Friday, January 9, 2009

Tax Cuts for the Wealthy: A Perpetual Growth Machine?/ Job losses/commercial real estate goes begging in Middle Tennessee

 The Tennessean had a story about how difficult it was to rent space in a newly completed office building in Cool Springs, near our HQ in Brentwood. Cool Springs offices can't find tenants | | The Tennessean  This particular office building was owned by Highwoods Properties (HIW), a REIT, that owns similar type properties in suburban areas primarily in the Southeast where there are generally low barriers to entry.  HIW: Summary for HIGHWOODS PRPTY INC - Yahoo! Finance It is not like building a new structure in Boston, New York or San Francisco.  Williamson County is a growing and prosperous area of  Middle Tennessee, and the real estate market, both commercial and residential, has just grounded to a screeching halt.  I do not have a position in Highwood.  

 I do remember that Highwoods redeemed a cumulative preferred issue last year at par value.  If the REIT has funds available, it would be better to just wait for a large discount to par value to develop, as now, and then buy them in the open market which is what Cousins Properties is currently doing.  

I am aware that some people who had quit their jobs to become real estate agents are starting to look for another job.  This housing recession appears to me to be much deeper than the one in 1973 to 1974.  

The NYT has a story of an ongoing criminal investigation of Wall Street.   Nationwide Inquiry on Bids for Municipal Bonds -   This one involves alleged big rigging activity among banks and other companies in dealing with municipal governments seeking bids to float bond offerings.  According to this article, the alleged criminal conspiracy operated in a similar fashion to the Tennessee bid rigging scandals in the early 1980s when paving companies would meet and decide who would submit the winning bid for each project with the others agreeing to submit worse bids.  All were convicted of criminal violations of the antitrust laws.  Then the "winner" on that bid would become an agreed upon " loser" on the next one, with the overall prices of the winning bids inflated over a competitive market price.  So the bidding process installed by the both Nashville and the State to achieve the best deal was corrupted by the collusion with the governments paying more.  I suggested an additional 500 million for federal prosecutions in the next budget just to investigate criminal activity on Wall Street, maybe that needs to be increased to 1 billion.  Functional Equivalence in Bond Trading/Hedge Funds & Independent AdminstrationIt would still be the best billion this government has ever spent. 

Until recently, the rest of the world stood in awe of the American financial titans, and sought to imitate their self-proclaimed and promoted financial wizardry. Really, a wizard earning 20 million a year must be a valuable commodity.   Maybe some of them are starting to have second thoughts.  
I would hope the judge revokes Madoff's bail.  

Someone is saying the emperor has no clothes.  

Job losses are likely to get worse before finding a bottom.  The jobless rate hit 7.2% in December, the highest level in 16 years. U.S. payrolls fall 524,000 in December - MarketWatch
The report this morning from the labor department was just more doom and gloom. In 2008, 2.6 million jobs were lost, with 1.9 million of those just in the last four months.  The job losses by themselves, without any other factor, will of course cause an acceleration of home foreclosures  and consumer debt delinquencies which will aggravate the banks' problems.  I want to hear some more from the GOP about how tax cuts, primarily for the wealthy, will create some kind of magical growth machine.  Most of the growth experienced in Bush's second term, before the current implosion, did not result from trickle down economics and had more to do with the improvident growth of credit and borrowing.   Think of it this way.  A lot of growth can be financed with debt.   Consumers, who are fed a virtual limitless supply of credit, would gorge themselves on stuff  and the demand fueled by easy credit creates a mirage of sustainable economic growth. Houses are built and bought that are in reality unaffordable for the purchasers, and then stuffed with goods financed with even more credit. All available lines of credit are tapped out, with credit cards used to the limit and new cars financed with zero per cent interest. It looks just great for a couple of years but ultimately doomed to fail, as any house of cards will ultimately do.   The current economic crisis will not cause Karl Rove and W to reassess anything that they have done.  The majority of people will likely learn nothing or soon forget whatever lessons have been learned from their present predicament.  

Unduly high marginal tax rates can certainly inhibit productive growth at a certain levels and cause people to make unproductive and ultimately foolish economic decisions.  A 70% marginal tax rate is just foolish.  A 50% marginal tax rate on earned income is equally beyond any rational justification. I also remember how the tax code caused a feverish rush into commercial real estate, as the rich sought to find shelter from high marginal tax rates by using accelerated depreciation on newly acquired real estate bought in real estate limited partnerships whose formation was a direct result of the then existing tax code.  The problem was  that the incentives built into the tax code actually encouraged and rewarded the promoters to over pay for the properties acquired, way beyond a price consistent with fundamentals, because paying more than the property was actually worth would increase the amount of depreciation that could then be used by the limited partners to offset their other income.  This was just another example of how price can be distorted in a free market.     

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