate, not rebate.

               Seems like there are some interesting issues there if someone ends up spending less than the prebate amount, but perhaps they just reduce their prebate amount for the next year (or years) to compensate.
            5. SeattleDave September 6, 2008 at 4:47 am

               And what about all those poor people who make more than the poverty rate. The 2008 federal poverty guideline for a single individual is $10,400. Every cent above that level is taxed at 23%, without a “prebate”. And since they did not pay income tax, they get no benefit from that. Granted, they will not pay Soc.Sec. tax, but I’d rather pay that 7.5% instead of 23%. How “Fair” is that?
            6. eastcoaster September 6, 2008 at 4:50 am

               Don’t waste your time worrying about what will/will not get taxed or when it would be taxed. A “true” Fair Tax Law will never get passed thru Congress. There are too many special interest groups and too many exclusions that would be tacked on to any bill coming out of Washington. Look at any bill currently being passed, it could be a simple “Pooper Scooper Law” and it would have 49 extra items attached to it.
4. myrtle beach condos September 5, 2008 at 7:41 pm

   I agree the tax system here is completly screwed up. I 100% agree with the fair tax plan as well.

   Maybe one day the country will wake up and see?
   1. SnowKat September 5, 2008 at 7:50 pm

      Hope so… but doubt it. =/
   2. Ed Dunkle September 5, 2008 at 10:25 pm

      The tax code is a political animal and I don’t think it will ever be simplified. It’s too much fun for legislators to enact policies through it. Should we encourage solar energy? Solar energy credits! Should we give a break to families with kids? Child Credit! And these play well during campaigns.

      I would like to see unearned income (interest, dividends) taxed progressively. And without the estate tax the U.S. would become even more of a third world country than it already is. Do we really want 1% of the citizens to permanently own over half the country?
      1. SeattleDave September 6, 2008 at 6:14 am

         The last true tax simplification law was passed by Congress in 1986. It was a grand bargain that traded lower tax rates across the board for fewer deductions and exclusions. The special treatment of capital gains, interest and dividends was eliminated. ALL income was taxed at the same lower rates. Sadly, over the next two decades, the rates stayed pretty low while the deductions and exclusions slowly crept back in. New exclusions were instituted for capital gains, interest and dividends. Today we have a fairly regressive tax system where taxes, as a percentage of income, have fallen for the top income groups.
         1. finsup September 6, 2008 at 7:50 pm

            Frankly, I expected the FairTax to be hammered here much more than it was — the apparent level of support is surprising.

            What is NOT surprising, though, is that the critics offer no alternative solutions, either in whole or in part.

            I’m not advocating the FairTax as a panacea to all our economic woes, but I do believe it would go a long way towards starting to solve them.

            Stay tuned, folks. More and more people are coming to realize the benefits of the FairTax; this year for the first time a major presidential contender (Huckabee) was on board.

            Most of the critics of the FairTax either 1.) do not understand the entire proposal (although it would vastly simplify our tax system it is anything but “simple” to completely understand; or 2.) have no idea how much they REALLY pay under the current tax code — like the guy above who thinks he pays 7.5% FICA. (Ask any self employed person what you really pay for Social Security — or how regressive the SS tax really is.)

            I enjoy this blog and thanks for the opportunity to bring up the FairTax — I felt is was relevant to today’s comments. I will resist bringing up the subject again as I don’t want to constantly interject my own pet cause.

            The feedback was interesting and entertaining. Thanks!
5. Schadendude September 5, 2008 at 7:55 pm

   I’m a fan of the fairtax also. Boortz and Linder really got it right I believe. Unfortunately as long as we have the Fed tinkering with the value of our fiat currency, the savings encouraged by the plan will be taxed by inflation.

   We need to go back to the Gold standard. ‘Financial innovation’ is horesqueeze. The law of supply and demand are as certain and predictable as that of gravity.
   1. Bitter Renter September 6, 2008 at 1:16 am

      “Horesqueeze”?
6. lendingmaestro September 5, 2008 at 8:23 pm

   I get a back yard for my half million bucks, right? What’s that you say? No? Aww shucks!!
7. caycifish September 5, 2008 at 8:33 pm

   All I have to say is: good song choice. But featuring the movie? It didn’t do the stage work justice.
8. Schadendude September 5, 2008 at 8:41 pm

   Just realized how atrocious my blogging diction has become. At the risk of sounding self-indulgent, apologies.
9. jsgoodkind September 5, 2008 at 8:42 pm

   How is cash king if we are in a period of monetary deflation? LOL
   1. jhill September 5, 2008 at 8:52 pm

      Because you lose money even faster in equities, and really, really fast in real estate!
   2. IrvineRenter September 5, 2008 at 10:35 pm

      Monetary deflation causes the decline of all asset values relative to cash. It is not a deflation in the value of cash, it is a reduction in the total amount of cash. Fewer dollars valuing the same assets means all asset values drop.
      1. Chris September 6, 2008 at 2:00 am

         De-leveraging is also a huge factor in today’s deflation phenomenon. The constriction of credit like you mentioned yesterday is one factor in the current contraction of RE prices. Commodities, OTOH, was inflated partly because of speculation and partly because of drop in interest rates.

         We still need commodities such as energy and food to survive.
10. SoCal78 September 5, 2008 at 9:43 pm

    “Five-hundred, twenty-four thousand, nine hundred dollars…” Thanks, now I have this new chorus stuck in my head.
11. alan September 5, 2008 at 11:27 pm

    Good song choice.

    Rent closes this weekend on Broadway after a very long run. The NY Times today has a nice send off to the musical.
12. tonyE September 6, 2008 at 12:10 am

    Someone better wake up this neighbor

    http://www.redfin.com/CA/Irvine/206-Tuberose-92603/home/5945365
13. tonyE September 6, 2008 at 12:12 am

    Going into cash?

    Heck, cash is going down too.

    I’m investing in pesos and Guatemalan underwear factories. The former is not being devalued and the latter provides something we can not do without. 😉
14. Sam September 6, 2008 at 1:01 am

    Hi IR,
    I live in Claremont area and i was looking at some homes on market in claremont and upland. The prices are down, but most homes which are reasonably priced (not too low either) get an offer within couple of weeks. I saw three homes and all of them had atleast 2-3 offers already. The agent told me that investors are picking up lot of properties and a lot are from out of state.
    This is pretty contradicting compared to what we been reading in news.
    1. Agent#777 September 6, 2008 at 2:16 am

       Were these super-smart investors like Susan Fallis?

       http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/04/BU2F12NEBN.DTL

       So many things wrong with that story, I am not even going to comment further. You have to read it yourself to believe it.
       1. IrvineRenter September 6, 2008 at 3:29 am

          That article is amazing on so many levels. A speculator thinks that her bank should lower her interest payment so she can break even on her speculative flips? I am speechless…
          1. Sam September 8, 2008 at 10:19 am

             the sad part is that the bank may actually reduce the rate and encourgae this kind of reckless behaviour.
             So, basically the wise people who took conservative 30 yrs loan and did not drink the koolaid are efectively going to feed the bill for these speculators. They will keep paying the interest rates they signed form while uncle sam steps in to reduce the rates for these risky buyers. now the freddi man and fannie may under feds, the 14bln bill is upto tax payers. ARGh!
    2. IrvineRenter September 6, 2008 at 3:32 am

       Sam,

       Intelligent investors are not buying properties for excessive valuations, stupid speculators are. They will get burned. There is no shortage of would-be Donald Trumps out there. If the foreclosure problem was not so large, these fools might even be able to support the market, but they can’t, and they won’t.

       It is ironic if out-of-state buyers are actually purchasing California real estate as speculative flips. Much of the bubble in surrounding states was caused by California buyers speculating in Arizona, Nevada, Idaho, and Utah.
       1. Priced_Out_IT_Guy September 6, 2008 at 3:52 am

          Everyone in SoCal during the bubble were speculating in Nevada, AZ, and Utah. Hair dressers, accountants, engineers, retirees, etc, many of whom I know. Every one of them got burned, except of course those who bought outright with cash, but their hopes and dreams for making a fortune are dashed and they’re just renting their properties out, often in markets that were overbuilt–ie new areas of Phoenix like Surprise. The owner-occupancy rate is very low compared to the national average.
15. Beinformed September 6, 2008 at 1:25 am

    INFLATION, TAXATION ==== REVOLUTION!!!! WAKE UP PEOPLE!! It is time that we stop complaining about all the SH—* that our current government is doing and make some CHANGES! We are slaves to the government and Fed. I urge Americans to listen to what Ron Paul has to say. The time for a revolution is NOW!

    http://www.youtube.com/watch?v=Qukh9ko3mw4&feature=related
16. Kirk September 6, 2008 at 10:36 am

    Fannie and Freddie will be nationalized.

    That would have been a sweet short.
17. Kirk September 6, 2008 at 10:43 am

    And bank failure #11. That’s 3 Fridays in a row. When do we get into the 2 or 3 bank failures a week mode? Soon, I bet.
18. ochomehunter September 6, 2008 at 12:31 pm

    Official depression begins this weekend when Govt. takes over FRE and FNM and assumes all liability for the $5 trillion debt. With rising unemployment, foreclosures will mount and loses will keep on mounting quarter after quarter. USD is about to get hammered, only thing keeping it up is falling EURO and recession in Europe. Things are really getting bad, be warned on a complete collapse of the US FInancial system in the coming quarters.

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