Tax Cuts, Supply Side Silliness, & Static Thinking.

I was at a social gathering over the weekend. I only went this gathering as a friend of mine recently had a baby and was repeatedly asking me to come and see his child.

“You Have To Come And See The Baby!” It was pure Seinfeld.

At this gathering there were many “Wall Street Types”, traders, analysts, and bankers who were very nice and courteous. We chit chatted about many different subjects like the Super Bowl, Olympics, Avatar, and NBA Trades. Soon the topic of conversation moved to the banker bailouts. I alerted to them that I used to work on Wall Street as a bond trader. Surprisingly, just a few of them were surprised that I had taken the stance against Wall Street and the bailouts. Most of them understood the public anger that had erupted over them. One trader alerted to me that without the bailouts, he would have had to file for bankruptcy protection and most probably would have lost his house. Obviously he was in favor of it. Others hated the idea that tax payers were on the hook for Wall Street’s decadence. So far. So good. We are all on the same page.

Until…..

The talk moved to TAXES! I met one particular individual who was a right wing anti tax, anti regulation, anti government Republican. He was intelligent and articulate in his speech, but he hardly made any sense. I will call him Rich for arguments sake. Rich and I had an hour long civil argument over economics and tax policy. What I found out was that Rich was an Ivy League graduate who worked for a very prominent I-Bank on Wall Street. So automatically I am left to believe that the rules just simply don’t apply to him like the rest of us minions. Rich went on for what seemed like hours over supply side economics, trickle down theory, EMH, tax policy, and deregulation. At the end of his ranting, I was able to decipher the following:

Rich is what I consider an articulate ignoramus with no ability to weigh reality vs. theory, a guy who is so ignorant regarding the actual workings of the economy that it should scare all of us. The simple fact that he works on Wall Street didn't stun me. I mean I understand the culture on Wall Street, but for a person not to understand the basic workings of economics and finance just made me realize that the entire country has been brainwashed into thinking along the lines of right wing think tanks. This man and millions more like him vote and actually believe they are informed and well read. But in reality these types of ideologues are static thinkers, unable to adjust to the reality of a dynamic world. This is really the problem within society in general. We look at certain people and say that they are intelligent, well read, an all out intellectual; the simple fact that they read hundreds of books and get advanced degrees doesn’t anoint you an intellectual. Their thinking is based off of snapshots in time. They build a theory off of this snapshot that has already happened and then they have the gall to predict the future based off of it. Regardless of what the future brings and delivers to us they still stick to the same old ludicrous ideological underpinnings, regardless of the facts and results. This is the definition of an ideologue in my opinion. This is also the main difference between a good trader and a bad one. A good trader makes an educated guess based on empirical evidence, but once he executes the trade he is automatically wrong. What does he do? Wait till the trade gets right? Or cut his losses? Most good traders will tuck in their ego and cut losses, in many cases, they completely reverse course. Doing a Costanza! Most of my best trades were of this variety. The ability to dynamically change your thinking process and to make quick informed trading decisions is at the heart of what a good trader does. A great trader does this very quickly and defiantly. Sticking to the same old script/story/theory that has been wrong for years just exemplifies you as an ignoramus. Doing so after you know it’s wrong in practical situations is moronic. Many people know the limitations of Black Scholes, but they use it anyway. Did portfolio insurance help investors in the 1987 crash? Did VaR assist LTCM? Did all of the complex derivative modeling save AIG? Did the Gaussian Capula function/equation work for all of those CDO issuers and investors? Absolutely not! Many people knew the limitations of these models and functions, but they used them anyway because supposed smart intellectual people created them. They were being ignorant. What’s truly moronic is that those same models that failed us are still being used today. Totally moronic behavior. So it’s not a surprise that my Wall Street friend kept to his guns about supply side/trickle down economics. We all know supply side economics has failed in theory as well as in practice. Just look at the income disparity and inequality?

Let’s take a look at the argument that….

Supply side tax cuts to the wealthy will grow the economy.

Nice theory, maybe it even had some truth 30-40 years ago in an era that, ironically, had the very regulations that the free market proponents have since dismantled. But here is the reality of tax cuts to the rich. This is what happened. The wealthy in this country are different then us. They eat, sleep, walk, talk, shower, most importantly invest differently them us. In fact they have more money than us because of the way they invest. The wealthy do not manage their money themselves, they give it all to investment banks and hedge funds that invest in the USA and abroad. The world of the super wealthy is tiny; competition is fierce so these hedge funds and I-Banks stand around in a circle shooting at each other for dominance on a day to day basis. The average person can’t invest in a hedge fund or get personal attention from his broker at Merrill Lynch. It doesn’t work this way. I used to work at a hedge fund so I know the clientele. These are the guys who took Crude to $150, all the while screaming that it was all supply/demand that was pushing Crude higher. Did I happen to mention that the supply of crude was increasing and demand dropping for the better half of the last decade? Hedge fund assets have exploded over the last 30 years before this past recession. Where did the money come from? You got it, the super wealthy. How were they able to invest? You got it, lower taxes on income and capital gains. Where is it good for the economy that gas is $4? Where is it good that a loaf of bread is $6? The tremendous flow of money inflated every single asset class to unsustainable levels. This killed the average person while the wealthy were cashing out. Coupled with central bankers always lowering rates when ever spreads widened out preserved the wealthy status quo. Long term interest rates dipped to again unsustainable levels to such an extent that the whole system was flooded with a Tsunami of credit. Again. Where did all of this money come from? The wealthy as well as the conduit for the wealthy - the central banks! These same hedge funds invest in China, India, The Middle East, Latin America, etc. Creating bubbles in those countries. Does this create and protect jobs in the USA? It’s these same Hedge funds and I-Banks that naked short sold sick banks and institutions and bought/sold CDS on companies, forcing them into a position where they would need to be bailed out by the tax payer. Is this good for the economy? They trade global currencies, gambling with the economic relationships between nations. Is this good? It’s these same hedge funds and I-Banks that created the lend to securitize mortgage model that pummeled loan standards and created a giant housing bubble. Was this good for our economy? They trade sometimes on a very short term basis, by the billions, creating massive volatility and a stock market that is often times disconnected from fundamentals and reality. Is that good for the economy? The apologists say it’s the free market! It’s Capitalism! This is what we do! The market is far from free and capitalism has failed! That’s the reality, but some still cling to the idea of Free Markets/Capitalism because that’s all they have left to justify their rape of ordinary citizens. This is no different than Warlords justifying ethnic cleansing. No different than Mullahs/Clerics justifying what they do to women in Islamic societies. All of this was made possible because of lax rules and regulations and a tax policy that made issuing debt more credible and profitable. All in the name of Free Market Capitalism. I am all in favor of Capitalism that is why I cheered when Lehman went into the toilet. Dick Fuld screwed up and everyone had to pay. It was horrible but that’s the way the cookie crumbles. What happened at AIG was a complete disgrace. Anyone who says Lehman should have been saved is completely clueless. If Lehman would have been bailed out, Dick Fuld today would be releasing billions in bonus money backed by the tax payer to the same assholes who screwed the company up. No thanks! We have witnessed enough atrocities so far.
In short, tax cuts to the wealthy have resulted in an acceleration of the gutting and raping of the USA economic infrastructure. In a world of 6 billion plus people what we've done through our tax code is set up a system where a few thousand families, maybe even a few hundred of the new gilded age were given crack cocaine on a global scale. Conservatives, blinded by their ideology, used the tax code and banking deregulations to turn the world’s economic infrastructure into a gambling casino on the borrowed money of the US taxpayer. Just look at the debt we have built up? These lunatics on the right who carry water and bread for the wealthy misunderstand even the most basics of economics. A democracy cannot survive long term if 99% of the people are disenfranchised. What we have seen so far is the wealthy just want to go back to the same broken system that has failed 99% of society previously. This isn't about some capitalistic notion of fairness. It's the reality of human nature and the frailties of humans. Whenever good enough is replaced with naked greed the system will fail. The super wealthy have so much money that there is simply no place to put it to work without disrupting markets, even on a global scale. This is not the path to a stable economy. There is absolutely zero rational (economic or otherwise) to take Ariba to $500 a share or Crude to 150. When gas costs 25-50 cents a gallon to make, there is simply no way we should pay $4 for it in a world of no shortages unless the speculators who work at hedge funds/I-Banks are gaming the system because they are funded up the wazoo by the wealthy. The idiots in society who keep electing the same crooks are left to no other device other then grin and bear it. There is no reason that a government for the people can market gas for a buck. Eugene Fama the father of the Efficient Market Hypothesis should be shot because the market was never efficient. Especially considering that The market is actually very inefficient if one considers all the other legitimate concerns of the human race.

The liberalization of technology and infrastructure without any barriers to global international investing opened the door so that all these hedge funds & investment banks could operate in purely their own interests in a world without borders and or rules. There has not been one job created by supply side economics, regardless of what the conservatives want you to believe. Instead, they've taken the inventions, wealth & power of the American middle class & spread it all over the globe unevenly. So now, in order to prevent a global economic jihad against the US, us taxpayers are going to subsidize the irresponsible & greedy who will still be allowed to keep their billions, their jobs, their Ferrari’s, their yachts, and their mansions. We are in effect going to pay off the rest of the world, who trusted and invested in our economic products, because of the irresponsible CEO's & conservatives like Phil Graham, Grover Norquist, and Dick Cheney, who decided to play with the stability of the world for their free market experiment. I can’t blame all of it on the conservatives, people like Larry Summers and Robert Rubin have also pulled the wool the taxpayer as well.

What’s worse is this. These super wealthy, who live in no single country and have zero patriotism except for the might dollar will move & take their fortunes to China, Europe, India to wherever while the rest of us pay the bill in a country that has been stripped of its economic, financial and social infrastructure.

This is what supply side economics and tax cuts have done to our country.