An Empirical Exploration into the Finance World

FHFA started to flex its muscle by suing the large banks for subprime. Is this the right time? They argue to recover money from the banks and help the borrowers, but really, will that really be helpful? The economy has been in such a low credit condition, and what this mass lawsuit will bring is even worst lending condition and lower housing prices. Economic recovery is pushed back even further.

An article on Bloomberg.com today writes, “at least five Republican presidential candidates support eliminating taxes on capital gains, proposing even deeper cuts than former President George W. Bush endorsed and standing in contrast to advocates of higher investment tax rates such as Warren Buffett.”

Can lowering tax stimulate growth and save the economy? I don’t think so. The most profound impact of the recent financial crisis, in my opinion, is to shatter people’s trust in each other. This leads to high risk aversion and low credit liquidity. US government used to be the most financially trustworthy entity on earth, but with mounting debt and the drama with raising the debt ceiling, people are just more unwilling to count on Uncle Sam. Capital spending and investment staggers. Unemployment stays high month after month.

I think the ultimate remedy is to improve US fiscal health by reducing its liability, especially debt. More money at people’s hand as tax savings won’t bring the fundamental lack-of-trust mindset back to a more helpful place, because the root is fiscal deficit, not monetary liquidity. I am not suggesting jacking up capital gain tax to where it was. Frankly I am not even sure how many investors can really have a lot of capital gains lately. This policy certainly will win lots of donation from the Wall Street, who have been reportedly becoming less generous with politicians. But, bank debt is what is really helping the economy and job growth. To ease lending, we have to bring the government deficit down. A tax system overhaul is badly needed, and it has to be fair and beneficial to government revenue. That is the only way to restore the trust people once had in the USA.