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September 16, 2008

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Brendan, thank you for linking to this interesting article. The entire article is well worth reading.

Contrary to Brendan's assertion, the WSJ did not say that cutting taxes is "the solution to the financial crisis and the looming recession." They said it was one part of the solution. They recommended a number of other steps, including the formation another Resolution Trust Corp., like the one created by Paul Volker, which, they say, "helped to buy, stabilize and liquidate troubled assets amid the savings and loan mess of the late 1980s."

There's a "damned if you do, damned if you don't" feel to Brendan's criticism. If the WSJ argued against tax cuts, they'd be hypocrites. When they espouse them, they're overly consistent.

Furthermore, tax cuts are a normal strategy to fight recession. Even Barack Obama agrees with this principle.

There's a "damned if you do, damned if you don't" feel to Brendan's criticism. If the WSJ argued against tax cuts, they'd be hypocrites.

It's not fair to level that charge against Brendan unless you've spotted him accusing the WSJ (or some other group) of being hypocrites for arguing against tax cuts.

But it's pretty strange to argue that the current fiscal mess can be cured with "pro-growth" tax cuts when the problem stems from reckless investment brought on by deregulation (which was also the cause of the S&L collapse). Additional tax cuts that encourage investment in a pyramid scheme would only have delayed the collapse, at which point the problem would have been much worse.

Long term growth will only come when people are confident that their investments are based on real value and that requires that the law prohibit the kind of creative accounting we've seen to date.

"Has there ever been a circumstance when the Journal wouldn't recommend a tax cut?"

If your primary economic philosophy is that it is always best to let indviduals make their own decisions about what to do with their money, why wouldn't tax cuts nearly always be viewed as a part of any positive econimic solution?

Jinchi, I agree with you that the S&L crisis was brought about to some degree by deregulation. Perhaps a bigger cause was the big increase in the federally insured amount of S&L deposits.

But, I don't see recent deregulation. On the contrary, corporations are now saddled with substantial additional regulations due to Sarbanes-Oxley. That burdensome law didn't do much good, did it?

Note the point made by Megan McCardle:

We start by asking what beefier SEC enforcement was supposed to do to portfolios and banks that were in full legal compliance with the SEC rules until the subprime market collapsed....

As an aside, we point out that the more lightly regulated hedge fund industry is weathering this storm better than the more heavily regulated banks.

Comparing a hedge fund to a bank is more misleading than helpful. They have different structures, ownerships and goals. An investment bank is different yet again. Hedge funds do and have failed on a regular basis.

Sarbanes-Oxley isn't specific to the Financial Industry and it wasn't introduced to lessen risk to the Financial System. If Sarbanes-Oxley was a poorly drawn set of regulations (and it was, to some degree) that doesn't prove that regulations are useless or counter productive.

Repeal of the Glass-Steagall Act (under Clinton and a Republican Congress) had more to do with the current situation but I wouldn't say it was "the cause". Still, it allowed commercial banks to engage in activities that were more similar to investment banks.

There are several different problems all at work and several different types of companies involved. Fannie and Freddie weren't banks, investment banks or hedge funds. They existed with little government oversight but with implicit government support. They were probably the weakest link in the chain and were where the lack of regulation hurt.

Additionally, the firms providing debt analysis (Moodys, S&P Corp., etc.) played a part by disregarding the risks associated with reduced lending standards and with lax analysis of asset values (the underlying real estate).

Lack of regulation clearly was a factor. Just as an absence of zoning laws or construction codes could be a factor if buildings are lost in a storm or an earthquake. But I wouldn't blame Congress - I'd blame the CEOs involved.

"If your primary economic philosophy is that it is always best to let individuals make their own decisions about what to do with their money, why wouldn't tax cuts nearly always be viewed as a part of any positive economic solution?"

Lets just do away with the Federal Gov altogether.

OK, supply-side revenue growth is a myth of sorts.

But, the Bush years are proof positive that marginal, repeat marginal, tax cuts on the rich overwhelmingly boost growth and lower unemployment.

The real solution to our economic woes in not tax and spend but efficiency in spending. But Democrats, beginning with the education unions but continuing endlessly refuse to permit efficiency in government spending because waste is their source of campaign finance. They pass around useless funds, jobs, and perks; they get campaign contributions.

Simply by outlawing civil service unions, as was the status under the domestic policy wise FDR (as was anti-dole safeguards) would return us to spending efficiency; no civil service worker and their family will starve.

The Democrats have this routine down, cause misery and blame Republicans; witness how the minimum wage increase lost all these jobs. Witness, too, how the main fiscal policy instrument of the USA, the Congress, has wrecked this economy.

TOH

To add to my long comment above, the only problem with "just" blaming the CEO's is that they didn't really take significant personal risk even if they were instrumental in making the mistakes.

Instead, the risks they took earned them great salaries (for a number of years) while others (taxpayers, lower level employees, investors, etc.) are suffering most of the consequences.

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