Bloomberg Washington Summit 2013: Infrastructure, Tax Reform, Dodd-Frank

Bloomberg Washington Summit

Bloomberg Washington Summit 2013

Infrastructure

This was a shibboleth muttered by many, that fixing infrastructure was a no-brainer of an idea, and I partially agree.  I would say, “Fine, what programs are you going to cut in order to fix infrastructure?” Government decisions work best when you compare spending versus spending, and taxes versus taxes.  If we did that, we would have better spending and better taxes.

Personally, I would eliminate whole government departments and hand the responsibility back to the states.  That would reduce subsidy problems, and make government more responsible.  National government is irresponsible government.

Corporate Tax Reform

Those that talked about corporate tax reform had a seeming unity, but that existed only where cute were to be made.  Any structural changes had some who would oppose. As I have said: If business were already agreed on tax policy, tax policy would have changed already.  Though the panelists were optimistic on corporate tax reform, I am not.  If it were easy, it would be done already.

Tom Keene brought up the corporate tax code given the Apple bond deal. Krueger said a deal could be done if the tax base could be broadened.  (Apple borrows money in the US to buy back stock, leaving cash overseas that it cannot repatriate without getting taxed.)

John Rogers of the CFA Institute asked a question on differential taxation of dividends/interest, and of course the panel goes for ending double taxation.

The final question from the audience was mine, where I asked:

So how if various business interests can’t agree, why should we expect corporate tax reform to succeed?

They said the agreement was close enough.  Wishful thinking to me.

Dodd-Frank

Many argued for more capital at banks. A few argued that there was enough capital already.  No one argued that there was not enough liquidity, which is my position.  Most financial crises are liquidity crises, and can be solved by having a large amount of high quality unencumbered assets.

Many felt that Dodd-Frank was unduly complex, somewhat of a waste, and subject to the reasoning of study committees.  Some felt there was no “too big to fail problem,” and that we ought to leave the big banks alone.  Not a lot of agreement among panelists.

My conclusion was this:

Too much discussion over bailing out the system. Too little discussion over how to limit overall debt and debt complexity

Wargaming in economics is impossible; there is no way to predict next economic crisis, writ small. Overlevered systems are risky

My point is this: you can’t solve busts.  You can constrain booms, if you dare (calling William McChesney Martin), and that will preserve the economy, though many will complain.

Gary Gensler

Gensler, chair of CFTC, traced the crisis to the derivatives markets when it was really due to bad mortgage lending.  I say that some losses were tied to the derivatives, but the real losses came from the mortgage underwriting, which came first.

For every winner on a derivative, there is a loser. The costs net to zero, but on the original loan there are real loan losses.  Solvency regulation should have prohibited financial institutions from taking default risk using derivatives, unless fully hedged.  Or, all derivative positions have to be reflected in the balance sheets, and disclosed in the footnotes, in detail, like insurance companies do.

What’s that, you say? They won’t do derivatives then?  Good.

He also alleged that 8 million jobs lost since 2008 due to unregulated swaps market.  Not likely in my opinion; again, the economy suffers from bad mortgage lending.

Gensler said that we will move away from Libor. I think that any benchmark not based on trades will be gamed, as well as those based on trades.  You can’t get away from gaming in financial markets.  Punish it where you find it, but you will never find it all.

Gensler used humor to avoid questions, and burned a lot of time (like running down the shot clock in Basketball).  The final question came from me:

Will the US Government stand behind a derivatives clearinghouse if it fails?

Give the guy some credit: he said no.

More in Part 4

By David Merkel, CFA of alephblog

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About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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