Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
1. GOOGLE (Alphabet) - Primary AI Tech Stock For Investing 2020 - 17th Jan 20
ERY Energy Bear Continues Basing Setup – Breakout Expected Near January 24th - 17th Jan 20
What Expiring Stock and Commodity Market Bubbles Look Like - 17th Jan 20
Platinum Breaks $1000 On Big Rally - What's Next Forecast - 17th Jan 20
Precious Metals Set to Keep Powering Ahead - 17th Jan 20
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20
AMAZON Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 11th Jan 20
Gold Price Reacting to Global Flash Points - 11th Jan 20
Land Rover Discovery Sport 2020 - What You Need to Know Before Buying - 11th Jan 20
Gold Buying Precarious - 11th Jan 20
The Crazy Stock Market Train to Bull Eternity - 11th Jan 20
Gold Gann Angle Update - 10th Jan 20
Gold In Rally Mode Suggests Commitment of Traders (COT) Data - 10th Jan 20
Disney Could Mount Its Biggest Rally in 2020 - 10th Jan 20
How on Earth Can Gold Decline During the U.S. – Iran Crisis? - 10th Jan 20
Getting Your HR Budget in Line - 10th Jan 20
The Fed Protects Gamblers at the Expense of the Economy - 9th Jan 20
Last Chance to Get Microsoft Windows 10 for FREE! - 9th Jan 20
The Stock Market is the Opiate of the Masses - 9th Jan 20
Is The Energy Sector Setting Up Another Great Entry? - 9th Jan 20
The Fed Is Creating a Monster Bubble - 9th Jan 20
If History Repeats, Video Game Stocks Could Soar 600%+ - 9th Jan 20
What to Know Before Buying a Land Rover Discovery Sport in 2020 - 8th Jan 20
Stock Market Forecast 2020 Trend Analysis - 8th Jan 20
Gold Price at Resistance - 8th Jan 20
The Fed Has Quietly Started QE4 - 8th Jan 20
NASDAQ Set to Fall 1000pts Early 2020, and What it Means for Gold Price - 8th Jan 20
Gold 2020 - Financial Analysts and Major Financial Institutions Outlook - 8th Jan 20
Stock Market Trend Review - 8th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Force Taxpayers to Buy Spanish Bonds is Ludicrous Proposal From Harvard Academic Economics Professor

Interest-Rates / Credit Crisis 2012 Apr 30, 2012 - 12:27 PM GMT

By: Mike_Shedlock

Interest-Rates

Best Financial Markets Analysis ArticleAs the economic crisis lingers on, the number of ludicrous proposals to deal with the crisis rises every month.

I have lost count by now of preposterous ideas and who made them (does anyone have the complete list?), but a proposal by Harvard Economics professor Martin Feldstein to force taxpayers to buy Spanish bonds surely makes the list of top-five ludicrous proposals.


Martin Feldstein, writing for the Financial Times says Taxpayers must backstop Spain's budget

Spain is rapidly approaching a liquidity impasse. Markets are nervous because it's not clear how the government will finance its budget deficit and the rollover of its maturing bonds. To meet its financing needs, the Spanish government needs the confidence of foreign and domestic investors.

Building investor confidence during this process requires a plan to avoid a Greek-style default.

One part of such a plan is to negotiate access to the European Stability Mechanism, the €700bn fund created to protect member governments from default. But if the refinancing shortfall from private sources is very large, Spain will need to supplement the funds from the ESM.

Raising those additional funds by increasing taxes would push the Spanish economy into a deeper recession and would weaken the supply-side incentives needed to stimulate long-term growth.

An alternative emergency approach would be to mandate, on a temporary basis, bond purchases by Spanish households and businesses. Here's how such a plan might be implemented.

The Spanish government could use the income tax system to levy a temporary "lending surcharge" on individual incomes. In exchange for those surcharge payments, the households would receive an interest-bearing government bond with a maturity of five to 10 years. A similar surcharge could be levied on businesses based on corporate profits or the businesses' value added.

The Spanish government should therefore move quickly to enact such a plan before it is overcome by its current liquidity problems.

Earth to Feldstein

For starters, Martin Feldstein correctly points out that "increasing taxes would push the Spanish economy into a deeper recession".

Unfortunately, Feldstein then left planet Earth with his proposal for "Spain use the income tax system to levy a temporary lending surcharge on individual incomes", as if that would not have precisely the same effect as a tax.

Highway Robbery

Feldstein's proposal would take money out of taxpayers' pockets to feed government programs just as a tax would, yet amusingly he warns against weakening "supply-side incentives needed to stimulate long-term growth".

Feldstein proposes giving taxpayers interest on their forced loans to the government. Let's assume 4%. Under Feldstein's proposal (highway robbery is a more apt description than a tax), taxpayers would have access to at most 4% of their money deposited into the scheme.

Somehow "using the income tax system" to take money away from consumers (with a promise to pay it back later) will not cause a drop in consumption, but a tax would. With that idea, Feldstein left planet Earth for some unknown, academic wonderland, alternate universe.

Unfit to Teach

Precisely why should taxpayers bail out banks that made stupid loans? Feldstein never bothers to say.

Are bondholders never, ever to take a loss?

Feldstein's proposal is so preposterous and so devoid of rudimentary thinking about taxes (by whatever name) that it should be clear that he is unfit to teach.

Mish's Five-Point Alternative Proposal

  1. Spain should plead for emergency funds from the ECB, IMF, EMU, wherever it can get them.
  2. Spain should declare a bank holiday and announce a return to the Spanish Peseta
  3. Spain should issue a statement to the ECB, IMF, EMU to the effect "anyone stupid enough to lend us money deserves to lose it at least two-thirds of it. All debts in Euros will be repaid 1-1 in Pesetas."
  4. Spain should then devalue the Peseta by 65%. Should Europe, the IMF, and EMU threaten sanctions, Spain would counter with a threat of 100% default on all external debt rather than 65% of it.
  5. Spain should lower the VAT, lower corporate income taxes, and make it easier to hire and fire workers.

Point number one is a bit tongue-in-cheek as it is tantamount to purposeful fraud. However, the rest of the points can easily stand on their own merits.

In regards to point number three, Spain can be much more diplomatic in its statement to the ECB, IMF, and EMU, but the bottom line would be the same regardless of how Spain phrases the statement.

Results

  • Spain would immediately be relieved of 65% of its foreign debt obligations.
  • The threat to not pay back any of its external debt if Europe of the IMF retaliates (perhaps coupled with a promise to pay back another 15% if everyone plays exceptionally nice) would prevent retaliation.
  • A lower VAT and lower corporate income taxes would encourage growth
  • At a huge discount to the Euro, Spain would become a tourist mecca
  • Spain's products would be far more competitive on the global economy

Effectively, I propose Spain do what Iceland did. The Icelandic economy is in recovery now, while Greece, Spain, Portugal, and Italy flounder.

In contrast, Feldstein proposes more bailouts of banks by taxpayers, while playing preposterous word games with the definition of "tax".

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2012 Mike Shedlock, All Rights Reserved.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules