Petra’s View

Why the US is doomed to high taxes, high spending and progressive socialism

April 18, 2010

I think most Americans would agree taxes are heading higher. Yet, curiously, most may not care. (A Gallup survey shows 45% of Americans are happy with their tax rates and 3% believe them to be too low.) In fact, I suspect a significant portion of the population may welcome the tax increases with hardly concealed joy.

How is that possible, you ask?

The explanation is as simple as it is disturbing. For nearly half of US households taxes are simply somebody else’s problem. Approximately 47% pay no federal income taxes at all! (Data from Tax Policy Center for 2009.)

That’s right: nearly half of Americans qualified for enough credits and deductions to fully eliminate their tax liability, or had too low incomes to start with. (According to Deloitte, credits for low- and middle-income families have risen so much that a family with two children making $50,000 a year will owe no federal income tax.)

Half the country is happy with tax policies… well, they should be if they pay no taxes in the first place! These are the people who, more often than not, support higher marginal tax rates, for that simply means someone else will have to pay for their ever growing entitlements.

It is a sign of our hypocritical era that the cry of making taxes more ‘fair’ – meaning of course robbing higher earners blind so that lower earners need to pay nothing – has now been almost universally accepted.

But how on earth can one talk of fairness?

Consider this: the top 1% of Americans pay 40% of federal income taxes, the top 5% pay over 60%… while the bottom 50% pay less than 3%! (Data from the Congressional Budget Office, latest available tax burden release, 2006.)

Half the population is getting something for nothing, and they call this fairness?

As is always the case with expanding welfare states, generous entitlements are paid for by everyone except the actual beneficiaries.

There is nothing fair about redistributing incomes, much less on such a massive scale. There is no fairness in the government penalizing someone for working harder than others. (Not to mention it is unsustainable over a longer term – you will run out of wealthy people to tax.)

Now can you see the fundamental problem here? 40% of American households paid 86% of total federal tax liabilities. However, when it comes to deciding how the government should spend that money, they are outnumbered by the 60% who paid just 14% of taxes.

Is it any wonder that government spending is out of control and the US is coming close to fully adopting European-style socialism? The majority of voters decide on how to use other people’s money – why would they want any spending cuts?

The Congressional Budget Office data also shows that higher earners are paying a larger share of total federal taxes than ever before (as far back as tax burden data goes, to 1979).  

According to the IRS, in 1987 the top 5% of earners paid 43.26% of all federal income taxes; today, that group pays more than 60% of the tax burden – despite bringing in just 37% of the income. By contrast, the share of taxes paid by the bottom 50% of taxpayers – who bring home 12% of the income – has gradually fallen to less than 3%.

Higher earners have, over time, been forced to fund an increasing share of the federal government and fast growing entitlement programs. Meanwhile, according to the Tax Foundation, 60% of Americans consume more in government services than they pay in taxes, and the benefits extended to this group have been steadily increasing.

And yet the likes of Mr. Obama continue to tell us the wealthy aren’t paying their ‘fair share’!

Hence the $650 billion or so in tax hikes and new taxes that will be imposed on higher earners over the next decade will hardly be of concern to the vast majority of Americans. This is a short-sighted view, but then most people aren’t programmed to think of long term consequences. Given the immediate benefits for oneself, who will spare any thought on the negative impact on the economy and future job creation?

Which of course explains the shift toward statism and socialism at a certain stage of mass democracy.(Not for nothing did John Adams, the 2^nd President of the USA, say that “there never was a democracy yet that did not commit suicide”, and did James Madison and other Founding Fathers believe that individual rights must be protected from the “tyranny of the majority”. They understood that without checks and balances the propertyless majority would tyrannically tax away the property of the minority.)

The state has clearly become far too big and in the process has made the majority of the electorate dependent on hand-outs, with the result that voting for the necessary medicine will now be virtually impossible.

The massive deficits, unprecedented debts and out of control entitlement programs (as well as demographic trends) leave few options – drastic spending cuts or significant tax hikes (or a combination of the two).

According to a recent Goldman Sachs study (based on budgetary data for 24 OECD economies covering 35 years from 1975), there is only one effective way to reduce debt and sustain future economic growth: imposing budget expenditure cuts across the board. On the other hand, increasing taxes to compensate for a higher budget has proved very damaging to future growth.

While cutting spending would be of most benefit to the country’s prosperity and future, it simply won’t happen on any meaningful scale. When the majority of the electorate has no interest in giving up their entitlements, political leaders will always take the path of least resistance and penalize those voters who, being a minority, don’t present a sufficient threat to their political careers.

And so, on top of all the existing, technically bankrupt federal programs, the Obama administration created a new health care entitlement, to be paid for, as usual, by everyone except those who will benefit. (Detailed overview of associated taxes further below.)

The problem is the US – along with much of Europe – is on a wholly unsustainable budget path, with unprecedented public spending (largely paid for by borrowing and money printing). In the absence of Americans rejecting the expanding welfare and entitlement state, taxes will have to rise much beyond the scheduled increases. Unless, that is, the administration finds some other – miraculous – way to reduce the enormous amounts of debt it continues to pile up.

A recent study by the nonpartisan Tax Policy Center calculated that to reduce the federal budget deficit to a sustainable 3% of GDP, the government would have to find some $500 billion each year – in new revenue (or spending cuts). To get that amount via tax increases on the top two brackets (families with over $209,000 in taxable income) the rates would have to go from the current 33% and 35% to 72.4% and 76.8%.

You didn’t think socialism comes cheaply, did you?

The truth is, no matter how much marginal income tax rates will rise, they cannot realistically be taken high enough to fill the fiscal hole. A broader based tax or a consumption tax is therefore likely to be on the horizon in the coming years.

Speculation about a value-added-tax (VAT) is already ripe. Former Fed Chairman Paul Volcker, among others, has called for VAT to be considered in light of the massive deficits. VAT is a national sales tax applied at each stage of production and collected by businesses (meaning additional bookkeeping and costs). It’s difficult for anyone to escape the tax since it’s included in the price of products and services you buy. (In Europe VAT rates range from 15-22%.)

VAT, apart from being a convenient way to pay for ObamaCare, has other advantages as well. It would allow (via increasing rates) for funding of a continued expansion of government, and as such would undoubtedly permanently open up the floodgates of public spending.

But while VAT is (for now) just a speculation, the tax increases starting next year are very real. Below you’ll find an overview of tax hikes and new taxes to be imposed on (better-off) Americans in 2011-2018.

2011 – tax hikes (tax cuts expiry) on higher income and capital income

First there is the expiry of the Bush tax cuts at the beginning of next year. The highest tax bracket will move from 35% to 39.6% and the 33% bracket will rise to 36%. The estate tax will also revert to 55%, with an exemption of $1 million (unless Congress reinstates the 2009 rules of 45% federal rate and $3.5 million exemption).

Importantly for investors, the capital gains rate is set to rise to 20%, up from 15% now. Dividends, currently taxed at 15%, will be taxed as ordinary income, with the top rate scheduled to rise to 39.6% (unless Congress enacts a proposal for a top dividend tax rate of 20%).

While most of these increases appear to only target wealthier Americans, they are also damaging to small businesses. (According to IRS data, some 26 million small business employers file under the individual income tax code and so will be subjected to much higher taxation.) This, along with the onerous new health care burdens, will certainly not help small businesses hire more people.

On top of the tax cuts reversal, Obama’s health care ‘reform’ brings a number of new taxes and tax increases (2011-18) aimed at financing part of the new spending. For obvious reasons most of the tax hikes will start in 2013, after the election year. (Some ObamaCare related taxes go into effect in 2011, however, these will affect drug makers and importers.)

2013 – increase in payroll tax + new tax on investment income

From the beginning of 2013 higher-income taxpayers will be hit with a tax increase on wages as well as an entirely new levy on investments.

Medicare payroll tax will rise by 0.9% from 1.45% to 2.35% – a gigantic 62% increase – on wages above $200,000 for individuals and $250,000 for married couples filing jointly.

In addition to that, and for the first time ever, Medicare taxes will be extended to investment income. A brand new3.8% tax will be imposed on the falsely called ‘unearned’ income – dividends, capital gains, interest, rents and other investment income – for individuals making more than $200,000 a year and couples making more than $250,000.

(A 2.3% excise tax on sale of medical devices also goes into effect in 2013.)

2014 – penalties for lack of insurance

2014 is when the health coverage goes into effect, and the requirement begins for everyone to have health insurance. (The government will provide subsidies for lower and middle income groups.) If you don’t want health insurance, tough; you’ll pay penalties – $695/p.a., further rising in 2016.

Medicaid (the federal-state program for the poor) will expand to all Americans with incomes of up to 133% of federal poverty level; since this could bankrupt the states they might start electing out of Medicaid. (More than a dozen states have already filed lawsuits over the constitutionality of the burden imposed by Obama’s bill.)

Subsidies (tax credits of up to 50% of employer’s contribution) for small businesses (up to 10 employees) will provide for coverage increase. Penalties will be imposed on employers with over 50 employees who don’t provide ‘affordable’ coverage (note – affordable as deemed by government bureaucrats); they will be fined $2,000 a year per employee, excluding the first 30.

(The health insurance industry will also start paying annual fees; $8 billion in 2014, rising in subsequent years.)

2016 – steep rise in penalties for uninsured

Penalties for those who don’t carry coverage will rise to 2.5% of their taxable income or $695/p.a. – whichever is higher.

Not to mention, a mammoth bureaucracy will be created thanks to ObamaCare (see here the astonishing list of all the new boards, commissions and agencies the bill gave birth to). The government will also hire an estimated 16,000 IRS agents to harass and audit individuals and individual businesses to check for compliance. (I suppose Mr. Obama would expect us to applaud this convenient new job creation scheme?!)

2018 – tax on high value plans

An excise tax of 40% will be imposed on health care plans with premiums exceeding $10,200 (individual coverage) and $27,500 (family coverage).

Investors hardest hit

Apart from higher-income taxpayers being disproportionately targeted as a revenue source, policy is now clearly taking the path of increased taxation of passive income. In fact investors and higher earners will bear all the burden of ObamaCare (without getting any of the benefits).

Let’s look again at the massive new taxes Obama assaulted investors with, as well as the likely impact.

Those with income from stocks, real estate or other investments are expected to contribute a giant share of the costs of health care expansion. (I suppose we’re seeing a theme here… from the continuing witch-hunt on the financial sector to the increasingly investor-hostile environment.)

Aside of the income tax and payroll tax hikes detailed above, there are three specific developments penalizing investors: increase in capital gains tax from 15% to 20% (2011), increase in dividend tax (to either 20% or as high as 39.6% – see further below; 2011), and the new additional 3.8% tax on all ‘unearned’ income (2013).

What exactly will be subject to the 3.8% tax? Dividends, interest, annuities, royalties, rents, as well as capital gains (minus deductions properly allocatable to such income). Basically, all income and gains derived from a ‘passive activity’ count as investment income. (Note that income and gains from an investment fund, even if the fund is classified as a ‘trader’ for tax purposes, will be subject to the tax.) Tax-exempt interest income and distributions from tax-qualified retirement plans, including IRAs and Roth IRAs, are not to be included in investment income.

Capital gains, currently taxed at 15%, will therefore be subject to a 23.8% tax (20% after expiry of the Bush tax cuts + 3.8% in new tax).

Dividend income (currently taxed at 15%) will be particularly hard hit. In 2011 dividends will be taxed as ordinary income, with the top rate scheduled to rise to 39.6% from 35%. With the additional 3.8% Medicare tax dividend tax will go as high as 43.4% in 2013. Obama has proposed a top dividend tax rate of 20%; if Congress enacts the proposal, the top tax rate for dividends would rise to ‘only’ 23.8% at the beginning of 2013.

Impact on investment and investors’ behavior

Overall, some $409 billion in additional taxes will be snatched from investors in order to pay for big government socialism. What will be the likely impact on investment?

Essentially, investment income (capital gains, dividends) will be worth less to investors once the tax hikes/new taxes go into force than it is today. It is feasible that it could revalue the entire stock market lower.

Credit Suisse in a recent (April 2010) report estimates that a 10% rise in dividend and capital gains tax in the US would take about 7% off the fair value of the equity markets (assuming that 30% of the market is owned by tax-exempt funds and foreigners and the higher tax rates will apply for 15 years).

The 2011 capital gains tax increase could also prompt investors to liquidate holdings this year, ahead of the increase.

In addition, we may see shifts in investors’ behavior, in particular if dividend tax goes up by nearly 200%. Investors will certainly take that into consideration when making decisions; as a result they could shy away from dividend stocks and focus on those they perceive as having greater potential to appreciate.

More generally, the new taxes will discourage investment, making it more difficult for companies to bounce back after the recession. On top of that, as noted earlier, most small businesses pay the individual income tax, and the rate hike will have a negative impact on expansion and hiring. (Mr. Obama of course sees small business owners not as job and wealth creators but as rich exploiters who must pay yet more onerous taxes so that those who don’t pay any can enjoy still further entitlements.)

Add higher income taxes for the most productive Americans and higher payroll taxes, and it becomes clear that theObama administration is penalizing those who have worked hard, saved, and invested, while rewarding and indulging the less able, unproductive and lazy. Classic Marxist class warfare… blaming the productive and enterprising for all of society’s ills, which can naturally only be ‘fixed’ by redistribution of unprecedented scale.

We will not need to wait too long to see the outcome. Significant tax increases can only reduce economic growth, for they take away people’s incentives to work, save, and invest. (They also encourage tax avoidance, thereby defeating the purpose of the tax increases.) Capital will be allocated to where it can avoid (some of) the taxes instead of where it would be most productive for the economy.

“When people who earn more than the average have their ‘surplus’ or the greater part of it seized from them in taxes, and when people who earn less than the average have the deficiency, or the greater part of it, turned over to them in hand-outs and doles, the production of all must sharply decline, for the energetic and able lose their incentive to produce more than the average and the slothful and unskilled lose their incentive to improve their condition.”

(Henry Hazlitt)

I will not even take into consideration increases in other taxes at federal, state and city levels, including corporate tax hike proposals, a likely consumption tax on energy (as part of climate change legislation) and possibly a value added tax.

And in the unlikely case you still believe Mr. Obama’s socialist propaganda on how the ‘rich’ aren’t paying their ‘fair share’, please review the statistical data at the beginning of this article. Not only do higher-earners pay a fair share, they are being robbed blind. (Brief recap – the top 5% earn 37% of income yet pay nearly 61% of all federal income taxes, while the lower 50% earn 12% of income and pay less than 3% of taxes. And that is before any of the coming tax hikes on the better-off!)

How did we get to this sorry state?

Consider that in 1913 the top rate of income tax was just 7%! Not only have taxes gotten more progressive and excessive, there has also been a staggering increase in related bureaucracy. The number of pages in the tax code has increased by 16,775% in the past century.

Taxes are, however, only a side issue. What should really concern us is how, within a relatively short period of time,the US went from a limited government, free enterprise, individual liberty valuing regime (of the Founders) to big government statism and finally the progressive socialism of today. The people, once freedom loving and self-reliant, have carelessly traded their liberties and responsibilities for entitlements and handouts.

Government programs and welfare only make people less reliant on themselves and more dependent on the state, which in turn prompts an ever increasing size of government, until one inevitably ends up with socialism.

The dependency mindset is now almost as prevalent among Americans as has long been the case in much of Europe. The productive sector that adds value to society is sucked dry by the parasitic state bureaucracy, the able and hard working are penalized for their success; as a result the whole society ends up much poorer. (Not to mention the terrifying and impoverishing public debt burden left to the next generations.)

Of course all this happens in the name of ‘fairness’ and ‘equality’.

Yet redistribution has nothing to do with fairness and everything to do with envy and theft. Such action gains, thanks to majority rule, a seal of legitimacy, but it really is no better than common robbery.

The fact is today the vast majority of people feel entitled to the property of others. They demand that it be taken away from them through taxation, so that (some of) it can be given to those they deem to be ‘in need’ – i.e. those who have less but of course feel entitled to have more.

Forcibly taking other people’s money would in other circumstances be considered criminal, yet this mass criminality is rationalized on the grounds of democracy, will of the people, political mandates, etc. Progressive taxation appeals to the masses who, more often than not, have a desire to pull down the minority of the most productive, talented, enterprising (and as a result more successful). Progressive policies in general are just a mean to an end; the end being an envy-based redistribution.

Unfortunately once a certain stage of statism or progressive socialism is reached it is nearly impossible to reverse.Once a voting majority pays no income tax and benefits from entitlements, the productive and enterprising minority is doomed. The majority will continue to vote away the rights of others, and call it the will of the people.

This is the tyranny of democracy the Founding Fathers had warned against. They did not intend for the state to guarantee everyone’s well-being and provide support against every possible obstacle. They would be horrified at the idea of divesting some people of their properties for the advancement of others in society. And yet today that is exactly what much of the population expects – to be taken care of by the government, be given something for nothing – all at the expense of those who stand on their own two feet and attain things by hard work.

One can work and produce goods or services that others want to pay for, or one can steal (or give the government a mandate to loot on their behalf). It is human nature to take the path of least resistance, which explains why most believe it is perfectly acceptable to plunder others rather than obtain what they desire by their own efforts and sweat. Naturally they will always find a justification for such action; hence it is deemed a matter of fairness for a minority to subsidize the majority who are perceived as disadvantaged in one way or the other (never less apt, less willing or simply lazy).

This socialist disease has now infected much of the fabric of the society. And it’s not just the liberals who prefer the state to make life-governing decisions for them. According to information from the 2008 American National Election Study about spending priorities, the majority of self-identified conservatives isn’t really in favor of cutting spending on most government programs either.

Of course anyone who disagrees with this entitlement mentality is labeled uncaring, uncharitable, lacking social conscience, or worse. The notion that unless we let the state do everything for us we are ‘bad’ persons is now so prevalent that few dare to mention the choices that must be made. How many in public office take up the cause for limited government and hence severe cuts to welfare and the public sector (including eliminating millions of counterproductive public jobs, bureaucracies, regulations, entitlement programs, etc)?

And yet far from unfair or uncaring, that is the only viable path to safeguarding America’s economic future.

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Ban, tax, regulate – government vs. free market

March 22, 2010

Here we are again, back to the disturbing – but entirely unsurprising – war on the ‘free market’ (or whatever is left of it after decades of government interventionism).

The pattern of governments creating a mess and promptly laying the blame at the feet of the private sector is not at all new, so EU’s and Washington’s attacks on the markets and George Papandreou’s continuing threats against ‘evil speculators’ should not have caught anyone by surprise. In much the same manner, the coming (politically motivated) clampdowns and regulations of various market activities are being designed with the sole purpose of shifting blame – for excessive borrowing, overspending, harmful interventions and defective regulation – away from the policy makers.

Of course diversion of blame and responsibility is not a behavior exclusive to governments. It has come to characterize much of today’s society, and is largely responsible for the economic, social and moral decline we’re at present witnessing all around us. (More on that in an upcoming post.)

Let’s start with Greece. Prime Minister Papandreou has stepped up his rhetoric about his country being victimized and having problems servicing its debt, not as a result of irresponsible and fraudulent behavior over many years, but because of speculators’ bets to bring it down.

“Despite the deep reforms we are making, traders and speculators have forced interest rates on Greek bonds to record highs. Many believe there have been malicious rumors, endlessly repeated and tactically amplified, that have been used to manipulate normal market terms for our bonds.” He went on to say that as a result Greece was forced to borrow at rates almost twice as high as Germany, and that such ‘prohibitive’ interest rates would swallow all gains from the planned austerity measures.

Manipulate ‘normal’ market terms? ‘Prohibitive’ rates? Someone please show Mr. Papandreou the spread between Greek and German bonds pre-Maastricht Treaty – at multiples of what it is today! See for yourself in this astonishing chart:Club Med spreads (1992-2010).

Let’s not forget that the Greeks (and other fiscally shaky Southern European states) have only enjoyed – undeservedly – low rates thanks to the EMU. And, had Greece not lied about its finances, it would never have been admitted into the monetary union in the first place (it has never complied with the required fiscal discipline, preferring to falsify data). The current rates on Greek borrowing are more than appropriate (in fact, quite benevolent) for a country that carelessly jeopardized its own future by decades-long irresponsibility.

For a decade the markets have ignored the vast differences in fiscal policies between eurozone members; risk premiums on sovereign bonds were barely discernible. After the financial crisis investors started awakening to sovereign risk and spreads became far more aligned with reality. The bond markets are once again reflecting fiscal policies, as they should. Far from ‘market manipulation’, it’s simply a return of country risk.

Indeed the financial markets are now doing the job that politicians have failed at so miserably – forcing the countries to take measures that will lead to a return to fiscal sanity (or else face the consequences). It should also be obvious that any country’s funding costs will now increasingly reflect its own fundamentals, rather than those of say Germany, as investors are unlikely to be blinded by any implicit EMU guarantees again, at least for the foreseeable future.

The Greeks, who have over decades borrowed and squandered too much money, won’t admit that their 12.7% budget deficit (that being the official figure; the true deficit is estimated at 16%), 120% debt/GDP (135% estimate for 2011), out of control government spending (at over 50% of GDP), rampant tax evasion, among other problems, are the root-cause of their troubles and consequent risk pricing by the markets. (For an analysis of the Greek situation and possible solutions see recent article here.)

Given that Greece has defaulted on its debt 108 times in the last 200 years, showing no sign that it has learned fiscal responsibility, it is rather astonishing that the Greeks should be surprised at rising interest costs. Would any responsible lender extend credit to an over-leveraged borrower on the verge of bankruptcy, at extremely low rates?

Yet the Greeks appear to believe that threats and regulation will force the capital markets to supply them with unreasonably cheap credit. During a recent Washington visit to win President Obama’s support for the war against evil speculators, Mr. Papandreou said: “Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system not to mention the human consequences of lost jobs, foreclosed homes and decimated pensions.”

Therefore, investors should lend to Greece at ultra low rates, ignoring any default risk, in order to allow the Greek government and population to carry on with a spending binge, delaying the day of reckoning indefinitely. (Much like banks had been coerced by the US government into lending to unworthy borrowers with no deposits and insufficient income; and we know how that ended. But more on that later.)

The Greeks’ sense of entitlement to other people’s wealth, their perceived ‘right’ to borrow at low rates, is indeed quite disturbing. Though rather than being solely a Greek issue it appears to be a sign of our times.

But why the widespread hatred of market participants, be it speculators, traders or investors?

After all, it wasn’t speculators who had run up massive debts and a 13% deficit, but the Greek politicians (and population). Investors and traders have merely exposed the truth the Greeks, as well as EU authorities, would have preferred to keep hidden. It should be obvious that Greece only has itself to blame for not being able to borrow at the same rates as fiscally prudent Germany.

The much vilified short sellers, as well as CDS (credit default swap) buyers, perform a vital function by pointing to problems and deficiencies (whether in companies, industries or countries) and backing their opinion with their money. When they believe an entity may go bust, shouldn’t they be allowed to protect themselves and/or profit accordingly? When it comes to sovereign debt, if it wasn’t for the markets, politicians would never take the necessary action to put their house in order.

Papandreou’s argument that “unprincipled speculators are making billions every day by betting on a Greek default” misses the point entirely. If Greece’s fundamentals were less disastrous, anyone betting on a default would be losing billions. No speculators can bring down a healthy company, currency or country. In any case, there are always two sides to each trade. For everyone shorting Greek debt there is also someone on the long side.

As for the fallacy of speculators destabilizing the Greek bond market via CDS use: Germany’s financial regulator (BaFin) has found no evidence that CDS were used for large scale speculation against Greek government bonds, reporting (earlier this month) that the net volume of outstanding CDS contracts has barely changed since the beginning of the year. Some of the most active CDS traders are German and French banks, who happen to hold significant amount of Greek debt. If there were no CDS (essentially, insurance against default), who would take on the risk of financing Greek debt?

Ironically, it has just been uncovered that the biggest CDS speculator, holding 15% ($1.2 billion) of the total $8 billion of Greek CDS, has been the Greek state-owned Hellenic Post Bank! (Article here.)

And yet, despite his obvious delusion, Mr. Papandreou has been finding an attentive audience in other European leaders as well as President Obama. After all, Greece’s is not the only government that views the markets as a welcome scapegoat for their own mismanagement and incompetency.

Given bureaucrats’ readiness never to waste an opportunity to further restrict economic freedom, it isn’t particularly surprising that the European Commission is discussing regulation of the sovereign CDS market, and the US Justice Department has reportedly been looking into hedge funds’ short positions against the euro, to determine whether they colluded to drive down the value of the single currency.

European politicians, who have a long tradition of anti free market beliefs, have blamed speculators for the recent decline of the euro in the wake of the Greek crisis. They, much like the Greeks, feel entitled to low borrowing costs for EMU members and a stable euro, irrespective of the fiscal and economic mess of the EU.

Germany’s finance minister, Wolfgang Schaeuble, went as far as suggesting the use of anti-terrorism methods against financial speculators in order to protect the euro. He said the government might “set up surveillance of who is getting together with whom for which kinds of speculative processes, and where.”

What’s next? Will they start arresting traders for threatening ‘economic stability’ if they happen to dislike the fundamentals of a certain country or currency and vote against it with their money?

It would seem there is no better sign that an entity is in severe trouble than authorities starting to crack down on short bets against it. The truth is, if the euro was fundamentally sound, it would not have been ‘attacked’. (Not to mention that those who believe speculators have caused the euro to drop to unfairly low levels can always back their opinion by taking action in the forex market.)

What Greece and other nations need to learn is that one cannot go on indefinitely increasing government spending and borrowing without consequences. There comes a point when markets lose confidence in the country’s ability to pay and refuse to lend the money (at acceptable rates). That moment appears to be fast approaching for a number of countries.     

Of course when it comes to short term political gain, shifting the blame onto the private sector is an entirely valid strategy. We have seen its success in the aftermath of the 2008 crisis; the people have, without much questioning, accepted the official line: the crisis was caused by insufficient state intervention and regulation of the ‘free market’. Therefore, we have been told, a massive increase in government bureaucracy and regulation was necessary.

The threats against speculators in (Greek) sovereign debt are reminiscent of the attacks on banks, hedge funds and financial markets in general, over the last two years. Of course there was much that went wrong in the financial sector, but the blame game has been indicative of the failure of governments to admit their own mistakes.

Notice that any economic boom is always a result of ‘wise government policies’. When the inevitable collapse comes, a culprit must be found, fast, before anyone starts looking at possible policy makers’ faults. And so all crises are quickly declared to be a problem of the ‘free market’.

Such denunciations look particularly misplaced given the disastrous track record of public management, including the crucial role of the Fed and US policy makers in creating the recent crisis. It was the Fed’s loose monetary policy that had encouraged speculation and inflated a massive housing bubble, aided by vote grabbing policy makers’ interventions in the housing market (incl. coercing financial institutions into lending to unqualified, low income borrowers under such monstrosities as the Community Reinvestment Act).

And of course the government sponsored Fannie Mae and Freddie Mac were by far the worst offenders, likely to end up costing the US taxpayer some $400 billion. (They remain an ‘off-balance sheet’ – or so the politically convenient fiction goes – dumping ground for the debris of the housing crisis.) But don’t hold your breath waiting for Obama et al. to acknowledge any of this; they’re too busy pounding on the banks.

Bizarrely, our political elites appear to fully ignore the fact that highly expansionary monetary policies – and resulting unprecedented indebtedness – have been largely responsible for the current mess. It’s nothing new; interventions into (what was once) the free market have always brought unintended negative consequences. And yet the link between low interest rates, excessive credit growth and asset bubbles appears to evade policy makers’ understanding.

The slashing of interest rates in 2001, and keeping them at record low levels for several years, has led to the credit and housing bubble. Spiraling debt contributed, in a large part, to the apparent prosperity of the last 15-20 years (much as it had in the 1920s, ending, equally disastrously, in the Great Depression). Greenspan and Bernanke acted as cheerleaders of debt, while policy makers were busy identifying new targets for lending, in the name of democratization of access to credit.

And let’s not forget the essential role of greedy housing market participants, millions of whom have knowingly taken on mortgages and loans they couldn’t afford to pay back, in order to satisfy their irresponsible craving for a lifestyle beyond their means. (In the past 25 years the amount owed by US families has risen more than sevenfold, from less than $2 trillion in 1984 to nearly $14 trillion, according to the Fed.) Inevitably, cheap credit has also created huge imbalances and fueled speculation in the financial sector.

And yet, shockingly, no lessons seem to have been learned. Central banks and governments – in particular in the US and UK, considering a painful period of readjustment (perhaps a short depression) to be politically unacceptable, have embarked on massive quantitative easing (in other words money printing) and huge stimuli to restore economic growth. In the process they have loaded their countries with an unprecedented mountain of debt.

Indeed, blind to the fact that easy credit and excessive debt created the crisis in the first place, the Fed and the Obama administration are happily running up higher and higher debts. In an unprecedented printing press exercise the Fed has purchased over $1.2 trillion of toxic agency (Fannie, Freddie, Ginnie Mae) mortgage backed securities (MBS), creating a floor for housing prices and so delaying necessary corrections. Hence the massive burden of toxic assets now weighs down not only the private financial markets but also the Fed itself.

Numerous other government support measures have been masking the fundamental sickness of the housing market, including tax breaks for home buyers and government-mandated loan modifications (the majority of which end up in default again within six months). The Federal Housing Administration (FHA), with its aim to make homes more affordable, has underwritten hundreds of billions of dollars of mortgages in the last two years alone. Its support for the housing market is expected to double again – growing to $1.5 trillion – over the next five years. FHA foolishly continues to require down payments as low as 3.5%, when it should be obvious that a 15-20% deposit would allow home owners to better withstand any future crisis. (Unsurprisingly, a record number of FHA-insured loans are delinquent.)

Speaking of loose monetary policy… rates have been fixed at near zero. The resulting boost to the price of securities held by banks, as well as what are, in effect, zero interest loans from depositors, have translated into strong revenues for the sector, allowing banks to ignore the bad loans still on their books. It is clear that the irrational monetary policy with artificially low interest rates, plus monetization of debt, will continue for quite some time. A certain recipe for the next bubble and crisis.

And of course the government has also embarked on an unprecedented fiscal stimulus, a consequence of which is a massive increase in public sector debt. (The US national debt now stands at over $12 trillion. But add the ‘off-balance sheet’ unfunded liabilities and the total public debt comes to an estimated $60 trillion – an amount that can clearly never be paid off. We’ve discussed the impact of extreme debt levels in a recent post here.)

Despite the shocking debt and deficit we’re unlikely to see any serious attempt at spending cuts any time soon; quite the opposite, there seems to be a new US spending bill proposed almost every week. Crucially, at a time when existing entitlement programs are bankrupt, the Obama administration saw it fit to create a monstrous new $2 trillion health care entitlement.

In spite of the alleged temporary nature of the public spending boom, the expansion of government will likely be permanent. The price to pay is obvious – high deficit, high taxes, slower economic growth and less wealth. Unless, that is, you agree with Mr. Obama and the ‘leading’ economists that government spending creates wealth.

The belief we can cure a debt crisis with even more debt would also be rather comical, if the situation, and consequences, weren’t so tragic.

So what then is the solution?

Instead of the government attempting to micromanage the financial markets (and any other private industries) via further interventions, regulation, punitive taxation, bans and growing bureaucracy, we should simply allow the free market to work. The finance industry as well as borrowers should be let to suffer the consequences of their actions (be it bad lending or irresponsible borrowing). They also need to be allowed to make commercial decisions without coercion or interference from policy makers. In the absence of government intervention – that only creates distortions and moral hazard – the markets would curb bad behavior via defaults and bankruptcies, resulting in suitable risk adjustment by other participants.

US home owners should also be liable for any outstanding mortgage balances (as is common in virtually every other country), instead of simply being allowed to walk away from underwater mortgages. Naturally such policies would mean fewer home buyers taking on mortgages they can’t afford to repay, and that goes against the government’s idea of home ownership being a near universal ‘right’ – a notion which, bizarrely, still appears to be alive and well in Washington. But until people return to a suitably affordable lifestyle (whether that be renting instead of home ownership, or a more modest home) we are only kicking the problems down the road for a little longer.

It is natural that in a crisis, recession or period of high unemployment people are angry; they need to externalize the enemy. The markets, speculators, or Wall Street are a highly convenient (and sometimes justified) target when it comes to diverting blame away from policy makers, central banks and general population. They also provide a welcome opportunity for governments to expand and to regulate more, tax more and interfere more in private sector activities.

However, if any lessons are to be learned at all, we must acknowledge that it was the culture of living on (cheap) credit and spending beyond our means – spurred by disastrous monetary policies and interventions - that led to record indebtedness, housing bubble and collapse, and resulting financial and economic hardship. Only then will we be able to recognize that the current policies are simply setting the stage for a much larger crisis a few years from now.

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The quiet death of the rule of law

February 4, 2010

The government’s plan to buy stolen data on Swiss bank accounts of alleged tax evaders generated a heated debate in Germany this week. A CD with some 1,500 names of German citizens with accounts at the bank (according to some reports HSBC’s private bank) was offered to the German authorities for the price of €2.5 million, by an alleged employee of the bank.

Germany’s main political parties have been divided on the question of legality and morality of the purchase. The opposition parties SPD (Social Democratic Party), Greens and the Left Party are in favour of the transaction; Angela Merkel’s Christian Democratic Union (CDU) and the business friendly Free Democratic Party (FDP) are split on the issue.

However, Chancellor Merkel has been very vocal on her intent to go ahead with the acquisition and Finance minister Wolfgang Schäuble (CDU) confirmed that the decision has, in principle, been made.

There is a precedent for such action – Bundesnachrichtendienst (Germany’s foreign intelligence service) paid €4.6 million to a thief two years ago, in exchange for confidential files on account holders at his former employer, LGT Group in Liechtenstein. That action netted the state approx €200 million in back taxes and penalties; then-CEO of Deutsche Post Klaus Zumwinkel was the most prominent German caught in the operation.

The majority of Germans approve the (possibly illegal) transaction – 57% want the government to pay for the stolen data, according to a poll by Stern.

The question is whether the state can and should buy stolen goods in order to catch potential tax evaders. To the government it appears to be a no-brainer. Not only will it play well with the populist sentiment of the moment, but the tax authorities may retrieve over €100 million in undeclared taxes.

Can a government break its own laws? According to prominent German legal experts – who have voiced concerns about the legality of the transaction – the government is running into a judicial minefield.

Purchase of stolen goods is a criminal offence in Germany and punishable with up to five years in prison. The question then is, must the state abide by its own laws, or is it exempt from such constraints, for some fictional ‘greater good’?

The notion that the authorities should be free to break the country’s laws ought to be inacceptable. Not only would it mean the state can commit a crime (or participate in one) with impunity, it would also encourage further data theft. It will not be long before another enterprising bank employee decides to quickly make a few millions by stealing confidential client information. The government’s action opens all doors to such criminal activity.

Germany is undoubtedly threading on dangerous terrain and the price to pay could be high. Put into question is the integrity of the German state and the rule of law.

Volker Kauder (Chairman of the CDU/CSU parliamentary group in the Bundestag) declared that the state should not collaborate with thieves. Constitutional law expert Prof. Dr. Helmut Siekmann said the possible multi-million euro revenue does not justify a purchase of illegally obtained data. In his view, the state, as the citizens, is obliged to abide by the laws. Data protection expert and Federal Commissioner for Data Protection and Freedom of Information Peter Schaar expressed great doubts about the legality of the transaction, considering it inacceptable.

Should any of the involved take the matter to court, the likelihood of the illegally obtained evidence being accepted as valid is low. The government will of course count on any tax offenders paying up quietly rather than taking on a lengthy legal battle against the state.

The question about the (im)morality of the proposed action seems easier still to answer. Then again, we should be under no illusion of our rulers being overly concerned with such matters.

When a government takes the liberty to ignore its own laws and willingly purchases stolen data in order to catch tax evaders and gain money for its coffers, what are the citizens supposed to think? If the authorities can break the law to satisfy their own pursuits, what example does it set for the people who until then had respect for law and order? Should the state not be bound by the laws of the land, even more so than its citizens?

Unsurprisingly, the relationship between Germany and Switzerland has suffered further damage. Swiss politicians of all parties have strongly condemned Germany’s intent to reward, rather than prosecute, the thief. The Conservatives compared Angela Merkel to a bank robber and the Swiss population seems to support that view.

“I consider it rather insidious that a state operating under the rule of law would make use of illegal data,” said Swiss President Doris Leuthard.

The Swiss see the German (and international) assault on their banking system and bank secrecy as a personal affront. Tax evasion, unlike tax fraud, is not considered a crime in Switzerland, and bank clients’ privacy is an utmost priority. The bank secrecy has started to crack recently, in particular thanks to US pressure on UBS and the bank’s resulting cooperation with US authorities. The country has a lot to lose; the financial sector is one of the most important for the Swiss economy.

But as shown above, there is far more at stake. No matter how keen the majority of the German population may be on prosecuting (supposedly rich) tax evaders, the ends must not justify the means. The government’s action should cause grave concern to everyone – not just those who dodge their taxes.

The rule of law requires that all individuals in a society are subject to the same laws, including – and especially – those who govern us. Our rulers cannot be exempt from it, regardless of any potential ‘good’ that might come from breaking the law. Indeed, what other protection from arbitrary government action and abuse do citizens have, if not the laws?

Clearly, IF we had the rule of law, a government wouldn’t be permitted to become accomplice in theft. But this episode is not the first indication that rule of law has died a quiet death some time ago. And I doubt it will be the last.

It’s not a specifically German issue either. Whether we look at the US, UK or any other of our cherished democracies, the state has increasingly been above the law, even though citizens may not yet have fully woken up to the fact. (As one recent example among many, consider the Chrysler bankruptcy and the mockery the Obama administration made of the bankruptcy laws and the rights of the secured creditors, in order to pay off a political debt to the unions.)

Be under no illusion, this is our new reality – and it’s here to stay – governments who don’t lose any time on legal niceties in a ruthless pursuit of their own goals.

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We have no right to lecture China

December 30, 2009

Two stories have dominated the news over the last few days. The attempt to blow flight 253 out of the sky has caused headlines around the world. The other news, creating as much – if not more – uproar here in the UK was the execution of drug trafficker Akmal Shaikh, a British citizen caught with 4kg of heroin in China. (4kg are apparently enough to kill 27,000 people.)

After an overdose of incessant outrage by all the bleeding heart liberals I simply had to share my thoughts on the matter.

Shockingly, Mr. Shaikh had found fervid defenders in Gordon Brown and other members of the UK government and our liberal elites. According to official sources the government raised the case on 27 occasions, including Gordon Brown’s direct interventions with Chinese president Hu Jintao and Prime Minister Wen Jiabao.  Their repeated calls for clemency were (thankfully) unsuccessful. As a result, our Prime Minister attacked and strongly condemned China this week, while the entire official campaign grew increasingly hysterical.

At a time when the UK is on the verge of bankruptcy thanks to a record deficit and general mismanagement of public finances and the economy, when British soldiers are killed in Afghanistan thanks to a lack of equipment and missing support from the government, Gordon Brown had seemingly nothing better to do than try to save the neck of a rightly convicted criminal.

As has been only too common with British criminals, Mr. Shaikh claimed to be suffering from a mental disease and hence not being responsible for his crimes. The illness he saw as a convenient coup-out was bipolar disorder.

To be fair, I have no way to know if Mr. Shaikh was bipolar or not. (It is interesting, however, that there have reportedly been no medical records of his ‘illness’.) The point is, he was clearly fit enough to conduct his criminal business, travel the world and traffic drugs. He absolutely knew he was committing a crime for which death penalty is the punishment in China and much of the Far East. As far as I know, nobody has forced him to go to China and break their laws.

Anyone who is (mentally, physically) fit to commit a crime is fit to stand trial and be punished. There are millions of people suffering from bipolar disorder, and they would happily attest that it doesn’t make them go out killing, robbing, or selling drugs. Blaming bipolar for a criminal career is an insult to all the law-abiding people who suffer from a mental illness.

I am glad China has not allowed itself to be bullied into reversing the sentence handed out by its courts. I cannot think of any country that has less of a right to criticize China when it comes to criminal justice than the UK.

We all know that our liberal elites view drugs as a fashionable habit and matter of personal choice rather than a serious criminal offence. Drug dealers are free to ply their trade in this country, celebrities openly hooked on drugs are revered as role models, even prisoners have easy access to drugs any time they wish to.

Worse still, drug users are rewarded by our welfare system. An estimated 267,000 drug addicts live off state benefits – addiction is seen as ‘disability’, entitling them to generous welfare payments. As usual, the (shrinking numbers of) hard working taxpayers are condemned to support the useless and destructive lives of criminals and drug users.

The Chinese Government should be applauded, not condemned, for acting to defend its people and society from the drug trade. I have little hope we will ever see our own government do the right thing and act vigorously against crime.

Meanwhile, we witness the workings of UK justice (laughable to even call it such) on a daily basis. The vast majority of criminals – including burglars, robbers, violent attackers, serial criminals with dozens of offences, and at times even rapists and pedophiles -continually escape custody. In fact, hundreds of thousands of crimes that carry a lengthy jail sentence in other countries don’t even make it to UK courts anymore – criminals are instead given on the spot fines and cautions.

Murderers are unlikely to spend more than a handful of years behind bars either. Only yesterday we saw a man who killed his wife – stabbing her 96 times (while their children where playing nearby) – released after just 5 years. (That means serving less than three weeks for each mortal wound.) As unbelievable as it seems, his was still one of the longer prison stays compared to many other murderers.

Offenders, no matter how shocking their crimes, are seen as victims. Victims of their upbringing, social class, environment, society, alcohol or drug use… anything is good enough an excuse. As such, they don’t deserve to be punished, for it would be ‘inhuman’. They must be supported and protected instead. A pity that the true victims seem to warrant no such humanity.

Our rotten justice system, inept government and the liberal intelligentsia with their destructive, ‘progressive’ ideas should learn from China, instead of lecturing and condemning it.

If they did, we might still have a chance of reversing the rampant drug and crime problem and complete social and moral breakdown we have been witnessing here. The reason why we have seen violent crime rates soar is the lack of any punishment, derisory sentencing and shockingly relaxed prison regime.

A society that rewards criminals and punishes the victims (whenever they try to protect themselves amidst a lack of protection from the police or law), while law-abiding citizens are increasingly afraid to walk the streets, is inevitably heading for self-destruction.

If anyone needs a proof that the Chinese justice system works, I can only encourage you to spend some time in Chinese cities. They are safe, with low crime, no anti-social behaviour, no vandalism. Then compare to the mayhem back home. Unlike the UK, China seems to understand that the state has a responsibility to protect the lives of vulnerable and innocent citizens. In failing to do so our government endangers all our lives and is co-responsible for millions of future victims.

Needless to say, I don’t support political imprisonment. However, when it comes to actual crime, China is right.

And for those who have cried out in support of the convicted drug trafficker: Save your sympathy for the victims instead.

And yet more appeasement…

The second story of the week has also much to do with appeasement. For Labour is well versed in that – whether it comes to criminals or, as in this case, radical Islam.

As we now know, Umar Farouk Abdulmutallab, who attempted to blow up Northwest Airlines flight 253 on Christmas day as it approached Detroit, was educated in Britain. It is here he was reportedly radicalized and turned to terrorism, before leaving to train with Al-Qaida in Yemen.

That should have come as no surprise. Although the majority of British Muslims oppose violence, there are many thousands who support the use of terror in the name of the Islamic cause. A number of them travel to places like Yemen to be trained and prepared for suicide missions, just as Nigerian born Abdulmutallab did after ending his studies at the University College London in 2008.

It’s not just British born extremists either. The UK has been a magnet for foreign radicals thanks to the generous welfare state, easy-entry immigration policies and extreme tolerance to expressions of radical Islamist views. The vast number of British connections of known terrorists and dozens of terror plots hatched and uncovered here are evidence the UK has become one of world’s main hubs of radical Islam and terrorism.

British intelligence has long known that many universities across the country have been infiltrated by militant jihadists. It is also no secret that extremists preach hate at many mosques and madrassas and use them as recruitment centres.

The sheer size of the problem is shocking. A 2008 poll by the Centre for Social Cohesion showed that nearly 30% of Muslim students in the UK thought killing in the name of Islam to be justified.

You’d think something was being done about this. Well, you’d be wrong.

British universities, including the University College London where Abdulmutallab was president of the Islamic Society, have been inviting radical preachers to give lectures. These are known extremists who spread anti-Western propaganda, incite killing of gays and violence against infidels. It is astonishing and criminal that this radicalization of students is allowed to go on in this country. No surprise then that a large number of known terrorists have studied at British universities.

And it’s not just universities. Radicals are allowed to openly preach hate and murder in UK mosques and at times even in mainstream media, and extremist Islamic networks can operate freely.

The government, although well aware of the threat, prefers to do nothing. All in the name of diversity, multiculturalism, human rights and other ‘progressive’ ideals.

While most countries arrest, jail, extradite or deport those who are linked to terrorism and incite murder, the UK seems to welcome them with open arms.

What is no less disturbing is that while radical Islamists are allowed to express their criminal views openly, those who come out in criticism of anything that has to do with Islam are rarely treated with such courtesy. For in the best case they are accused of islamophobia and racism and, in the worst, charged with some spectacularly misapplied criminal offence.

Our leaders insist that extremism and terrorism are simply matters of violence and have nothing to do with Islam. They have chosen a path of appeasement, frightened of offending Muslims or making them feel targeted in any way.

Even the concepts of patriotism and national identity have become an inconvenience and increasingly provoke embarrassment or outright derision. Apparently they are unfit for a modern, multicultural society. I have lived in many countries over the last fifteen years. Britain is the only one where patriotism is a dirty word.

But it gets worse still. Not only does our government not fight this widespread radicalization, it often indirectly supports it. Millions of pounds of taxpayers’ money are poured into promoting the ‘real’ (peaceful) Islam, much of it diverted straight to radical groups. Some of the organizations the government supports are known to harbour extremist views. A number of extremists are even on the government payroll as advisors on radical Islam.

Am I the only one who thinks all this is insanity?

It’s important not to demonize those Muslims who oppose violence and extremism. They are just as entitled to live here in peace as any other religious minorities. But isn’t it time to take steps against those who preach hate and violence and openly admit to want to destroy the British society and Western way of life?

That includes prosecuting and jailing those who incite murder, deporting and extraditing the many who are wanted abroad for terror-related crimes, outlawing the extremist networks and tightening up immigration controls. I’d like to think it will happen at some point. Time is running out though, and our ruling class is not exactly known for common sense policies…

Chances are, we’ll get an extra large dose of diversity, multiculturalism and other politically correct ideas instead. And more hassling of old ladies at airports, so that certain groups don’t feel offended for being singled out. After all, profiling those who are most likely to present a threat is terribly un-PC today, and making life more onerous for everyone is so much more ‘fair’.

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Why Banker Bashing is Unwise and Counterproductive

December 18, 2009

As if we haven’t had enough of the insane ‘bash the banker’ game already… Today a senior Bank of England official – director for Financial Stability Andy Haldane – said the departure of financial institutions and bankers from the UK to avoid the super-tax on bonuses is a ‘price worth paying’ to achieve reform of the sector.

Given that BoE is supposed to be independent and non-political, this is a staggering comment in support of the government-led hostility against the City of London.

A new obsession sweeping the country

Banker bashing has, in the last 12 months, become the new national pastime, sweeping the country like the Spanish Flu. Depressingly, this rush to populism isn’t just confined to the government. Politicians of all parties are in fierce competition to show who is the toughest, the most vengeful on bankers, the modern day witches to be sacrificed and burnt at stake to satisfy the populist thirst for blood.

It’s a no brainer – attacking (‘rich & evil’) bankers is certain to prove popular with voters, who appear to take immense pleasure in castigating the generators of their recent prosperity.

The source of all evil?

Of course, bankers are a convenient scapegoat to divert attention from the government’s own role in the financial and economic meltdown. It wasn’t bankers’ greed and bonuses – as our ministers like to claim – that caused Britain to be on the verge of bankruptcy and having the largest budget deficit in history. For the past 12 years the government has been only too keen to get hands on the massive tax revenues from the finance industry, blowing them on pointless social engineering and ever growing state bureaucracy.

Not surprising then that Gordon Brown is only too happy to divert attention from his own ineptitude and recklessness by painting bankers as greedy little bastards responsible for UK’s economic collapse. Don’t get me wrong. I’m not saying they have nothing to answer for, just that they are no more to blame than the government, regulators, or, indeed, you and me.

Bonus envy? Let’s see…

And – at the risk of being lynched – I’d argue bankers may deserve to be paid more than many other professionals. You see, of all the people I have known, the bankers are some of the hardest working. 15+ hour days (often 7 days a week) in an extremely competitive, high stress environment, constant pressure to perform, barely any holidays, not to mention no time to spend with their families, not seeing the kids grow up…

So before we succumb to envy of bankers’ compensation, why not consider the sacrifices that go with it. How many of us would really want to trade in? And, who is more deserving of their large salaries and bonuses – the bankers, working 15 hour days in an onerous environment, or the politicians and bureaucrats in their cushy non-jobs with 90 days of holiday a year? And what about the country’s union barons, earning several hundreds of thousands a year for disrupting the economy with constant strikes?

Where do you think the money has come from?

Just a couple of days ago yet another case came alight of a £2.6 million, eight room mansion rented by a London council – at a rent of over £90,000 a year – to house a benefit claimant single mother of eight.  Thanks to our pathetically generous welfare state, not only does she live in a home beyond the wildest dreams of most hard working tax payers, she also receives over £15,000 a year in other benefits, tax free. And there are thousands like her who have not done a day’s work in their lives – and never will – yet live in luxury, courtesy of the tax payer.

Across the country there are over five million of such welfare-addicts, most of whom, having long realized work wouldn’t pay, have dedicated their lives to such favourite activities as drinking and watching TV. (The percentage of UK households where no one works is now a staggering 17%, according to the Office for National Statistics.)

If it wasn’t for the huge tax collected from the City (and its hundreds of thousands of highly paid bankers, traders and other staff) over the last two decades, how would the state have ever gotten its dirty hands on enough money to squander on all the undeserving?

Let’s not forget it’s the financial sector that can be credited for much of the unprecedented wealth that has been created in Britain in the last few decades. The UK – government and public – were profiting from the banking industry without complaint for nearly 20 years, yet didn’t hesitate to turn into a lynch mob overnight. Short memory, or just plain ingratitude?

And what about the role of the debt-addicted public? Most of us were eager to take on loans and credit card debt, remortgage our homes to fund a lifestyle we craved yet knew was beyond our means. Little wonder we’re casting blame while avoiding a look in the mirror – we are as guilty as anyone.

Drive them away and you’ll be sorry…

Like it or not, we need a profitable banking sector, and its billions in taxes – now more than ever. (Public borrowing hit an all-time record high of £20.3 billion in November alone, and yet our political elites act like we don’t need our biggest tax generator.)

Attempting to drive away its biggest cash cow is an act shockingly stupid even for this self-righteous, semi-socialist government. And it’s not just bankers either… Entrepreneurs and other wealth and job creators are equally being made to feel rather unwelcome and unappreciated in the UK these days (punitive taxation, class war & moronic labeling of the ‘bad rich’ aren’t exactly an incentive for anyone to invest their money and talent here).

Given that the 1% of top earners pay 24% of UK income tax and the top 10% pay 54%, and the City contributes 25% of UK corporation taxes, the stupidity of the current policies is mind blowing. And it’s not just about tax – the financial services industry accounts for 21.4% of total employment in the UK, over 6 million out of a total of 29 million workers (according to government statistics).

And yet the government propaganda and most of the masses are happily shouting we don’t need or want bankers in this country. The bad news for us is, there are plenty of countries that welcome enterprising people with open arms, appreciate their skills, and reward hard work with low taxes. Fact is, the UK needs such people far more than they need the UK.

In recent days New York, Frankfurt, Hong Kong, Singapore, Zurich have reportedly  been making an aggressive pitch to financial institutions to move their business from London. Labour’s populism is offering them an unprecedented opportunity to destroy the competitive advantage London has built over the last two decades.

With the country on the verge of bankruptcy and public borrowing out of control, who else is going to pay for the bloated, dysfunctional, inefficient public sector and the millions of welfare addicts? What is supposed to replace the City? Sheep farming, perhaps? Maybe the people now so keen to engage in banker-hatred will start to use their brain (that’s assuming there is any) once their welfare cheques stop coming.

The only thing certain is that the punitive tax raid (bonus tax, 50% income tax, etc) is a purely populist political measure that makes no economic sense (in fact, it comes as close to economic suicide as I’ve ever seen). Not only will it not provide any additional revenue for the taxman, it will cost Britain billions in investment – and taxes – diverted away from London, for many years to come.

I can only hope that at some point sanity will prevail, anger &  hypocrisy will fade, and we will acknowledge banks and bankers for what they are – a vital part of the economy. We should applaud them (and any other businesses) for making money, not demonize them or make them apologize for it.

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Impressions from the House of Commons (Drinks… and Crime Debate)

December 6, 2009

I spent a surprisingly enjoyable evening at the House of Commons on Wednesday. Now, a drinks reception is not the type of place where you’d often find me. In fact, getting me to one usually needs some convincing (or kicking and dragging!). Let’s just say that an event where working the room and small talk are the necessary requisites is about as appealing to me as a visit to the dentist.

But, the theme of the Britain Club evening being crime (and prison reform), and one of the speakers the excellent journalist and author Harriet Sergeant – whose reporting I’ve always respected – I decided to suppress my natural dislike of such events. And you know what? I am glad I did.

That’s not to say working the packed (and a bit claustrophobic) room was the most enjoyable thing I’ve ever done. The crowd was an interesting mix of business people, bankers, consultants, teachers, doctors, and a variety of other UK and foreign professionals, as well as a number of what I’d describe as professional networkers without a clearly defined profession.

As anyone who knows me can attest, as much as I dislike governments (and politicians), I’m always up for debate when it comes to policies and topics that concern people today. And our criminal justice system is one of my favourite targets. (Along with business/red tape/regulation, the outrageous benefits system, excessive taxation, education and healthcare standards, freedom of speech, civil liberties and the nanny state, and…. well, you get the idea… I don’t suffer from a shortage of topics to argue about!)

But, back to the evening at the Parliament… Journalist and author Harriet Sergeant spoke about her investigation of UK’s criminal and education systems. She has been doing a great job in her reporting and it was a pleasure to meet her. You can read her recent damning reports here: Harriet Sergeant reporting.

The author, ex-MP and ex-prisoner Jonathan Aitken spoke about prison reform. Interesting and funny speech too, which is not to say I agree with his ideas on prison reform. See, Mr. Aitken believes the state should rehabilitate criminals with education programmes. As far as I know, those prisoners who are interested in taking part already have access to free education and courses in UK jails. With reoffending rates over 70% within just two years of release, that’s hardly the solution to our wretched criminal justice system.

Worse still, Mr. Aitken suggested that instead of building the sorely needed jails we should put prisoners into hostels to allow them to be more integrated in society. Apparently, it would save money, as housing criminals in hostels is far cheaper than keeping them in prisons. I was going to write ‘It’s a nice idea, but….’ But I can’t. It’s an abhorrent idea, pure and simple.

Now, don’t get me wrong. I hate to see taxpayers’ money being spent on providing all kind of insane comforts for criminals (you should see some UK jails, with plasma TVs etc; prisoners being able to order vegetarian, vegan and ethically sourced food and toiletries, and demand nearly hotel-like standards). That is why I firmly believe all prisoners should be put to work, just like they usually are in the US (or China), to pay for their incarceration cost, medical cost, education, etc. What’s wrong with forcing criminals to work to give something back to society?

In the US, the average cost for housing one prisoner in jail is around $22,000 p.a. or $60 a day. In the UK it’s over GBP40,000 ($66,000 p.a. or $180 a day). I’d say it’s time to cut the fancy TVs and other goodies and put the inmates to work, so that they a) pay for some of their costs and b) find it unpleasant enough not to want to come back.

That said, the very last thing we can afford to do is leave yet more criminals running free – as if there weren’t enough of them already. Recent statistics show that more than 70% of violent criminals aren’t jailed. Serial criminals with multiple convictions are also escaping prison (a Civitas study shows over 60% of those convicted on more than 15 occasions are not sent to prison).

Worse still, serial offenders committing crimes as serious as burglary, robbery and violent attack are handed (repeated) cautions and fines – not even taken to court anymore, much less jailed. According to a Metropolitan Police study, 400,000 criminals who should be sentenced by courts are instead given a fine or caution every year.

In 2007 just 24% of all serious criminals were sent to prison (Civitas report, using government figures). Those who are sentenced receive pathetically short sentences (including for murders), and, to make it worse, are then automatically released in mid term (or less).

I’m always amazed when people react with shock to my arguments that instead of mollycoddling them, we should punish criminals with severity. There are few things that make me more furious than seeing criminals being set free (with a slap on the wrist), while their victims (and future victims) are neither protected nor see any justice being done.

Isn’t it time we stopped worrying about criminals’ comforts and human rights and started caring about the victims instead? In my opinion, people give up their rights the moment they commit a crime. Sadly, our liberal elites don’t seem to share that opinion.

It’s not as if, in this absence of a properly functioning police and judicial system, we, the public, are allowed to protect ourselves. Those few that do tend to see the full force of our criminal justice come down on them. Like the disabled 71 year old grandmother who poked a thug in the chest with her finger, only to be promptly convicted of assault, receiving a criminal record. And thousands of other law-abiding citizens like her with similar experiences.

With all the political correctness, human rights laws and other liberal dogmas, it seems the concept of punishing criminals is no longer popular. Clearly, neither the ridiculous sentencing in this country nor the comfortable standards in jails can be considered a punishment, by any measure.

I’d love to hear your opinion… Are we too soft on crime? Can criminals be successfully rehabilitated, or should we focus on putting them away and protecting the public instead?

For now let’s just say that the least politically correct person to probably ever have set foot in the Westminster Parliament thoroughly enjoyed this week’s event, including disagreeing with most of the fellow attendees.

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Global Warming Con… Exposed?

November 30, 2009

So now we know it – much of the global warming drama is nothing but a scam.

Earlier this month, hackers exposed hundreds of emails and documents from the University of East Anglia’s Climatic Research Unit (CRU) – one of the world’s leading climate change research centres – that appear to prove researchers faked and manipulated statistics.

The issue is, CRU’s research and archive of global temperature data form the basis of United Nation’s key reports on climate change. Therefore, if the data was fabricated or corrupted, the models supporting the global warming theory would also have been compromised.

The popular consensus is that global warming a) exists and b) is caused by human activity and industrialization. There are skeptics – even among scientists – disputing this thesis, and there has been plenty of data supporting a theory that global warming (and cooling) periods are caused by solar activity.

There has been a lack of an open debate on the issue, but that might change now. The leak of the damaging emails, causing a sensation around the globe, has been seized upon by global warming skeptics. I freely admit to being one of them.

CRU has for years been refusing to publish details of its temperature research data, so the exposed emails certainly don’t look very good. In some of them Phil Jones, CRU’s director, appears to suggest a ‘trick’ to ‘hide the decline’ of temperatures and lack of any warming.

So is this “the greatest act of scientific fraud in history”, as some US pundits have called it? It’s too early to tell for sure. But at least we might see an honest debate now, hopefully before governments start wasting trillions of tax payers’ money on (possibly) unnecessary legislation and measures.

Or perhaps I’m just being overly optimistic.

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Selection of an EU President, Another Act in the EU Farce

November 21, 2009

So here we have them… the first EU President and High Representative for Foreign Affairs (aka foreign minister). Two obscure figures – staunch federalist Herman van Rompuy, keen on shifting more and more powers to Brussels (including rights for the EU to impose taxes) and Baroness Ashton, a non-entity bureaucrat with zero experience or knowledge of foreign affairs.

Not elected, of course – this is the European Union after all and not some democratic institution – but selected, behind closed doors, to rule over 500 million people. Just as bullying Ireland into repeating a plebiscite (a result of which was not to Brussels’ liking), this was simply another step in the undemocratic farce the EU has morphed into.

As far as I can recall, nobody has asked voters in this country whether they want an EU President, or foreign minister, or a European constitution/Lisbon Treaty for that matter. No, voters’ views simply don’t matter when it comes to the EU. It is extraordinary how a fundamentally good idea of a single market has been bastardised into the biggest slap in the face for democracy.

Having denied its people the promised referendum on the Lisbon Treaty, the government surrendered British sovereignty to the European Union. EU courts and unelected – as well as unaccountable – officials supersede the democratically elected national governments. National veto powers have been axed, leaving us at the mercy of an unelected politburo in Brussels. EU now has control over British foreign policy, military and defence, immigration, criminal justice, social and employment laws and many other policy areas. The path to a complete federalisation of the EU is set, national sovereignty irretrievably lost.

Now that the Lisbon Treaty has been ratified, the next – Conservative – government (there goes hope!) should focus on regaining for the UK some of the sovereign powers and competences in key areas. And, as that is unlikely to succeed, calling a referendum on whether to stay in the EU or opt out only seems appropriate.

According to the TaxPayer’s Alliance, the EU costs each of us £2,000 a year. It seems particularly bad value given the ever growing red tape, bureaucracy and out-of-control regulations and directives that are imposed on us. Should the British people ever get the chance to vote on opting out, my guess is that UK’s days in the EU would be numbered.