Guideposts Towards Economic Recovery

Originally publised in the CA and NV Examiner for the 11/26/2010 issue    

     I have written several articles in this column in the past, “ Obamanomics vs. Reaganomics,” “ Stimulus and Tax Cuts: Who Are We Kidding,” wherein I shared the views of the critics of this Administration regarding the failure of several Administration’s programs, such as the Cash for Clunkers, First Time Homebuyer’s Credit, Massive Stimulus Spending and Monetary Easing. (You may want to check out my Blog, http:artjaviertax.blogspot.com, if you missed these articles or if you want to check them out and read them again the second time).

      What seems to be perplexing is that in spite of these failures, the present Administration still holds on to the book of Keynes. Recently, the Fed announced to pump $600 billion of money supply to stimulate the economy- again embracing the Keynesian demand side economics. The Administration officials should probably take a  hard look to determine if their line of approach has not been effective to bring this country towards growth and economic recovery.

     A noted economist, Arthur Laffer, is saying that, "the solution to our economic problem can be found in the Price Theory which can be found in the most basic Economics textbook." It’s basic supply and demand, which we have learned in Economics 101. Let’s take the issue of Unemployment. Laffer argues that employment is low because the incentives for workers to work are too small and the incentives not to work are too high. Workers compare the wages or benefits they will get if they work vis-a-vis the unemployment benefits if they don't (they add the leisure value of not working). They conclude that they are better off not working and would rather enjoy the 99 weeks of unemployment benefits.

     With the workers’ wages really down, the supply of labor is therefore limited. Meanwhile the demand for labor is also down since when employers consider the costs of employing new workers-wages, health care, and more-they are greater today than the benefits.

     The Agenda.  But we need more specifics here, as in, "what agenda can we propose to the present Administration to bring us and propel us towards achieving economic recovery?" I share the views of Laffer and this is the agenda he proposes:

(1)   The full extension of the Bush tax cuts. The Republican controlled House of Congress will push this and the Senate may block it or President Obama can veto the House bill. Our unemployment problem can be worsened if we let the Bush tax cuts expire. Personal income tax rate should stay at the top rate of 35%, capital gains tax rate at 15%, dividend tax rate at 15% and pursue the permanent elimination of the estate tax.

(2)   The full repeal of the ObamaCare, which allows the individual to pay only five cents for each dollar of health care. Who do you think pays the other 95 cents? The former Senator Phil Gramm notes, if he had to pay only 5 cents for each dollar of groceries he buys, then he would really eat very well-and so would his dog. Many critics note that no single bill is more antithetical or an antithesis to growth and economic recovery than the ObamaCare.

(3)    The cancellation of all spending that punishes those who produce and rewards those who do not. Laffer argues that “this is really the distinction between the demand side economics and the supply side economics.”  Stimulus spending and quantitative easing don’t make it more rewarding to work an extra hour. If the government pays people not to work and taxes people who do work, is it really so difficult to understand why employment is too low? Talk about the Las Vegas or Nevada unemployment rate of 15%!

 

Hot Tax Issues of the Day

Originally published in the CA and NV Examiner 11/19/2010 issue     

     Now that the midterm election is over we now know that we have a divided government. The House of Congress is now controlled by the Republicans and we know that their top priority is to repeal the Obama Health Care. But equally important to the Republicans is the issue on taxes. From my readings I came across the still uncertain and unresolved burning tax issues. But what is certain is that Congress will reconvene on Nov 15 and leaders from both houses will meet with the White House on Nov 18. Both Chambers are still under control by the Democrats until power passes in January. The IRS urgently needs to know the right computations on next year’s withholding taxes as well as payroll executives who require at least three weeks to install a new system.

     While there’s a laundry list of tax issues that Congress needs to resolve, the following  seem to be the most outstanding:

     INCOME TAX. As we all know the Bush tax rates will expire by the end of the year. The top rate will go back to almost 40%. We have been told by the Obama Administration that the cuts will only be extended for those making less than $250,000.00 ($200,000 for singles). The Republicans disagree. They want the extensions be given to everyone and these cuts be made permanent.

      Are there other alternatives being considered by the Administration? Yes. A possibility will be a one to two year extension for everyone. This still is not acceptable to the Republicans. A possible compromise would be to extend permanently the tax cuts for those making less than a $1million.  As of press time, I have learned that the White House is amenable to extend the Bush tax cuts. But the details have not been given yet to the media as everyone await President Obama back from his meeting at the G20. 

     For those who are doing tax planning it might be good to accelerate income and take deductions at a later time. Even if the tax cuts shall be extended taxes are likely to be up sometime in 2012 or 2013.  We need to prepare for this likely event.

     CAPITAL GAINS AND DIVIDENDS. If the Bush tax cuts are not extended capital gains will go up to 20% and dividends will revert to being taxed as ordinary income with 39.6% as top rate. The fate of these rates will likely be parallel to the decision on the Income Tax rates.

     Tax planners suggest that we consider taking dividends from C-Corps before the end of the year if the extension on tax cuts will not materialize. Again for high earners expect tax increases in the future even if there is an extension.

     ESTATE TAX. The status of the estate tax is chaotic at this point as described by Laura Sanders in her article in the Wall Street Journal. She stated that the estate tax lapsed last Jan.1 and will return on Jan 1, 2011, with an exemption of only $1million per individual and a 55% top rate. The House bill which was passed last year would have extended 2009’s exemption of $3.5 million and top rate of 45%. The Senate’s inaction, due to their internal contradictions, was unable to deliver any finality on the issue all year long. Some Senators want to keep the 2009 rates, while some want to raise the exemption to $5 million and still others just want to repeal the whole thing altogether.

      At this point, it is still unclear if a fix would be coming. There are strong sentiments to allow estates of people who died this year a choice of which rules to use. We don’t know yet if this would be allowed.

     So what would you do if you are an heir or an executor of someone who passed away in 2010? Well, determine if the 2010 rules would be the best. If not, use the 2009 rate if it would be allowed. But in all likelihood, it may not be good for those with assets of $1.3 million to $4 million.

The American Dream..That Was....

                  Originally published in the CA and NV Examiner on 11/12/2010 issue

     It used to be that owning your home was a hallmark for one to be identified as belonging to the middle class American family life. The fulfillment of home ownership is in fact the fulfillment of the “American Dream.” With the rest of the US citizenry, we too, the immigrants who came to this country shared the thought of home ownership as a symbol of the American Dream. Being able to provide a decent house gave our families not only a secured shelter but also for our young to have access to a good public education.  The financial aspects of a home are equally important since it became a strong speculative store of value to protect us- whether we originally intended it to be our long-term abode or as an investment or retirement asset in our sunset years.

     Today, millions of us whether U.S. citizens or immigrants, just shake and scratch our heads that the above so called “American Dream” is now a distant memory as we confront the realities of the times. Millions and millions of Americans have to face the fact that their homes declined in devastating figures-big time. What seems perplexing to the average Joe, is that, not only must he tackle the pressure of making his mortgage payment on a house that has lost its value- but he also lost his job and is now unemployed because of the debilitating and malignant recession that engulfed the entire economy. To add insult to injury, Joe cannot find a new job - not only because the job market is likewise depressed- but he is now faced with a very low credit score spawned mainly by his inability to make timely payments on his mortgage. Joe cannot recoup what he has put in his house and he cannot get out of his obligation since he cannot re-sell in this very miserable market.

     As reported by Mr. Zuckerman of US News and World Report, “new home sales, pending home sales and mortgage applications are down to a 13 year low despite the fact that long term mortgage rates have plummeted to an average of 4%. New home prices have fallen to about 30% to 40%.”

     It is a “given” that the fall in house prices will eat up the equity that we have in our homes. I have read reports that 11 million residential properties have mortgage balances that exceed the homes’ values. “And given the total inventory of homes and the shadow inventory of an additional 3.7 million empty (foreclosed) homes,” David Rosenberg, Chief Economist of Gluskin Sheff, notes that “home prices will still fall by another 5% to 10%. This would now leave an estimated 40% of all American homeowners with mortgages in excess of the value of their homes.”

     There is no denying the fact that the disappearing equity is an invite for strategic defaults. A lot of homeowners will take the “Cash for Keys” deal, that is, mail or personally surrender the keys to their “friendly” lenders and just walk away even if they can afford to make the payments. But some will just refuse to make any more payment and hang in there. The banks won’t take these deflated properties onto their books because they will then have to declare a financial loss- over and above the fact that they still have to worry about maintaining these properties. So, my dear readers, do you know now why a quarter of the people who have not made a single mortgage payment are still able to live in their houses for more than 2 years?  In fact, there are some unscrupulous people in Las Vegas and maybe in some areas, who have the audacity to rent out their houses which are already in a state of foreclosure. The naïve and poor renters are just caught in the middle and are forced to vacate the properties in a very untimely manner when the letters to foreclose from the lender start to come in.  So where did this ex-homeowner turned Landlord go after all these happened?  “Man, he’s gone…he’s nowhere to find.” He’s probably in Timbuktu, having a good time and spending your hard-earned money.  

     There is a report that states “a staggering 8 million homes are currently in some state of delinquency, default or foreclosure.” Alan Abelson of Baron’s reports, “ that an additional 8 million more homeowners are estimated to have mortgages representing 95% or more of the value of their homes leaving them with 5% or less equity in their homes, and thus vulnerable to further price declines.”

     Foreclosures may have slowed down a bit with the Home Affordable Modification Programs and other government efforts. But as I have already stated in a previous article of this column that these programs have not worked as hoped since more than 50% re-defaulted within 6 to 12 months, after modification, even after their monthly payments were cut by as much as 50%.

     Mr. Zuckerman writes, “While the foreclosure pipeline remains clogged, as it unclogs, a new wave of homes will wash into the market and precipitate additional downward pressure on prices. The number of foreclosed homes put on the market by banks will be a more powerful influence on the further decline of home prices than either consumer demand or interest rates.”  

     As I have also written in my past article, the mortgage finance was a sick market and today is still deeply troubled. Conventional lenders are now asking for substantial down payments and are imposing very stringent financial requirements. More and more home sales are now being conducted on cash basis transactions.

     At the end of the day, what is the most critical factor that is subduing the demand for housing? Well, home ownership, which was once referred to as the great American Dream, is now the great American nightmare. Mr. Zuckerman writes that, “It is no longer seen as a great, long term buildup in equity value. It will not be difficult for one to understand why the demand for housing has declined and will not revive anytime soon.”

     In conclusion, I would say that there is no immediate panacea that will solve this catastrophe. The more the government tries to interfere with the housing crisis the longer it will take time for the market to correct itself and the longer it will take for the realistic price to find the equilibrium between supply and demand.

Recession: The Second Coming

     Originally published in the CA and NV Examiner on 11/05/2010 issue

     The American public is indignant on the way the present Administration is handling current government affairs. The most recent survey showed a low 36% approval rate on the President. Two years had passed and the “Obama Change” we were promised if it did materialize, probably needs to be changed-again.

      But brace yourselves. What is more lamentable to note, more than survey results, is that some observers are in fact saying that we will all be witnesses, a polite word for “victims,” again to the second wave of recession. Sounds scary. Haven’t we had enough?

     On the contrary, according to the Obama allies, “Assuming all variables remain constant, the U.S. economy will slowly gain momentum starting next year and should start to be normal again sometime in 2012 or 2013. At that time, unemployment will improve and the housing market will be revived and this should finally boost consumer spending.” Are you saying then, that we should be out of recession?

     The truth is, in the real world, the variables do not remain constant. Variables are dynamic and ever-changing. In my opinion, we may still be stuck in our situation right now and we should be cognizant of the events that could trigger another bout of recession. The possible re-emergence of recession should be understood within the context of national and international scenarios.

     The National Scenario. First let’s look at the national level. The U.S. economy is like a turtle growing at a very insignificant rate of about 2 per cent. It is now election year and the Democrats with supporting actor, former Pres. Bill Clinton on the forefront of the campaign trail, are saying that we are on the road to economic recovery and recession should be over. Sorry, Mr. President, I cannot agree with that. With such an anemic growth rate of 2% and the absence of a healthy demand in the housing market and no sign of increases in consumer spending economic recovery cannot possibly be achievable. The fact is, we are more akin to experiencing a “double dip” recession in light of current situations. When everything else is said and done, do you know, my dear readers of this column, why we will still be overwhelmed and fall victims to another round of recession? Read my lips –“unemployment.”

     Monetary Policy. So what national monetary policies may likely be implemented to get us out of this mess? According to Rick Newmann of U.S. News, “most likely the Federal Reserve Bank will inject more money supply in the economy by buying pools of Treasury securities and this move will drive interest rates even lower. The stock and bond market can rally; our balance of payments will improve, since a devalued dollar could mean cheaper prices of our exports. Businesses can be persuaded to spend that $2 trillion they are hoarding.” We’re all gonna be back on track! Sounds simple. Not really because there are a host of factors that can stop this from happening.

     The International Scene. Let’s look at the international arena. It is a known fact that China is the biggest foreign holder of debt issued by the US government. Rick Newmann writes, “the mutual interests of both countries are served. China gets to keep its currency low, which makes its exports cheap, while the U.S. government is able to run a deficit and keep interest rates low here. But if China were to abruptly dump significant amounts of treasuries, interest rates would spike and the U.S. government would have to pay more to borrow. This alone would probably trigger a recession.”

     Over the past year, China had been gradually reducing its holdings of U.S. treasuries. This had triggered tensions over interest rates and trade policy. Some members of the U.S. Congress are advocating for imposition of tariffs on Chinese goods while the opposite camp are criticizing U.S. borrowings and hinting that China should permanently divest its U.S. holdings. This action could easily destabilize the markets and possibly be the origin of another bout of recession in the U.S. economy.

     Conclusion. My position to this issue is as follows: There are no crystal clear economic indicators to assert that the U.S. economy is on its way to recovery. Let’s not kid ourselves. On the contrary, against the backdrop of local and international scenarios that we have shortly discussed here, the U.S. government should in fact be wary and implement policies and procedures that should counteract the possible second coming of recession. Probably then, the survey rating of President Obama should be up again.

Lessons in Foreclosure: The Aftermath of a 1099-C

     Originally published in the NV and CA Examiner 10/29/2010 issue

     While we are witnesses to the millions of homes that were foreclosed in the past two years all across the country, we anticipate that there will still be millions that will be foreclosed in the near future. Even if there was temporary halt of foreclosures about two weeks ago, as Attorneys  general from all 50 states launched a joint investigation into allegations that mortgage-servicing companies submitted fraudulent documents and broke laws in foreclosure proceedings, the freeze has now thawed and foreclosures will now proceed as planned or scheduled.  For some observers, they say that a Foreclosure Moratorium is actually a bad idea. For starters, it will not address the underlying issue that thousands of homeowners can’t make their mortgage payments. According to Barbara Novick, Vice-Chairman of Black Rock Investment Management, “postponing the resolution of these debts will actually prevent consumers from extricating themselves from loans they can’t afford. Worse, a national foreclosure moratorium will exacerbate the housing-market crisis and prevent supply and demand from ever reaching its equilibrium.”

      Indeed, the topic of foreclosure, whether in the investment world or the tax world, is still very hot and does qualify to be referred to as the “talk of the town.” In my book, it will do well for all tax practitioners to equip and arm themselves with this knowledge so that they are able understand it themselves and eloquently relay it to their clientele. Las Vegas, and maybe some parts of California, could be a place or two, where probably two out of every five homeowners had been or is going through foreclosure. The stats from my readings reveal that almost half of all homeowners all around the country where they are “upside down” or “underwater” in their mortgages are all candidates for foreclosures.

     So let’s get some eye-openers here as we learn some lessons in foreclosures. But before I discuss the implications of foreclosures, let me give you a bird’s eye view of what foreclosure can mean to an individual who has not yet consulted an Enrolled Agent or a licensed tax professional in this issue.

     Foreclosure is one of the most negative, if not the most negative, items in our credit report. They say it can affect one’s credit score by more than 300 points. A foreclosure will remain on our credit report for as long as ten years and is permanent in the public records of the county in which the property is located. Present and future employment can also be affected by foreclosure since employers have the right to check one’s credit, especially those who are in very sensitive job positions.

     So when does foreclosure begin and when does it end? Well, normally a foreclosure begins its process when the homeowner decides to stop making payment on his or her mortgage. Surely there are valid reasons from the side of the homeowner, such as decrease in income due to unemployment or business failures, etc., why they have decided to stop making payments. However, in a depressed housing market, such as what we have right now, one reason stands out: The property has lost its value.

     After the homeowner had been bombarded with letters of default, the mortgage company will soon foreclose on the property. And after the foreclosure proceedings, the homeowners try to piece their lives together or whatever is left of it. The fact is, majority of them don’t really know what lies ahead of them.

     A few months later after they have settled in some blighted and unwanted apartment dwellings or moved to their in-laws, the homeowner or now the new ex-homeowner receives in the mail a 1099-C (Cancellation of Debt) from the Mortgage Company. So what will she or he do now?

     The ex-homeowner should consult with an Enrolled Agent or a licensed Tax Professional such as a CPA or Tax Attorney, and pretty much the consultation will have a semblance of the following explanation:

(1)   A foreclosure is treated as a sale that may result in a gain or loss. If the outstanding loan balance is greater than the fair market value of the home and the lender cancels all or part remaining loan balance then one will realize ordinary income from the cancellation of debt. This amount should be reported as income on the tax returns, unless exceptions apply.

(2)   A qualified principal residence indebtedness exclusion is available if the mortgage taken out is to purchase, build or substantially improve a home. This loan must be secured by the main home of the borrower. Qualified principal residence indebtedness also includes any debt secured by the main home that is used to refinance a mortgage taken out to buy, build or substantially improve a main home, but only up to the amount of the old mortgage principal just before the refinancing.

(3)   This exclusion is provided by the Mortgage Forgiveness Debt Relief Act of 2007. This act generally allows taxpayers to exclude from income discharges of debt on their principal residence. Debt reduced through restructuring as well as mortgage debt forgiven in connection with this foreclosure qualifies for the relief. This debt relief applies to debt forgiven in years 2007-2012. Up to $2 million of forgiven debt is eligible for exclusion ($1 million for married filing separately). This exclusion does not apply if the discharge is for any other than a decline in the home’s value or the taxpayer’s financial condition.

     In conclusion, when a lender has written off or cancelled debt, as in a foreclosure, it will result in a 1099 C being issued to the borrower. The IRS views this as an income. But if handled correctly by an Enrolled Agent, who is licensed to practice before the IRS, or another licensed tax professional as a CPA or lawyer, he or she can totally eliminate any taxable consequence of these situations.

The Dichotomy of Competence and Integirty

     Originally published in the CA and NV Examiner 10/22/2010 issue 

    

      When Pres. Cory Aquino passed away, an overwhelming nostalgia engulfed a grieving nation. The people terribly missed the true democracy the late President propagated and the heroism and martyrdom that the late Senator Ninoy Aquino had demonstrated. The name of their son, Benigno Simeon C. Aquino III or P-Noy, as he wants to be called, at that time crossed the people's minds and became their symbol of hope, to a nation that is plagued with unparalleled corruption, in and out of the government.  Unfortunately, Noy was not even among the names of Presidentiables in this year’s 2010 elections. Because in reality, PNoy never sought the Presidency of the land.  But the Filipino people nonetheless, wanted him to be their President.

     And it came to pass...PNoy took the challenge and fifteen million Filipinos gave him the mandate, second only to Pres Gloria Arroyo’s 16 million. But contrary to Arroyo's being a recipient of perennial accusations of  massive electoral fraud, PNoy came out an undisputed winner, in a generally clean and honest presidential elections.  He holds the second biggest margin over his closest rival of 5 million in the presidential race second only to Joseph Estrada’s 6 million over Joe De Venecia in 1998. While PNoy stands as an antonym of Arroyo’s “dirty” election tactics, he became synonymous, at least during the election campaign, to former Pres. Estrada's questionable ability to discharge executive competence.  It was indeed during this campaign period that PNoy captivated his constituents with his aura of integrity but fell short in competence.

     That's done. That was the campaign period. Let's get to the real deal now that he is in office for more than 100 days. The following question now joins us at this point: “ Must we dichotomize integrity and competence in choosing a President?”  I honestly feel that  President Noy in exercising his leadership abilities must radiate both the qualities of sincerity and competence. You agree with my position, right? Question is, "did P-Noy demonstrate both qualities of Competence and Integrity in his first 100 days in office?" Let’s take a short review. First of all, let me give credit to my Fraternity brods, Christian Cardiente and Karl Barlaan in their article "Aquino’s First 100 days," which inspired me and gave me the material to write this article.

Case in Point: The Economy

     The Philippine economy grew by 7.9% in the first 100 days of PNoy mainly attributed to the stimulus that was created owing to the influx of money circulating in the economy at the aftermath of the elections and also to the export industry. Foreign investments is up by $1 billion in investments pushing up the peso against the dollar. Many economists attribute these positives to higher corporate earnings, increased exports, favorable expectations on the new government and renewed investor confidence. In this area, I would give my grade to PNoy as Passed in Competence.

    However, according to the World Bank, inspite of the economic growth of the Phil economy in this period almost half of the entire population remain poor and more than 38% of the population did not feel any difference or improvement in their living standards during this "robust" economy. These figures are confirmed by the SWS (Social Weather Stations).  A truly sincere leader should implement economic and social mechanisms in his government machinery so that the progress of the economy should trickle down to the poor, not only to the middle class or rich people in the society.  Maybe my comment here is in line with Economist and Professor Ben Diokno (who was my teacher in Microeconomics at UP Diliman), who said, “Where’s the road map?”  This map, Mr. Diokno might be looking for is one that will show us where the PNoy Administration should begin, in concert with all concerned, and how the benefits of our labor could  ultimately lead to the greater masses of the Filipino people.

     My personal grade  to the PNoy administration in this area is Failed in Integrity.

The August 23 Hostage Taking and the Jueteng Scandal

     This August 23 incident as well as the Jueteng scandal hurled numerous attacks against PNoy from his critics. The first, August 23 hostage taking, questioned his competence and the second, jueteng scandal, questioned his integrity. These two big issues penetrated and put  out in the open the fact that there is a tremendous partisan infighting going on inside the walls of the Malacanang Palace. During the August 23 crisis, PNoy distanced himself and did not want to interfere with Police matter. The two Palace Communications officials, Secretary Sonny Coloma and Secretary Ricky Carandang, according to press reports, gave conflicting advisories. They conflicted each other and only led to the unfolding of the fact that there are two warring factions among the Aquino supporters. Those that belong to the Samar group and the other the Balay.

     The DILG (Department of Interior and Local Government) is also another image and scenario of the same warring factions. Secretary Jessie Robredo is not in good terms with the shooting buddy of PNoy, DILG Undersecretary Rico Puno. One is said to belong to the Samar and the other to the Balay.  The President should really do something about this. If these people cannot work together for the good of the Administration, the President should start purging these warring government officials and bring in people who can work with each other in harmony.

     Many too question PNoy’s sincerity when the IIRC review took a long time at the Palace, because Malacanang  officials needed to make sure that they can have all the legal grounds covered to absolve Undersecretary Rico Puno of any administrative or criminal charges. As of press time, Puno had already been absolved of any administrative and criminal charges contrary to Justice Secretary Leila De Lima’s recommendation.

     But before Puno was absolved of these charges, Bishop Cruz accused the Aquino administration of condoning the flourishment of the illegal numbers game “jueteng” wherein his Undersecretary and best friend, Rico Puno, as one of the biggest jueteng protectors. This was confirmed by a privilege speech by Miriam Defensor Santiago who identified both Puno and former PNP Chief Verzosa as jueteng protectors. By the way, did you know that jueteng as reported by PNP Director Raul Bacalzo is  now a P37B industry?

     The grade I am giving PNoy Administration in this area is Failure in both Competence and in Integrity.

     I believe that PNoy who is well loved by the Filipino people as manifested by his overwhelming mandate will not have a problem in discarding the elements in his Administration who are pulling him down. PNoy can and will deliver the results expected of him to his true bosses-the Filipino people. While 100 days cannot really be a measure of his true competence and integrity, as well as the competence and integrity of his Administration, at least it gives us a sneak preview of the future. But one thing for sure Mr. President, please do not dichotomize competence and integrity.

Double Dip Phenomenon: Negative Growth

     Originally published in the CA and NV Examiner 10/15/2010 issue

     In my recent articles I have covered various current Administration’s policies that are anchored on the demand side, i.e.,  Keynesian oriented Obanomics. I have referred to various stimulus programs that are geared towards inspiring spending in the economy to subsequently give incentives to producers or manufacturers to increase their productivity. In turn, this should ultimately lead to positive economic growth. However, inspite of such programs, as in the Cash for Clunkers, and the like, the economy is achieving a very insignificant growth, at worse, maybe even negative growth. Some experts, especially on the side of the Administration, maintain that the U.S. economy is in a very slow but steady recovery. On the other hand, we cannot summarily dismiss the pessimists who are saying, which is not really surprising, that we are in for a negative growth or sometimes referred to as double dip.

     Why is there such an economic phenomenon as double dip or negative growth? Can we put it in proper perspective, against the backdrop of today’s economy, so that the layman and the readers of this column can understand why we are or could be in such a situation? I would like to give credit to Derek Thompson and Daniel Indiviglio, who helped me, through their research, put my points and ideas together.

      Okay, here goes my simplistic inference why we experience or will experience a negative growth, or double dip, in the economy. The explanation I am giving here is not really a cause and effect but merely an attempt to trace the roots of this phenomenon vis-à-vis today’s economy.

      Let’s start with the biggest concern of this Administration: The Housing Market.

     We all know that the housing market is plagued with weak sales.  The end result is a mounting real estate inventory. There’s just too much supply with a very weak demand. The immediate effect is for builders to shy away with construction of new homes since there’s a tremendous competition with home resale. New home prices are depressed thereby reducing construction jobs. Unemployment, lay-offs ensue and the sister industries directly and indirectly linked to housing are hardest hit. This domino effect will lead to more and more economic crisis, the most outstanding of which will be a soaring unemployment rate.

     Consequently, the decrease in home prices will make it even more difficult for the homeowners to sell their homes to avoid foreclosures and pan the market with more and more defaulting homeowners. The average American realizes that a lower home value effectively depletes the value of his wealth so he is encouraged to save more and spend less. The stock market goes down, the credit market tightens, and private investors and homeowners cut down spending. The resultant economic phenomenon joins us at this point. Growth in the economy turns negative.

     The residential market’s problems are indeed worsening. It will continue to become worse before it gets better. The foreclosures will continue as millions of homeowners have started defaulting or have already defaulted on their mortgages.  Even if we reach the point when foreclosures will start to decline, waves of defaults will follow as participants in the loan modification programs re-default, now at alarming rate of about 50%. Home and commercial real estate values will continue to decline as well as the assets that back them up. The banks who have big exposures to these toxic assets are in for another bout of losses. The investors who put in their money in these endeavors will start to question the stability of these banks. The stock market takes a dive and again the credit market is frozen. At this point again, the above economic phenomenon joins us. We experience negative growth in the economy.

Stimulus and Tax Cuts: Who are we Kidding?

Originally published in the NV and CA Examiner 10/08/2010 issue

     The common politician always argues that "we need to increase spending in the economy," as opposed to spending cuts, since "this is what is needed to speed up economic recovery."  From all angles, the current Administration's policies are built along this framework. On the contrary, history reveals that in fact it is the "cuts in spending to reduce deficits" which became the key to promote economic recovery. Where does the myth end and the reality begin?

     Today, we bear witness to the U.S. economy being bombarded with government spending through various stimulus packages with the expectation that the multiplier effect the Administration's economists are anticipating for will trickle down to increase in gross domestic product (GDP).  Sorry, Senor y Senoritas, the answer we have for now is "Nada." The effect on GDP is just too small we call them "de minimis" in the tax world.

     The flip side of this story is that stimulus spending is actually scary. It means that tax increases are coming! And more often than not, tax increases is a threat to economic growth! …..." Oh yeah! Where’s your evidence?” you may ask…..

     Well here’s the evidence….

     In a recent study conducted by Alberto Alesina and Sylvia Ardagna, Professors of Political Economy at the Harvard, they concluded that:

            (1) Large adjustments in fiscal policy if based on well-targeted spending cuts have often led to expansions, not recessions.

            (2) Fiscal adjustments based on higher taxes, on the other hand, have generally been recessionary.

     The study covered 107 large fiscal adjustments that took place in 21 countries between 1970 to 2007. According to their economic model, the results were striking. Over nearly 40 years, expansionary adjustments were based mostly on spending cuts, while recessionary adjustments were based mostly on tax increases.

     Let’s look at the scenario why spending cuts can be expansionary:

First and foremost, such a policy will signal that no tax increases will occur in the near future, or even if did, it will be relatively smaller. Government should present a transparent and credible plan that will surely cut outlays. This will therefore create an impression in the minds of the people that no changes on future tax liabilities are coming. Subsequently, this will be transferred and manifested in the behavior of consumers and more importantly investors who will be willing to spend and invest, since both camps foresee no tax increases, at least over a sustainable period.

      On the contrary, fiscal adjustments based on tax increases will reduce the disposable income of consumers and subsequently reduce incentives for productivity.

     In today’s U.S. economy, there are still a lot of firms that are profitable. The problem is, they do have large unspent idle resources due mainly to uncertainty over the regulations on taxes, which directly discourage them from taking risks in investments as well as consumption.

     In conclusion, we are able to discern that the United States is at a greater risk from the increased Obama’s stimulus spending rather than undertaking gradual and credible spending cuts. The evidence from the last 40 years does not lie. Spending increases that is meant to stimulate the economy and tax increases to reduce deficits just don’t work.  The writing is on the wall! Who are we kidding?

Obamanomics vs Reaganomics

         Originally Published in NV and CA Examiner on October 1, 2010

      The decade was the 80's. The household word was supply side economics. Supply side economics is actually a classical theorist which became the foundation of Reaganomics. The fact is, Reaganomics merely concentrated on incentives. The key point at that time was the cuts in income taxes, particularly in the marginal tax rates. The policy became effective since it spurred the economy with an enhanced supply (particularly for the people to exert more work efforts thereby promoting productivity) and consequently inspired the demand (with increased investment in plants and equipment and put muscle in research and developmental efforts).

     Reagan boldly cut the average marginal income tax rate from a high 29.4% in 1981 to 21.8% in 1988. Over a seven year period, from 1982-1989, the gross domestic product grew by 4.3% at an average growth rate of about 0.6% per year.

    George W Bush followed suit the inspiration provided by Reagonomics by cutting then the marginal tax rates from 24.7% in 2000 to 21.1% in 2003. The economy, particularly the GDP, grew at a respectable rate of 2.7% per year over a 4 year period from 2001- 2005.  (Stats provided by Robert Barro of the Harvard School of Economics).

     In contrast, the core of Obamanomics seems to be founded along Keynesian origins, since policies being implemented are those that are demand driven.  The underlying objective is just the same with Reaganomics, i.e., incentives.

     Case in point, the cash for clunkers. This program promoted the destruction of functional old cars and accelerated the demand or purchase of new cars. Unfortunately, this scenario drove up the prices of used cars and did not really work out well. The automobile sales increase went on a boom and later bust pattern.

     Another program is the First Time Homebuyer credit which was enhanced with the Long Time Resident Credit. Were the incentives felt on a continuing basis? Yes, we witnessed temporary increase in home sales. But as I have argued in a previous article, the FTHBC was probably a failure rather than a sustainable “incentives” program inspite of. The buyers were already mind set to buy their first homes and at best the program only hastened the timing of their purchases.

     Lastly, let’s look at the labor market, which is currently saddled by a national average of 10% unemployment rate and 15% in some areas, as in Las Vegas NV.  This too, became an area where the demand “incentives” was instituted.

     We are witnesses to the current program that unemployment insurance eligibility had been extended to 99 weeks, with the end in view that it could have the “incentives” effect. Labor Department statistics show that 57% of all people receiving unemployment benefits are already on the extended program. Experts argue that in a weak economy, extending unemployment benefits in fact “encourage” prolonged unemployment notwithstanding the fact that workers only get about 40% of their previous earning potential.

     So what’s the bottom line? Well, Reaganomics is anchored in the classical economist theory, which encourages incentives that had lasting positive effects. It initially enhances productivity, and then builds up the “supply” in the economy. In the process, the enhanced supply inspires the demand in the economy. Obamanomics, on the other hand is taking the Keynesian position, which is oriented on the demand side. The programs that are being implemented lean towards pushing demand or “stimulus” in the economy.  The common denominator however is just the same-incentives.

     To date, the salient programs in the Obama administration are probably not that effective. The current economic advisers of this era can learn from lessons in the past and should emphasize favorable and long-lasting economic incentives. As Mr. Barro put it, “we can start by considering the extension of the tax cuts that were implemented in 2001-03 as well as reduction in the period of  eligibility for unemployment insurance. “

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Pacquiao vs. Margarito..The Wisdom Behind It

Originally Published in the Nevada Examiner on September 24, 2010

On the June 16, 1983 undercard of Duran-Moore, middleweight journeyman Luis Resto defeated top prospect Billy Collins Jr. in a 10-round assault-- literally. At the conclusion of the fight, Collins' corner discovered that Resto's gloves had been doctored and at least one ounce of padding removed from each. Collins was left with significant injuries and permanent eye damage that changed the course of his life. Meanwhile, Resto and his trainer, Panama Lewis, were charged with assault and banned from the sport of boxing for life.


Over the years, Resto had maintained that Lewis tampered with the gloves without the fighter's knowledge, but he finally admitted 25 years later that not only did he know that the gloves were doctored but he knew that his hands were wrapped in tape that had been dipped in plaster of paris.

That is where we join Antonio Margarito. The Tijuana Tornado is living down his own illegal hand wrap incident while also trying to re-assign the blame to his trainer. Unlike Resto, Margarito's illegal hand wraps were discovered in the dressing room and never made it to ring. So he was never arrested by the law, but the California State Athletic Commission continues to incarcerate his career and the Nevada Commission agrees, for now.

Some might argue with Nevada's wisdom. After all, if they had rubberstamped Margarito (as Texas has) then the year's largest fight would be coming to Las Vegas and its almost 15% unemployment rate, not to mention its rabid Filipino fans. However, anyone who has seen a picture of Billy Collins Jr., with his cheek broken and his eyes swollen shut, knows that approving Margarito's license was about much more than economic impact.

What happened to Collins was attempted murder, and no commission should be able to stomach the idea of licensing a fighter that was willing to do that to someone. Las Vegas has always embraced boxing and its gladiatorial metaphor, but if they're going to license Margarito, then they might as well license feeding Christians to lions at Caesar's Palace.

Margarito maintains, as does Bob Arum, that the fighter was unaware of what was in his hand wraps, but the majority of us remain skeptical. As Manny put it, "Of course, I believe he knew." And why wouldn't a fighter notice a foreign object in his wrap or feel it when he punched? Maybe Margarito will tell us more about it in 25 years.

For now, both parties agree that Team Pacquiao will be watching Margarito's hand wrapping very closely. But why stop there? Check the gloves, the trunks, the mouthpiece, his water bottle, and his hair gel. You don't catch a guy robbing a bank, and then wait for him to rob the same bank when he gets out of jail. If you think Margarito is a cheater, then you should anticipate all of the new and interesting ways of cheating that he could have researched while he was suspended.

That will be the job of Freddie Roach, Buboy or whichever Pacquiao representative is asked to bring a microscope to Margarito's hand wraps. It's a job that someone should have done for Billy Collins Jr. And at the end of the day, while some people believe Antonio Margarito and some people have forgiven Antonio Margarito, the image of Team Pacquiao watching as the trainer wraps the Mexican fighter's hands will remind us all that none of us really trusts Antonio Margarito.

Is the First Time HomeBuyer Credit a Failure?

Originally Published in Nevada Examiner on September 17, 2010

The July sales of existing homes fell by a devastating 30%. What could be more frustrating is the fact that there seems to be no light at the end of the tunnel. For the past many months players in the real estate market are just curious to know if we already hit rock bottom. Many feel that we have not and a lot of us just keep on scratching our heads where the market is actually heading. Experts predict that the next six months could be worse before they get better. They say that values of homes will still decline by double digit in some areas in the U.S. especially those hardly hit, tops Vegas, within the next 6 months to a year. No. No….Johnny, it’s not the end of the world!


Many observers noted that this phenomenon might be traceable to the imminent expiration of the $8,000 First Time Homebuyer Credit, (FTHBC). Guys and gals, it’s gonna be gone by Sept 30! The question we are putting forward here is, “was there a real additional demand created with the advent of the FTHBC or was this another failed policy by the Obama administration? “

The fact is, many critics are taking the position, and I may have to agree with them, that the FTHBC was just another political gimmick that may have only influenced or hastened the timing of home purchases and simply put, provided free money to many people who were already mind-set to buy their houses anyway. Sad to say, the FTHBC did nothing to change the fundamentals (guys, remember your Economics 101) of demand and supply in the housing market. While others may argue, “yeah it did,’ “particularly the supply side since new homes were aggressively built during this period.” Yeah, you may have a point too. But what I am saying here is, there was no increase in the demand since I am arguing here that only the timing was influenced. The “artificial” increase in demand was unsustainable to really make a difference in the market forces- because if it did then the market should feel upswings in the price of homes. But it did not.

If one will objectively analyze the empirical data, the FTHBC was probably an armament to postpone the day of reckoning in the real estate market while simultaneously creating an illusion that the economy is on its way to recovery. Whether as a solo policy or in concert with other Federal programs, nothing much was achieved as we continue to witness home prices decline-- hitting more than 30-50% of their peak values. The game of refinancing is over! We now realize that housing isn’t just going to be another driver to improve consumer spending.

We also note that the Loan Modification programs, as being announced in the radio, is also a failure! They say that more than 50% of those who did loan modification are kicked out of the program no more than 6 months after modification. They’re back on the red and swiftly become delinquent again with their mortgage payments.

However, the lobbyists which include Realtors, Mortgage Bankers, and Home Builders continue to propagate the concept that rising home prices is an indicator of a robust economy. They are encouraging the government to do everything in its power do stand by this school of thought. Corollary to this blinded paradigm, and in keeping with this scenario, the government is trying its best to keep homeowners in their houses they just couldn’t afford! People just want too much house for too little money!

Sound economics would suggest that the above concept of rising house prices could only be a symptom or a manifestation but cannot be a cause of an aggressive or robust economy. Whether you are a Classical, Keynesian, post-Keynesian, Reaganite or whatever school of thought you belong to, you will agree that productivity in the economy is the true measure of economic growth. If we translate this to the needs of today’s economy, that would mean we need jobs, more jobs and more, more jobs!

In fact, from my readings, I recollect that in order for us to fulfill the growth rates set by government of 3.3% in 2010, we need to create 1.5 million jobs. For 2011, government has set a target of 3.7% which should translate to 3.1 million jobs. Lastly, the target growth rate of 3.8% in 2012 would call for the creation of 2.6 million jobs.

Mr. President, we desperately need jobs. Reports say that there are some areas, in the country, particularly Las Vegas NV, which are saddled with more than 14% unemployment rate. Some urgent measures have to be taken- probably not just bailouts-- before it’s too late…

Why the hype..when there's no fight?

Originally Published in Nevada Examiner September 10, 2010
                                
In a recent U-stream video, Floyd Mayweather Jr. scoffs at accusations that he is ducking Manny Pacquiao. The 5'8" welterweight insists he will "stomp the midget" (aka the 5'6" Pacquiao) and cook him with some “rice with a little bit of barbecued dog" afterwards. The inflammatory comments are first-class fight hype, the sort of talk you would expect from Muhammad Ali in the days when he canvassed the streets of the Philippines claiming he was going to 'kill the gorilla in Manila.'

The only problem is that Floyd and Manny aren't fighting. Make no mistake, the fight that Mayweather seems to be promoting is the fight that everyone wants to see, the fight that everyone would rather see as Pacquiao prepares to face Antonio Margarito and Pretty Boy Floyd continues his most recent, and perhaps IRS-motivated, sabbatical from boxing. But for the second straight year, one of the fighters has walked away from the money (perhaps mountains of it) only to say, 'maybe next year.'

Truthfully, neither man has a lot of 'next year' in him. Mayweather is now 33 and Pacquiao will soon be 32, a far cry from the 25 year-old Sugar Ray Leonard ducking a 23 year-old Thomas Hearns, perhaps the last time that ducking was truly 'good' for a boxing promotion. No, this delay is decidedly bad for any potential Pacquiao-Mayweather clash, and frankly, it's bad for the already financially flagging boxing industry. It's as if the NFC and AFC champions declined to take the field for the Super Bowl but agreed to face each other after the players had all retired. How can anyone take the sport seriously?

And how is a public already sentenced to another year of replacement main events supposed to receive an incendiary hype video for a fight that, at the earliest, would occur next March? Of course, that assumes that Mayweather isn't actually ducking Pacquiao, and there are many legitimate reasons he should.

For one, Pacquiao's punches come from non-traditional and constantly shifting angles. The power puncher, who was once able to put his left fist through guards and knock opponents backwards in the 130 pound weight class, has found a much more artful way to dispense of his opponents at 135 and above; he simply uses his hand speed and movement to put clean punches right on their chins.

As impenetrable as Mayweather's defense is, he does occasionally leave himself open, and he relies on his reflexes and speed to recover. However, both seemed to fail him as he took a heavy overhand from a 38 year-old Shane Mosley in May. Mayweather may be slowing down more than he realizes, and considering Pacquiao throws three punches to Mosley's one, Floyd could end up looking like King Kong fighting a fleet of airplanes. It just takes one lucky pilot to find the chin.

That's not to say that, as time goes by, Manny becomes a clear favorite, far from it. Pacquiao's most celebrated successes at the higher weight classes have come against fighters who are willing to trade punches with him. Mayweather is not that kind of opponent. He's a faster, bigger, smarter and more patient version of Juan Manuel Marquez.

And Manny will slow, just as Floyd has, if not from age, then from the road wear of facing larger and larger opponents. And if an older, slower Pacquiao faces an older, slower Mayweather, it may become obvious how badly Manny needs his speed to penetrate Floyd's defense, and how little speed matters to Floyd's ability to outwait and out-time Pacquiao.

The fight may happen next year. The fight may not happen at all. But what is most clear as Floyd Mayweather simultaneously blasts and ducks Pacquiao on the Internet, is that the fight will not happen in either man's prime. Pacquiao will not defeat the "real" Mayweather, and Mayweather will not defeat the "real" Pacquiao. Two men trying to sell themselves slightly after their expiration date will enter the ring, and the only clear winner will be Father Time. Last I checked, he was undefeated.

A Sick Housing Finance System

Originally published in the Nevada Examiner on September 3, 2010

A lot of us who are now or who had been involved in Housing Finance wonder what the stars hold for the immediate future and the years to come. The underwriting process that we are witnessing now, are indeed very strict to the point that some borrowers just find the stringent rules to be absurd if not downright ridiculous. Well, isn’t this just right? We all deserve it! The fact of the matter is that, if we historically trace the roots of today’s mortgage problems and the collapse of the real estate market, a lot has to do with the breakdown of sensible underwriting procedures.

Prior to the 1990’s, we had common sense underwriting principles that require down payments, good credit and the due diligence of the lenders or mortgage agents to strictly verify if the borrowers and future homeowners have the ability to handle their mortgage debt. In 1992, the U.S. Congress passed the Federal Enterprise Safety and Soundness Act. The law basically imposed affordable housing mandates on Fannie Mae and Freddie Mac. Hey, this was the start of former President Bill Clinton’s era!

At the start of 1993, regulators have started to abandon the conventional tried and tested underwriting principles. They started to substitute liberalized lending standards which led to the influx of the no-down payment or minimal down payments and other weak, if not “sick” loans. By the year 2006, more than 30% of all home buyers put no money down.

Prior to the real estate meltdown, we saw the negative amortization loans soared sky-high which were sugar-coated with the very popular pseudonym “Option ARMS.” We were all in awe to see mortgage loans that started with a low 1% interest rate. These types of loans were so misunderstood by so many that eventually led to the catastrophic consequences to the common homeowner. Sheila Bair, chair of the FDIC noted that, “the financial crisis was triggered by a reckless departure from tried and true common sense loan underwriting practices.”

Given that we practically faced or continually face a sick and dysfunctional housing finance system, what do we do now, bright boys?

According to Edward Pinto, a stalwart in the Housing Finance system, the following should be done:
(1) We should require larger down payments and stricter underwriting standards
(2) Reliance on the private sector and capital
(3) Removal of affordable housing mandates

Pinto wrote, “If there is to be an affordable housing policy, it should not be implemented by hidden subsidies and loose lending standards, but instead made transparent and funded on budget by the government.”

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Art C. Javier, Enrolled Agent, a Tax Professional for more than 18 years in Las Vegas, is Federally Licensed to Represent Taxpayers Before the IRS. He was the Publisher and Editor-in-Chief of the former Las Vegas Examiner. A former Professor of Economics at the University of the Philippines and De La Salle University Manila, Art was also a Professorial Lecturer in Economics and Management at the Sokoto State University, Nigeria and CEU Graduate School of Business MBA Program, Manila.