[Nesster]

I read an article recently - no link saved - where the point was that the rich folks agitating for a higher income tax rate for the rich were evading the issue... as long as the capital gains tax is lower their major tax component is lower. There was a statistic that tax revenues went down just about = the percentage of cap gains cuts with Bush II...

[newarts]

Quote Originally posted by newarts

Let's say that 1/2 the people in the top quintile are employed - that means that one of eight in the bottom quintile work.

Since the top quintile has (50%)/worker of the income and the bottom quintile has 4% / (1/4 worker) the few lower quintile lucky to have work get rewarded at 16/50 or about 1/3 the wage rate. On a per person basis the top quintile people each have 12.5x more resources to live on.
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My guess is that more than 1/2 of the people in the top quintile are employed. More like everyone who wants a job is employed (definition of full employment).

I guessed 1/2 because the original data was based quintiles of households: maybe more than half of people in a household (including children, aged parents, crazy aunts, etc) are employable ... I'll see what I can find.

EDIT in 2000 the US household held 2.6 people of which 1.2 were workers...http://www.fhwa.dot.gov/ctpp/jtw/jtw1.htm

[GeneV]

Quote Originally posted by newarts

I guessed 1/2 because the original data was based quintiles of households: maybe more than half of people in a household (including children, aged parents, crazy aunts, etc) are employable ... I'll see what I can find.

EDIT in 2000 the US household held 2.6 people of which 1.2 were workers...Chapter 1. NATIONAL SUMMARY - CTPP - Planning - FHWA

That would be approximately 1/2 for the population as a whole, so based upon Mr. Cunningham's analysis, it would be much more than 1/2 for the top quintile and less for the bottom.

I also wonder how relevant the statistics in 2000 would be. The data would be coming off a booming decade with abundant employment, and would be before the effects of two major recessions with jobless recoveries and the other upward wealth redistributions of the last decade.

[GeneV]

And capital appreciation isn't counted as income unless they sell it.

In fact I wouldn't be surprised if someone like Mark Zuckerburg is no where near the top 400 income earners. If you counted capital appreciation he would would probably be in the top 10 though.

Or if you look at people like Elon Musk who keep fully invested in themselves and their own enterprises and instead borrow against the value of those assets and just pay the interest on those loans out of their wages which are meager compared to their assets.

Which is why wealth is a better indicator of the redistribution that has happened over the last decades.

Joseph Stiglitz was spot on in observing that the financial sector has prospered by grabbing from the bottom and redistributing wealth upward.

The result of the financial crisis of the last decade was to eliminate equity, which is the primary source of wealth for the middle class, and squeeze every penny of penalty and interest possible from individuals. At the same time, the government has provided $9 trillion in essentially free money to the financial sector, so that the wealthiest never lose. Federal Reserve made $9 trillion in emergency loans - Dec. 1, 2010 Check my math on this, but if you are not a chartalist, you have to reckon that every man, woman and child in the U.S. loaned the banks (and indirectly its wealthy owners) $30,000 at little or no interest. A median family loaned the banks a year's income.

[mikemike]

That explains the discrepancy and how the discrepancy in income is good thing how?

Wealthy people's wealth swings up and down. If you counted capital appreciation as income and MS or Berkshire had a bad year Bill Gates or Warren Buffet would be qualified for food stamps. The income tax doesn't tax wealth or do anything to contain the accumulation of wealth because the greatest accumulation of wealth comes from sitting on long term investments in enterprises which you control and run successfully a la Gates, Buffet, Zuckerburg, etc.

Federal Reserve made $9 trillion in emergency loans - Dec. 1, 2010 Check my math on this, but if you are not a chartalist, you have to reckon that every man, woman and child in the U.S. loaned the banks (and indirectly its wealthy owners) $30,000 at little or no interest. A median family loaned the banks a year's income.

I'm no expert on exactly how the banking system works but I thought these were overnight loans so if a bank borrowed $100 Billion for ten days by paying it back and borrowing again does that would count as $1 trillion in emergency loans. If anyone understands how this works better than I, please correct me.

[shooz]

Wealthy people's wealth swings up and down. If you counted capital appreciation as income and MS or Berkshire had a bad year Bill Gates or Warren Buffet would be qualified for food stamps. The income tax doesn't tax wealth or do anything to contain the accumulation of wealth because the greatest accumulation of wealth comes from sitting on long term investments in enterprises which you control and run successfully a la Gates, Buffet, Zuckerburg, etc.

Didn't answer the question.

[GeneV]

I'm no expert on exactly how the banking system works but I thought these were overnight loans so if a bank borrowed $100 Billion for ten days by paying it back and borrowing again does that would count as $1 trillion in emergency loans. If anyone understands how this works better than I, please correct me.

The transparency of this system is a huge problem upon which the political right and the left agree. We don't know for sure how much of this has been repaid and when. Estimates vary but it seems that estimates are around $2.1-3.3 trillion in liquidity was added to the system and stayed on the books. That would seem to indicate that a third of the money was not repaid overnight, but I'm no expert, either.

Even so, how many middle class taxpayers can get a short term unsecured loan of more than their annual household income? This money was (and may still be) transferred upward.

[Nesster]

The investment banks - and other investment houses - finance their own positions overnight, every night. Often this is done via repurchase agreements (repos) and securties loans, or commercial paper issuance... the inventory may be put up as collateral over night (each night) to cover loans, etc. When the liquidity crisis hit the borrowing rates to finance positions went way up, which of course hurt profits and cash flows... not to mention, what counterparties accepted as collateral became a smaller portion of the securities held. Finally, counterparties would stop dealing with e.g. Bear alltogether, at which point e.g. Bear would have no recourse save bankrupcy or sale.

"Real" banks have access to the Fed window whereas investment banks and brokerages do not. The Fed opened up the spigot at their window in an attempt to replace the lost overnight liquidity in the market: rather than trying to arrange an overnight repo etc, a bank could go to the Fed to finance the positions overnight. In order to avail themselves of this facility, Goldman and Morgan restructured themselves as bank holding companies.

By definition the money was repaid each day; if not the borrower would be bankrupt. Therefore the liquidity provided was more like a line of credit total; each night the draw down on this line of credit would be different, depending on market conditions.


Here's the Fed explaining it:
http://www.frbdiscountwindow.org/discountwindowbook.cfm?hdrID=14&dtlID=43


and here's another explanation:
http://www.flatworldknowledge.com/node/29364#web-29364

[GeneV]

The investment banks - and other investment houses - finance their own positions overnight, every night. Often this is done via repurchase agreements (repos) and securties loans, or commercial paper issuance... the inventory may be put up as collateral over night (each night) to cover loans, etc. When the liquidity crisis hit the borrowing rates to finance positions went way up, which of course hurt profits and cash flows... not to mention, what counterparties accepted as collateral became a smaller portion of the securities held. Finally, counterparties would stop dealing with e.g. Bear alltogether, at which point e.g. Bear would have no recourse save bankrupcy or sale.

"Real" banks have access to the Fed window whereas investment banks and brokerages do not. The Fed opened up the spigot at their window in an attempt to replace the lost overnight liquidity in the market: rather than trying to arrange an overnight repo etc, a bank could go to the Fed to finance the positions overnight. In order to avail themselves of this facility, Goldman and Morgan restructured themselves as bank holding companies.

By definition the money was repaid each day; if not the borrower would be bankrupt. Therefore the liquidity provided was more like a line of credit total; each night the draw down on this line of credit would be different, depending on market conditions.

Doesn't this result in an increase in the money supply which accrues to the benefit of the banks and their owners?

[Nesster]

Doesn't this result in an increase in the money supply which accrues to the benefit of the banks and their owners?

I added a couple of links to my post above with further explanation of how the Fed operates in this area.

But yes, it does so, temporarily, to avert liquidity crisis or other trouble. And yes, it benefits the banks as they don't have to go bankrupt. And it benefits all the financial institutions as they don't have to deal with counterparty bankrupcies during difficult times -- the markets are still working out Lehman, for example.

This is distinct from the TARP, afaik, as the TARP and other 'purchases' of preferred stock aimed to inject capital rather than liquidity into the system.

--

A little more on the overnight financing: 1) there is money to be made from financial positions; especially street-name custodial assets 2) as the proprietary positions are all leveraged and hedged, always, the financing becomes both complex and sensitive to minor market moves.

E.g. let's say I am an investment bank, and I take on a $100mill position in some debt instrument. Let's say my leverage is moderate, e.g. I put up $20mill of my own capital to buy this $100mill position - and borrow the rest. I now need to repo out $100mm each night + borrow $80mm.... I hope to make money on my position through a positive market move, i.e. selling higher than I bought and keeping the leveraged profit - Let's say I sell for $110mm, I just made $10mm on a short term investment of $20mm, less borrowing costs. I also make the interest on the debt instrument while I own it.

This ignores the hedging strategies I put on to minimize my downside risk. Also, it ignores the strategies for borrowing that $80mm in the first place - e.g. I might take a 'reverse repo' each night, 'buying' someone else's securities with an agreement to 'sell' them back the following day at a pre-arranged price.



The point here is that if the $100mm investment goes down to $90mm you've just lost a ton, and likely your borrowing costs have gone way up. And if the counterparties believe the value will go down to $80mm or less, they figure you're out of business as you just lost >100% of your capital investment. Would you lend to me under that scenario, and take these bad bonds as collateral?

[GeneV]

If money can stay out on the line of credit, then it would seem to me that it increases the money supply and the "effective" wealth of the person who has the credit line. One article I read said there was $3.3 Trillion still outstanding on these accounts in mid-2009. That seems like a pretty big boost to the money supply, but I'm no economist.

[Nesster]

Yep, that's whats called keeping the banks on life support: if they can't manufacture profit from the yield spread something's seriously wrong. And what is seriously wrong? All the bad debt paper they are stuck holding and marking to market & therefore showing big drains on capital and earnings.

[Nesster]

Actually, now that I reconsider, I did have a spurious $80mm borrowing for the initial position: essentially you keep your position financed by putting up the $100mm as collateral for the $80mm you owe...

[newarts]

While this is a reasonable approach, it can be misleading. We often hear, for example, that the top 20 percent of households receive roughly 50 percent of total income, while the bottom 20 percent receives less than 4 percent. The problem is that we are not told that the top 20 percent of households includes four times as many workers as the bottom 20 percent.

newarts

I guessed 1/2 because the original data was based quintiles of households: maybe more than half of people in a household (including children, aged parents, crazy aunts, etc) are employable ... I'll see what I can find.

EDIT in 2000 the US household held 2.6 people of which 1.2 were workers...Chapter 1. NATIONAL SUMMARY - CTPP - Planning - FHWA

That would be approximately 1/2 for the population as a whole, so based upon Mr. Cunningham's analysis, it would be much more than 1/2 for the top quintile and less for the bottom.

You are right: Here's some older data which shows a worker ration somewhat less than 4:

http://www.russellsage.org/research/social-inequality/chartbook/basic-trends...rs-by-quintile

I also wonder how relevant the statistics in 2000 would be. The data would be coming off a booming decade with abundant employment, and would be before the effects of two major recessions with jobless recoveries and the other upward wealth redistributions of the last decade.

The ratios haven't changed dramatically over the years.