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10/24/2008
Parins: On government, over-leveraged
A friend who knows Wall Street described to me the über leveraging of financial institutions as a function of very complex derivatives. What is leveraging? Remember that schoolyard teeter-totter when a heavier kid could balance the lighter kid by sitting forward on the board? That's “leveraging” your lesser weight. But if the big guy gets off the board too fast, you hit the ground hard, cracking your tailbone - the equivalent of being over-leveraged.
Ok, now what is a derivative? I asked that one myself and he told me that a derivative is a financial contract that says you either may or will do something, IF something else happens. The contract allows you to either buy something, for instance oil, or you can buy a derivative whose value depends on that something, like a right to buy oil at $90 per barrel. That right is only valuable IF oil is above $90 per barrel. So the value of your right to buy -- a "call" option -- DERIVES from the value of oil.
Unfortunately, if you can believe it, some State School District investment officers dabbled in these derivatives to grow their underfunded pension plans. They are rubbing their tailbones now.
But the WILL-IF derivative structure reminded me of something else in the context of over-leveraging. The Oneida WILL pay me $35 for every dollar invested IF the little silver ball settles in Red 23. Now that’s keeping it local.
There is a point in our over-inventive financial markets at which money is not MADE but WON. It becomes a zero-sum game that does not grow, but rather cannibalizes our economy. On Wall Street it’s short sellers, people making money from the falling value of a company – and the crime is that you don’t always have to own any company stock. Cannibals eating the dead and dying, is this our America? When folks get a clearer picture the backlash could be brutal.
Like Wall Street, government has gotten too greedy and clever with taxes and our economy has ceased to grow. Taxes fairly collected and spent should promote our economy to grow. We are trapped in a tax hell, but before we start ‘short selling’ ourselves, like School Districts dabbling in derivatives, we must consider other ways to escape.
Some of these escape plans will be risky, but won’t be as irreversible as over-taxing ourselves or landing on our tailbone. Like ending the corporate income tax. Just ending it. Almost nobody pays it anyway; revenues have steadily declined toward zero for decades as the tax code has been predicated towards reducing the tax. What’s worse, the tax code has incentivized companies to leave our shores to avoid the tax, taking jobs with them.
What if we just treated corporations like personal income generators and just taxed the personal income? What a gift to our business community. We could also stop the corporate welfare -- those tasty pastries known as tax credits and state grants. Our economy would grow like crazy.
And we could get rid of half of an impossibly arcane tax code and axe a few thousand state workers on the corporate sides of the Depts. of Revenue and Commerce. This might help Diamond Jim get re-elected by actually making progress toward his impossible promise to cut 10,000 state workers. But if he is willing to sign such a law, I am willing to risk putting him back at the helm for another four. (What?)
Richard Parins is President of the Brown County Taxpayers Association.
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