When in doubt, loot!

By Fester:

TPM has the Republican Study Committee 'proposal' to 'bail-out' the stock market.  And it is a doozy as it is a complimation of supply sider masteurbatory fantasies that have no connection to any reality that is not the result of illegal chemical ingestion.

The highlight of this 'plan' is to immediately suspend for 2 years the capital gains tax and then reinstitute the tax but make it inflation adjusted. 

Here is the largest problem with this 'proposal'.  Capital gains are taxed when there are GAINS.  It is a tax on profits.  However the credit crisis is a crisis because of massive losses.  The size of those losses are not quite known (yet) but they are massive.  No one is going to get their purchase price back for any mortgage backed security, much less make a profit on one.

It does not matter if you are using marked to market accounting or some hold to maturity pricing model.  The basic problem is that the default assumptions underlying all of those bonds were way too optimistic.  No one will be booking original capital gains on those securities.   

About the only purchasers who would contemplate capital gains treatment in their decision tree would be the current vulture holders who think they can make a future profit. Warren Buffett is making the decision that his cash investment into Goldman Sach's portion of Big Shitpile will turn a massive profit on the rebound; anyways his downside risk is minimized as he is effectively charging credit card rates to GS for fresh cash.  In this scenario, a capital gains tax holiday would theoretically increase the price that he is willing to pay for the same amount of control.  So the capital gains tax holiday would be an indirect subsidy to current holders of MBS who think that they are worth a whole lot more than current market prices.  And it would be a massive give-away to the top 5% in general.

Typical Republican prioritities --- find a crisis and screw 95% of the country and tell them it is for their own good.

Comments

[Jim]

The interest rate Buffett's charging GS has nothing to do with downside risk—it's maximizing the upside, not minimizing the downside.

[Plumb Bob]

Here is the largest problem with this 'proposal'. Capital gains are taxed when there are GAINS. It is a tax on profits. However the credit crisis is a crisis because of massive losses.

Your "problem" is actually one of the best features of this proposal. Let me explain:

The problem we're trying to solve is not that some folks who made bad investments are losing a bunch of money. The problem we're trying to solve is that a run on money market funds due to financial company failures is making all the short-term capital dry up. We're not trying to save companies that made mistakes, we're trying to make the capital start flowing again.

The weakness of the current government bailout plan is that the way it goes about making the capital start flowing again actually rewards the people who screwed up the system, rescuing them from their bad decisions by having the government buy their bad loans to give them capital.

Repealing the capital gains tax gives the entire system the infusion of short-term capital it needs -- without rewarding the guys who made bad decisions. The bad guys go out of business, but the good guys get to keep on chugging, because they have liquidity.

In other words, the fact that the guys who didn't make any gains don't get helped by the solution is part of the point. You get more of whatever you subsidize; we don't want to subsidize failure, we want to subsidize success.

Get it?