Federal Reserve and Monetary Policy: The Federal Property Tax

Yeah, I know there is no Federal Property Tax, however, the Bush administration has structured its economic policy to reflect such a tax. I’m going to use the Alternative Minimum Tax as a guide and show why there is a “Phantom Federal Property Tax”. See ATM Instructions, look specifically at mortgage deductions-line 4. The nut shell of this deduction is: if you use a home equity line of credit to buy a car (non-home improvement) you do not get the interest deduction. I do not think Congress needs to fix the ATM. Housing prices are coming down which will fix the problem.

If one (me) takes the poll results from the mid term elections as a given state of the US consumer (two thirds of those polled indicated that “Wall Street” and “Oil Prices” were not a factor”, but home wealth was) then one (me) can argue the following:

• Bush has pushed paying for his economic policy to the future. Unfortunately for him and the Republicans, his decision has backfired because it will be part of the 2008 election cycle.
• Bush and the Republicans have come to the conclusion that we can borrow unlimited amounts of money because of “Globalization”. Unfortunately for the US consumer, this faulty reasoning was the crux of the Great Depression. See previous post.
• The “Rich” as represented by people like Fisher (“The Only 3 Questions That Count") and Forbes thinks GDP based on borrowing is more efficient than GDP based on US of A’s output. In other words, home owners who do not borrow against their home’s equity (house rich) are being punished, in the aggregate. See Renting Households Financial Obligation Ratio, it is at 25.18. The credit bubble for renters is over. See Survey of Consumer Finances and previous post “Federal Reserve and Monetary Policy: States' Separatist Movements and Local Currencies.” In another nut shell, homeowners need to borrow against built up home equity to pay for health-care, education, heating the house, driving to ones low pay work place and clothing your family. You do so in the hopes that next year will be better than this year.

If I was in charge of 2007 Congressional hearing schedule, I would put GE and the GSEs in the hot seat.
I would use GE as the “poster child” due to their involvement of American Jobs Creation Act of 2004 (K Street Project). Make them justify their tax break and put their parrots (CNBC [GE’s propaganda outlet] and Princeton’s ROSSI-HANSBERG and GROSSMAN [See page 14 of their paper The Rise of Off shoring… “Imports textiles and exports finical services”. Exports finical services is GE’s US business strategy.]) on the stand.

OFHEO has filed civil charges.
The charges "reveal how the individuals improperly manipulated earnings to maximize their bonuses, while knowingly neglecting accounting systems and internal controls, misapplying over 20 accounting principles, and misleading the regulator and the public," OFHEO Director James B. Lockhart said in a statement.

I would use these charges as a lever to get them (Rains, etc) to squeal on the White House’s involvement of the fraud. It was a jobless recovery and the 2004 Presidential race was close. Bush twisted the economic data and use housing as a theme for his race.

I will also put the Wall Street Journal in the hot seat because they are “joined at the hip” with the White House. Charge them, along with GE etc…, under the Racketeer Influenced and Corrupt Organizations Act, with conspiracy to commit fraud and tax evasion. Make the the test case for all negative results from the K Street Project.

If I were a governor I would rescind the Federal Bankruptcy law. Economic data was twisted too such an extent that allow US consumers to over leverage themselves.
See Inflation Targeting under Imperfect Knowledge
A central tenet of inflation targeting is that establishing and maintaining well-anchored inflation expectations are essential. In this paper, we reexamine the role of key elements of the inflation targeting framework towards this end, in the context of an economy where economic agents have an imperfect understanding of the macroeconomic landscape within which the public forms expectations and policymakers must formulate and implement monetary policy. Using an estimated model of the U.S. economy, we show that monetary policy rules that would perform well under the assumption of rational expectations can perform very poorly when we introduce imperfect knowledge. We then examine the performance of an easily implemented policy rule that incorporates three key characteristics of inflation targeting: transparency, commitment to maintaining price stability, and close monitoring of inflation expectations, and find that all three play an important role in assuring its success. Our analysis suggests that simple difference rules in the spirit of Knut Wicksell excel at tethering inflation expectations to the central bank’s goal and in so doing achieve superior stabilization of inflation and economic activity in an environment of imperfect knowledge.

I’m glad to see the “REAL” Republican Party has stood up.

I’m expecting an economic policy change to prevent the US going into depression. It’s a game of chick between the Fed and the White House. The implosion, in the sub-prime housing market, CAN NOT stay in the sub-prime mortgage market. One of the reasons given by those sub-prime loan originators was their expectation of housing price appreciation, not a decline. I believe this attitude was wide spread. In Fannie Mae’s 2004 10K PDF page 99. Assessing the sensitivity of the profitability of the single-family mortgage credit book of business to changes in composition and the economic environment sub-section, one will note that Fannie Mae never consider the possibility of a nation wide price decline. This assumption was removed in 2005. Fannie’s Mae 2006 10K PDF page 151 assumes a modest price decline. The housing bubble was based on fraud NOT on economic fundamentals. Reality dictates that “ALL Prices Should have Changed” when the US was shifting production off-shore (the Japanese Recession/Deflationary event). Home prices, at the very least, should not have increased at the rate they did. The White House, through its proxy Fannie and Freddie, placed a priced control floor on housing prices. This lead to their self full filling prophecy of ever increasing price appreciation. Homeowners’ expectations WERE NOT MET.

I’m also expecting hearings and Bush going through the impeachment process. “All the President’s Men” part 3. Nixon was part 1 and Regan was part 2.

Or……………….

Washington DC can acknowledge there is a structural problem in the US due to Bush’s trade, tax and economic policies. At the very least they can remove the repatriation reward of mega-corp profits, expand the economic zone from Katrina/Rita to the US and siphon off the Social Security Surplus to a GSE that will use the funds to invest in NEW municipal bonds. I think this last one well have the greatest impact. There will be a need for higher output of building materials and an increase of the “wear and tear” on equipment.