Suggested Answers to the Short Quiz

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johnkarls
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Joined: Fri Jun 29, 2007 8:43 pm

Suggested Answers to the Short Quiz

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Question 1

Is our author, James Stone, obviously a Jack Nicholson fan?

Answer 1

Yes -- it would appear that he tried to make his book title (5 Easy Theses) sound like “Five Easy Pieces” (the classic 1970 Jack Nicholson movie that received Oscar nominations for Best Picture & Best Actor).

Question 2

After earning a PhD in Economics from Harvard in 1973, did James Stone serve as Massachusetts State Insurance Commissioner and then Chairman of the U.S. Government’s Commodities Futures Trading Commission before returning to Massachusetts to found the Plymouth Rock Insurance Company which writes more than $1 billion/year in auto and homeowners’ insurance?

Answer 2

Yes.

SPOILER TRIVIA ALERT – Please skip to Q-3 to avoid interesting/amusing trivia.

In researching James Stone’s background, it appears that he may never have married until approximately 1980-1986.

His wife???

Catherine Douglas Stone, who was the widow of U.S. Supreme Court Justice William O. Douglas who holds the record (36 years + 209 days) for tenure on the Supreme Court.

Catherine’s becoming the third wife of Douglas on 7/15/1966 caused quite a stir because he was nearly 68 and she was a 22-year-old student at Maryhurst College in Portland OR (she was a summer waitress when they met).

She transferred to American U in Washington DC to finish her BA and then earn an LL.B, followed by an LL.M from Georgetown Law School.

[William Douglas retired from the Supreme Court in 1975 and passed away in 1980.]

Catherine joined the Massachusetts Bar in 1986 (which provides a clue that she and James Stone married sometime between 1980 and 1986).

[Sorry for the digression, but it is always fun to stumble across someone who hadn’t crossed your radar for half a century!!!]

Question 3

Thesis Questions -- In trying to make his book title sound like “Five Easy Pieces” (the classic 1970 Jack Nicholson movie that received Oscar nominations for Best Picture & Best Actor), James Stone picks 5 of the nation’s most challenging problems -- fiscal balance, inequality, education, health care and financial-sector reform -- and, for each, posits a thesis of allegedly-easy solutions.

For each of the 5 theses, please ask yourself the following questions --

3-a. Did James Stone identify the cause of the problem correctly?

3-b. Whether or not Stone identified the cause correctly, do his proposed solutions help to solve the problem?

3-c. Are there better solutions to solving the problem?


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“EASY” THESIS NO. 1 -- FISCAL BALANCE (pp. 15-53)

Question 3-a

Did James Stone identify the cause of the problem correctly?

Answer 3-a

No!!!

As we have studied so many times in the past with respect to balancing the Federal budget (and halting the ballooning of the national debt which is the cumulative total of budget deficits) --

both the Republican Party and the Democratic Party have been plagiarizing Rhett Butler (Clark Gable) from the classic movie “Gone With The Wind” --

“Frankly, my dear, I don’t give a damn”!!!

Ever since George H.W. Bush violated his 1988 campaign pledge (“Read my lips, no new taxes”) with new taxes and tax increases in 1990, Grover Nordquist and his Americans for Tax Reform have intimidated virtually every Republican Senator/Congressperson/etc. into taking Nordquist’s multi-page no-tax pledge because any holdout promptly sees a primary opponent materialize who is lavishly bankrolled by Nordquist and his Americans for Tax Reform.

Accordingly, Republicans have stubbornly stuck to Nordquist’s no-tax pledge and, as a result, “don’t give a damn” about any deficits. Except, of course, for occasional verbal attacks on Democrats.

At the same time, Democrats staunchly defend social programs and, as a result, “don’t give a damn” about any deficits. Except, of course, for occasional verbal attacks on Republicans.

Question 3-b

Whether or not Stone identified the cause correctly, do his proposed solutions help to solve the problem?

Answer 3-b

Well yes, technically.

First, he proposes raising tax revenue by eliminating the deduction for home-mortgage interest.

Which, even in the absence of Nordquist, is a non-starter because it is used extensively by the Middle Class, which is the only group over which the Republicans and Democrats fight.

[And which, since mortgage interest is only deductible on the first $1 million used for acquiring, constructing or substantially improving a taxpayer’s residence, probably does NOT affect James Stone who is a multi-billionaire who, presumably, lives in a multi-zillion-dollar mansion vis-à-vis which deductibility of interest on a mere $1 million of mortgage debt is NOT even a rounding error.]

Secondly, he proposes extending the double income taxation of corporate earnings (which are already subject to the corporate income tax and then, on dividends, to the shareholders) --

to double income taxation of corporate NON-earnings to the extent of the corporation’s interest expense (subjecting it first to the corporate income tax even though the interest is an expense to the corporation, and then taxing it to the recipients which are typically financial institutions).

[Why are we NOT surprised that James Stone’s Plymouth Rock Insurance Company prides itself in NEVER HAVING HAD ANY DEBT which would be subject to his proposal to extend double taxation to the interest on such debt???]

[Indeed, even though James Stone’s Plymouth Rock Insurance Company writes more than $1 billion/year in auto and homeowners’ insurance, it is a CLOSELY-HELD PRIVATE ENTERPRISE which, presumably, IS NOT EVEN SUBJECT TO CORPORATE INCOME TAX*!!!]

* As a retired international tax attorney (JD, Harvard Law School, 1967; Who’s Who in American Law, 1988-2003; Who’s Who in America 1988-2003; Who’s Who in the World 1994-2003) I can testify that it would be TAX MAL-PRACTICE if James Stone’s Plymouth Rock Insurance Company is NOT treated as a “flow through” entity (such as an LLC treated for tax purposes as a partnership) which is NOT subject to corporate income tax but whose income is taxed ONLY ONCE to the shareholders (partners for tax purposes).

James Stone concludes (p. 53): “The easy thesis in this chapter is ….. The savings that could be realized by eliminating just these two interest deductions would be sufficient to balance the current budget.”

Question 3-c

Are there better solutions to solving the problem?

Answer 3-c

Of course!!!

Social Security is usually claimed by our pols to be the culprit driving our federal deficits.

BTW, the pols pillory the Social Security program on the grounds that Social Security is not fully funded forever, like pension plans of corporations are supposed to be. But, as we have studied many times, the Federal government does NOT fund AT ALL its military or civilian-worker pensions!!! Moreover, why don’t the pols think that other areas of the federal budget, such as defense, should be subject to the requirement that all future expenditures ALSO BE ASSURED by an ENDOWMENT FUND???

But, in any event, our 2/9/2011 meeting resulted in a Six-Degrees-Of-Separation E-mail Campaign to have both Social Security and Medicare financed from a European-style tax on gasoline which most European countries use to finance their social security programs, which would have the added benefit of reducing the usage of gasoline and its greenhouse-gas emissions.

*****
Note No. 1

We have also studied for our meetings on 5/11/2011, 11/14/2012 and 2/12/2014, how the U.S. Government incredibly refuses to tax the corporate profits from exporting American jobs!!!

If our pols are going to insist in their War on Workers to export American jobs, the pols should at least have the decency to subject to the corporate income tax the exorbitant profits from exporting American jobs!!!

*****
Note No. 2

On pp. 15-17, James Stone seems to think that the only limit on the size of our national debt is the level with which we feel comfortable, after citing several considerations!!!

No, James Stone, there is a limit beyond which creditors will refuse to accept your debt!!!

As well as your currency which, as we have studied so many times, is nothing more than zero-interest, infinite-maturity, debt obligations!!!

Indeed, our 12/14/2011 meeting focused on the fact that the U.S. was passing through the level of debt to GDP (annual national economic output) that had caused Greece to “hit the wall” and was widely thought to be about to cause Italy and Spain to also “hit the wall”!!!

Our 12/14/2011 meeting resulted in a Six-Degrees-Of-Separation E-mail Campaign to President Obama requesting him to prosecute criminally Fed Chair Ben Bernanke and his fellow Federal Reserve Governors for malfeasance in announcing in Sep 2011 that the Fed would print as much as $5 TRillion to purchase any debt issued by Italy and Spain before 12/31/2011 -- and in further announcing on 11/30/2011 that it would print enough dollars to bail out for 14 months through 2/1/2013 ALL EUROPEAN BANKS, not just those in Italy and Spain!!!

[Our E-mail Campaign was based on the fact that, regardless of whether you think the multi-TRillion foreign bailouts were a good idea to protect only $9 Billion/year of U.S. exports (far less than 1/10 of 1%), the Fed did/does NOT have the authority under The Federal Reserve Act to bail out foreign governments and/or foreign banks under such circumstances. And that even if you think it is a wonderful idea to print $5 TRillion to $12 TRillion of new dollars, it would be better to spend the $5 - $12 TRillion on main-streaming America's 30% Permanent "Untouchable" Under-Caste or, if Christian America is going to insist on hating its inner-city neighbors, to spend the $5 -$12 TRillion on improving infra-structure -- highways, bridges, etc.]

But back to the main point.

The accumulated debt of the U.S. government is ALREADY PAST the point at which Greece “hit the wall” and Italy and Spain would have “hit the wall” in the absence of the illegal actions of The Fed.

So, James Stone, we have been in uncharted territory for 5 years and there is no assurance that just because we might feel comfortable with our level of debt (the interest on which would exceed our entire Federal budget if the prime rate went back to the record 21.5%/year level that prevailed when Jimmy Carter left office), there is no risk.

Harvard should revoke your Ph.D in order to preserve its own reputation!!!


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“EASY” THESIS NO. 2 -- INEQUALITY (pp. 54-98)

Question 3-a

Did James Stone identify the cause of the problem correctly?

Answer 3-a

No!!!

The reason for economic inequality is, as we have studied as recently as our meeting of 4/20/2016, The Establishment’s War on American Workers (the exporting of American jobs to third-world countries) and The Establishment’s War on our 30% Permanent “Untouchable” Under-Caste!!!

[NB: We defined The Establishment as the billionaires who “own” virtually all the pols of both political parties as a result of campaign contributions and who “own” many members of the media and who “own” many members of academia.]

The War on Workers began in earnest in the form of Exporting American Jobs with Bill Clinton negotiating and signing (1) NAFTA -- aka the North Atlantic Free Trade Agreement pursuant to which so many American jobs have been exported to Mexico; (2) a free-trade agreement with China -- pursuant to which so many American jobs have been exported to China, (3) the Worldwide Free Trade Agreement creating the World Trade Organization -- pursuant to which so many American jobs have been exported to third-world countries; and (4) approximately 300 additional free-trade agreements.

The War on Workers also takes the form of Importing Illegal Aliens to compete for American jobs that cannot be exported geographically.

[Every President since President Reagan has refused to enforce President Reagan’s Immigration Reform and Control Act of 1986, with our pols thinking that we are so stupid that we will believe that their refusal to enforce the 1986 Act means our immigration system is “broken” and that we are so stupid that we will believe the “solution” such as the 2013 “Gang of Eight” Immigration Bill that passed the Senate, is something more than a re-enactment of the 1986 Act!!! After all, what is the definition of insanity??? And does that definition mean our pols think that we are NOT merely stupid -- that we are INSANE???]

We have studied on numerous occasions how Illegal Aliens are de facto slaves because their labor is NOT subject to any minimum-wage laws as a practical matter because (A) employers are free to deduct from the minimum wage whatever they please for meals and housing, and (B) illegal aliens cannot, as a practical matter, complain about anything for fear their employers will report them to Immigration.

The Establishment’s War on America’s 30% Permanent “Untouchable” Under-Caste has already lasted more than a half century!!!

And the size of our Permanent-Under-Cast is 3-4 times the size of any other industrialized nation’s economic outcasts, causing America TO RANK LAST IN VIRTUALLY EVERY MEASURE OF CIVILIZATION (education, life expectancy, infant mortality, etc., etc.).

We have five Six-Degrees-Of-Separation E-mail Campaigns aimed at trying to mainstream America’s Permanent “Untouchable” Under-Caste that are posted in the first section of http://www.ReadingLiberally-SaltLake.org =

6/27/2015 – Pope Francis and 23% of U.S. Children In Poverty
9/12/2012 – Bill & Melinda Gates Crimes Against Inner-City Ed
1/13/2010 – Prevailing Single-Digit Inner-City Grad’n Rates
5/16/2009 – Prevailing Single-Digit Inner-City Grad’n Rates
1/22/2009 – Prevailing Single-Digit Inner-City Grad’n Rates

And sections 3 and 4 of http://www.ReadingLiberally-SaltLake.org contain voluminous information about how 43 news-media super-stars and 21 top governmental officials turned their backs on the lawsuits to permit $84 billion of PRIVATE FUNDS to benefit the education of 10 million inner-city children -- even though every one of them knew that if any of them had lifted a single finger to help, the 10 million inner-city children might have been able to avoid “a fate worse than death”!!!

Question 3-b

Whether or not Stone identified the cause correctly, do his proposed solutions help to solve the problem?

Answer 3-b

Probably not!!!

He recommends new taxes, principally (1) an annual Federal tax on the value of all property, personal as well as realty, and (2) higher estate taxes.

He points out that most increases in the wealth of the top 1% of the population take the form of appreciating assets (corporate stock, fine art, etc.) whose appreciation is NEVER subject to the income/capital gains tax, and which for many wealthy people even escapes the Estate Tax entirely.

However, we agreed in our 4/20/2016 meeting that The Establishment’s War on American Workers (exporting their jobs and importing illegal aliens to compete for the jobs that cannot be exported) will NOT end until the earnings of American workers are driven down to THIRD-WORLD POVERTY LEVELS!!!

So Stone’s proposals, in reality, are nothing more than a blueprint for saddling The Establishment with the cost of the U.S. Government (which makes sense since they will be the only Americans left who are not suffering third-world poverty levels) RATHER THAN an attempt to save American workers from being reduced to third-world poverty levels.

Question 3-c

Are there better solutions to solving the problem?

Answer 3-c

Of course!!!

First, enforce the 1986 Immigration Reform and Control Act.

Second, stop Exporting American Jobs pursuant to so-called Free-Trade Agreements.

Third, halt immediately the Exportation of American Capital by renewing 1968 Executive Order 11387.

1968 Executive Order 11387 prohibited the Exportation of American Capital during the last year of Lyndon Johnson’s Presidency AND THE FIRST 4 YEARS of Richard Nixon’s Presidency.

Our 2/12/2014 Six-Degrees-Of-Separation E-mail Campaign was a direct response to President Obama’s famous statement a mere 29 days earlier on 1/14/2014 that “I’ve got a pen and I’ve got a phone” and am asking for good ideas that can be implemented by Executive Order.

Our E-mail Campaign imploring President Obama to renew 1968 Executive Order 11387 said that doing so would have at least two important benefits –

“(1) the retention of more American capital in the U.S. would mean that the additional capital would have to be invested in domestic projects that would employ more American workers, thereby reducing or eliminating American unemployment; and

“(2) the resulting increase in the ratio of capital employed per American worker would cause the real income of American workers to rise once more.”


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“EASY” THESIS NO. 3 -- EDUCATION (pp. 99-134)

Question 3-a

Did James Stone identify the cause of the problem correctly?

Answer 3-a

Absolutely not!!!

He identifies the problem (as distinguished from its cause) by listing “the results of a popularly cited survey of nations ranked by the Organization for Economic Co-operation And Development (OECD)” – as noted above, the 36 OECD nations are often referenced as the world’s industrialized nations.

The U.S. ranked 32 out of 36.

But Stone fails to identify THE CAUSE of the problem, which is America’s 30% Permanent “Untouchable” Under-Caste that is 3-4 times the size of the economic outcasts in any other OECD country and that America has refused for more than a half century to mainstream by providing its children with an effective education.

This, despite as we so often study, the Identical Twin Studies (which are The Gold Standard for determining what is genetic and what is environmental) which have continually and consistently shown over the decades that when inner-city identical twins are orphaned before the age of 12 months and one identical twin is adopted by a suburban family while the other is adopted by another inner-city family, the identical twins adopted by suburban families develop measured IQ’s equal to average suburban IQ’s and their identical twins adopted by other inner-city families develop measured IQ’s equal to average inner-city IQ’s.

Question 3-b

Whether or not Stone identified the cause correctly, do his proposed solutions help to solve the problem?

Answer 3-b

Having FAILED to identify the cause of the problem, Stone FAILS to recognize that the poor performance of inner-city schools is A SOCIOLOGY PROBLEM, rather than AN EDUCATION PROBLEM!!!

As we have studied so many times, the typical conditions facing the 178 “I Have A Dream”® Programs in 51 American cities during the 1990’s when Yours Truly was the volunteer Treasurer of IHAD-National were --

(A) SINGLE-DIGIT high-school graduation rates for the class immediately preceding, and the class immediately following, the Dreamer class.

(B) 99% of all Dreamers living in single-adult households.

(C) 95% of all Dreamers living in single-adult households headed by a druggie.

(D) 75%-80% of all Dreamers living in a single-adult household headed by a druggie who hands over all receipts to the pusher so that the kids have to steal just in order to eat.

(E) Virtually-universal recognition by inner-city 5-year-olds that their only realistic career objectives are pusher or pimp, or girl friend of a pusher or pimp graduating to whore.

What we need is Bill Clinton to tell us “IT’S THE SOCIOLGY, STUPID”!!!

Not James Stone providing a laundry list of otherwise-good suggestions that would be effective EXCEPT FOR THE SOCIOLOGICAL ENVIRONMENT with which they have to cope!!!

Question 3-c

Are there better solutions to solving the problem?

Answer 3-c

Of course!!!

And we have known what is effective for the last 30 years!!!

It was 30 years ago that the “I Have A Dream”® model began enclosing an entire inner-city third-grade class (or public-housing third-grade cohort) in a protective cocoon in which --

(A) they would receive tutoring and mentoring through high school graduation with a guarantee of college tuition;

(B) education and accomplishment are worshipped rather than ridiculed; and

(C) the tutors and mentors become SURROGATE PARENTS.

The earliest IHAD programs typically transformed the SINGLE-DIGIT high school graduation – college matriculation rates from SINGLE DIGITS to 60% - 65%.

And when we realized that half the female Dreamers typically became pregnant because they felt there was nobody who loved them and they were going to create a human being that had no choice but to love them --

but the other half of the female Dreamers had an IHAD tutor or mentor who had become a SURROGATE PARENT and told them they could make something of themselves with the IHAD program, AND IT WOULD BREAK THE HEART of the tutor/mentor if she failed to do so --

so that we had all our tutors/mentors express their love and hope in such a manner, the graduation/matriculation rates blasted through the 90% barrier!!!


*****
Note 1

Unfortunately, Bill and Melinda Gates and their Foundation caused the nation to turn away from The Promised Land.

It is tragic that Bill and Melinda Gates and their foundation caused the nation to worship for 10 years the "false idol" of breaking up inner-city schools into smaller units and, after admitting that failure, of leading the nation to worship the "false idol" of school choice.

Recent comprehensive studies by the Brookings Institution and by Stanford University show that charter schools are no better than public schools even though the charter schools typically accept only children of functional parents and then expel anyone who isn't performing.

"School Choice" is treating a SOCIOLOGY problem as an EDUCATION problem and makes no more sense than closing a police precinct in whose jurisdiction a crime is committed and hiring amateurs in their place.

Since the reckless behavior of Bill and Melinda Gates are "Crimes Against Humanity" as defined in the Rome Statute establishing the International Criminal Court at The Hague, our 9/12/2012 Six-Degrees-Of-Separation respectfully requested President Obama to petition the U.N. Security Council to provide the ICC with jurisdiction to prosecute the Gates. After all, they condemned more inner-city children to a "fate worse than death" than the number of victims involved in all of the prosecutions at the ICC combined.


*****
Note 2

As mentioned in the comments on Stone’s Second Thesis (Inequality), sections 3 and 4 of http://www.ReadingLiberally-SaltLake.org contain voluminous information about how 43 news-media super-stars and 21 top governmental officials turned their backs on the lawsuits to permit $84 billion of PRIVATE FUNDS to provide IHAD or IHAD-style programs for 10 million inner-city children -- even though every one of them knew that if any of them had lifted a single finger to help, the 10 million inner-city children might have been able to avoid “a fate worse than death”!!!

The final report to each of the 51 inner-city clergy from San Francisco, Los Angeles and Oakland who had been supporting the lawsuits (A) informed them that the US Supreme Court on 10/4/2011 refused to hear our appeal, (B) thanked them for their efforts with the solace that each of us would be able to say at The Pearly Gates with St. Paul (II Timothy 4:7): “I have fought a good fight, I have finished my course, I have kept the faith” and (C) requested them and their congregants to pray for the souls of the 43 news-media superstars, the 21 governmental officials, the California judges and the U.S. Supreme Court Justices.


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“EASY” THESIS NO. 4 -- HEALTH CARE (pp. 135-177)

Question 3-a

Did James Stone identify the cause of the problem correctly?

Answer 3-a

James Stone addresses the fact that the U.S. has the highest healthcare costs in the world by any number of measures. And despite the high costs, has among the poorest results.

Among the causes of the high costs, he identifies:

(A) Doctors’ and nurses’ incomes;

(B) Over-utilization of testing and defensive medicine in response to litigation;

(C) Prescription drugs are more costly in the U.S.;

(D) Excessive end-of-life care for marginally-longer outcomes;

(E) Exorbitant administrative costs;

(F) Unfavorable demographics as our Baby Boomers reach old age.

I have no quarrel with his analysis.

Indeed, we have often remarked about how in the Old Soviet Union, being a doctor was considered “women’s work” and they received very low compensation -- a mere fraction of what the Old Soviet Union paid its teachers!!!

And indeed, we have often remarked about how the Second President Bush’s Prescription Drug Benefit Legislation prohibited Medicare from negotiating prices with pharmaceutical companies rather than meekly accepting whatever prices they chose to dictate!!! Which, in effect, means that the Medicare program “foots the bill” for THE WORLD’S medical research!!!

Question 3-b

Whether or not Stone identified the cause correctly, do his proposed solutions help to solve the problem?

Answer 3-b

He proposes a single-payer system. In other words, Medicare for all.

I have no quarrel with that either.

Question 3-c

Are there better solutions to solving the problem?

Answer 3-c

What do you think??? Let’s discuss!!!


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“EASY” THESIS NO. 5 -- FINANCIAL SECTOR REFORM (pp. 178-231)

Question 3-a

Did James Stone identify the cause of the problem correctly?

Answer 3-a

Absolutely not!!!

Stone is fuzzy on even identifying the problem (as distinguished from identifying THE CAUSE of the problem).

After providing a very-nice history of regulation of securities (annual disclosure by corporations and public-offering disclosure for stocks and bonds) to protect investors, he rails at so-called HEDGE FUNDS, rails at the size of COMMERCIAL BANKS, and rails at the extent to which DERIVATIVES are used.

He finishes by citing the 2008-20?? Economic Meltdown, while implying that it was somehow the result of his three culprits, or some combination thereof.

*****
First, Hedge Funds.

This is a Red Herring that, in typical Stone fashion, is pilloried because they are a threat to his own personal interests -- not because they have anything to do with market instability or economic meltdowns!!!

The term Hedge Funds is a misnomer!!! Because they typically have nothing to do with hedging!!!

Sometimes called Private Equity Funds, a Hedge Fund is nothing more than a mutual fund that sometimes, if not typically, takes a controlling interest in the companies in its portfolio.

However, the principal difference between Hedge Funds (aka Private Equity Funds) and mutual funds is NOT whether they take controlling interests, but whether the investors in the Hedge Funds ARE LARGE SOPHISTICATED INVESTORS that do NOT need the protection of regulation by the Securities and Exchange Commission that protects small investors vis-à-vis their investments in stocks, bonds and mutual funds.

Hedge Funds typically target companies that are poorly managed and/or are insufficiently leveraged.

Obviously, Stone knows that his Plymouth Rock Insurance Company, which has never had any debt (aka leverage) and whose other shareholders probably find their investments illiquid, IS FEARFUL OF A BUY-OUT OFFER at which his shareholders would leap!!!

So once again, Stone is trying to “blow the high hard fastball” past us to get us to believe that something that is in his personal best interests is somehow in the best interests of the nation!!!

*****
Second, Commercial Banks and Derivatives

Stone has obviously “DRUNK THE KOOL AID” of the pols and economists who blame the 2008-20?? Economic Meltdown on the Commercial Banks and Derivatives.

And, specifically, to a so-called derivative labelled “Mortgage Credit-Default Swaps.”

The first problem is that “Mortgage Credit-Default Swaps” are NOT derivatives.

Instead, they are simply insurance contracts that insure the value of a pool of mortgages that has been sold to investors!!!

And the name those insurance contracts were given by their issuers, principally the giant AIG Insurance Company, was designed to fool the New York State Insurance Commissioner into failing to regulate them!!!

Laughably, AIG Insurance Company did NOT maintain any insurance reserves for prospective losses on these insurance contracts!!!

But many purchasers of these insurance contracts, most notably Goldman Sachs, realized that the puny AIG subsidiary (AIG Financial Products) that was issuing these insurance contracts did not have the financial wherewithal to make good on losses from the insurance contracts.

Accordingly, Goldman Sachs required as a pre-condition for purchasing the insurance contracts, that the parent AIG company guarantee these insurance contracts issued by AIG Financial Products.

Which is why, when payments had to be made on these insurance contracts, the parent AIG company had to default.

But rather than let AIG go through bankruptcy, which it probably should have done to penalize such reckless non-insurance-like behavior by an insurance company that should have known better, the U.S. government stepped in with a massive bailout of AIG!!!

*****
The Real Cause of the 2008 Meltdown

As we have studied so often in the past, the true cause of the 2008 Economic Meltdown was the $4 TRillion - $5 TRillion reduction in American payrolls and American capital expenditures by the CHUMP American companies that did NOT export American jobs that was caused by the so-called American Jobs Creation (sic) Act of 2004.

The $4 TRillion - $5 TRillion represented the earnings of U.S.-based Multi-National Companies FROM EXPORTING AMERICAN JOBS that had piled up in their tax-haven subsidiaries.

[Microsoft alone had more than $1 TRillion in a tax-haven subsidiary as a result of which Microsoft’s stock was being valued by Stock Analysts as a bank, rather than as a software company!!!]

The painfully-obvious question that the pols [including US Senator Hillary Clinton (D-NY) and US Senator Chuck Shumer (D-NY) who will succeed Harry Reid next January as leader of the Senate Democrats, though NOT Bernie Sanders (I-VT) or Ted Kennedy (D-MA)] DID NOT STOP TO ASK or, because of campaign contributions, DID NOT WANT TO ASK was -- is the $4 TRillion - $5 TRillion stuffed in mattresses in the tax havens???!!!

As a practical matter, the U.S. tax law required the $4 TRillion - $5 TRillion to be loaned to unrelated U.S. companies -- in other words, the CHUMP American companies that had NOT exported American jobs.

Our Six-Degrees-Of-Separation E-mail Campaigns of 11/14/2012 (entitled “$5 TRillion Reductions in Amn Payrolls > Meltdowns”) and of 2/12/2014 (entitled “1968 Executive Order 11387 To Halt American Job Exports”), both of which are posted in the first section of http://www.ReadingLiberally-SaltLake.org, explain in painful detail how the sudden reduction of the normal 35% corporate income tax rate on dividends of the $5 TRillion from the tax-haven subs, to a special one-time-only 5.25% rate, CAUSED THE COMPANIES THAT EXPORT AMERICAN JOBS TO REQUIRE THE CHUMP COMPANIES THAT HAD NOT EXPORTED AMERICAN JOBS TO REDUCE THEIR PAYROLLS AND CAPITAL EXPENDITURES DURING 2005-2007 BY $5 TRILLION!!!

While the Federal Reserve, WHICH HAD NO CLUE WHAT WAS HAPPENING, lamented throughout the meltdown that the CHUMP companies that had NOT exported American jobs were in desperate need of loans which they could not get!!!

The annual output of the American economy (GDP) is only approximately $18 TRillion/year!!!

So if the pols are going to require a reduction in American payroll of $5 TRillion over 3 years -- which is nearly 1/3 of the American economy (!!!) -- it is painfully obvious that the 2008-20?? Economic Meltdown would have occurred EVEN IF THERE HAD NEVER BEEN A SUB-PRIME MORTGAGE!!!

Because that many Americans being thrown out of work simultaneously means that there is nobody to buy all their homes as they are being foreclosed!!!

****
Janet Yellen and The Fed Still Asleep???

Since the 2008 Economic Meltdown, another $4 TRillion to $5 TRillion representing profits from EXPORTING AMERICAN JOBS has piled up in the tax-haven subsidiaries.

And, just as before, it has been loaned to the CHUMP American companies that did NOT export American jobs.

So instead of being stuffed in tax-haven mattresses, it has been loaned to American companies that have long since invested the $4 TRillion to $5 TRillion in American “bricks and mortar”!!!

And now there is a drumbeat from The Establishment and the pols (indeed, even from President Obama’s Simpson-Bowles Commission) to exempt from U.S. tax the $4 TRillion - $5 TRillion of tax-haven earnings from EXPORTING AMERICAN JOBS.

[The Simpson-Bowles Commission called this “territorial taxation.”]

So watch out Fed Chair Janet Yellen!!!

We studied your husband’s book for our 10/11/2015 meeting.

[Phishing for Phools: The Economics of Manipulation and Deception by George Akerloff and Robert Shiller, both of whom are Nobel Laureate Economists -- Akerloff is the long-time husband of Yellen.]

Unfortunately, Akerloff and Shiller resembled Podiatrists trying to write about Brain Surgery!!!

Because they also DRANK THE KOOL AID that the 2008-20?? Economic Meltdown was caused by sub-prime mortgages and so-called mortgage credit default swaps!!!

Janet, you will just have to “Woman Up” and NOT blame your husband if you and your fellow Federal Reserve Governors fail to recognize the ramifications if the pols once again let the companies that EXPORTED AMERICAN JOBS suddenly require the CHUMP American companies that did NOT export American jobs to reduce American payroll and capital expenditures by $4 TRillion - $5 TRillion like they did a decade ago!!!

A suggestion.

Many of your regional Federal Reserve Banks make loans to regional businesses.

So be prepared, when the deluge hits, for the Federal Reserve TO BUY from the American companies that EXPORTED AMERICAN JOBS the loans that they made to the CHUMP American companies that did NOT export American jobs.

Yes, you may have to print another $5 TRillion!!!

But that is better than letting the American economy crash again!!!

And much better than having to blame your husband for leading you astray!!!

Enough said!!!

Question 3-b

Whether or not Stone identified the cause correctly, do his proposed solutions help to solve the problem?

Answer 3-b

Re Hedge Funds, absolutely not!!!

Hedge Fund investors are typically University Endowment Funds and Corporate Pension Plans. They are sophisticated enough that they do NOT need SEC protection in making their investments.

Re large Commercial Banks and real derivatives (as distinguished from insurance contracts such as so-called mortgage credit-default contracts), who knows???

Though the pols always seem to think doing something is better than doing nothing!!!

Even if, as is so typical, the pols have no idea what they are doing!!!

Question 3-c

Are there better solutions to solving the problem?

Answer 3-c

Yes!!!

Educating Janet Yellen and the Federal Reserve Governors (as described above)!!!

solutions
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The American Jobs Creation (sic) Act of 2004

Post by solutions »

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---------------------------- Original Message ----------------------------
Subject: The American Jobs Creation (sic) Act of 2004
From: Solutions
Date: Fri, June 3, 2016 9:39 am - MDT
To: ReadingLiberally-SaltLake@johnkarls.com
--------------------------------------------------------------------------

Dear John,

I have just finished reading your Suggested Answers to the Short Quiz.

With regard to the last section on Financial Sector Reform, you reprise our frequent conclusion that the 2008-20?? Economic Meltdown was caused by The American Jobs Creation (sic) Act of 2004 which caused the CHUMP American companies that had NOT exported American jobs to have to reduce their payrolls and capital expenditures during 2005-2007 by $4 TRillion to $5 TRillion!!!

Please remind me why the requirement that the U.S.-based multinational companies THAT HAD EXPORTED AMERICAN JOBS invest in the U.S. the $4 TRillion to $5 TRillion that they were demanding the CHUMP American companies to repay, did NOT result in any increase in U.S. investment by them.

And please remind me why the requirement that the U.S.-based multinational companies THAT HAD EXPORTED AMERICAN JOBS would have their tax-haven subs WHICH HAD EARNED THE $4 TRILLION TO $5 TRILLION FROM EXPORTING AMERICAN JOBS (and loaned those earnings to the CHUMP American companies rather than stuffing them into mattresses located in the tax havens) -- to receive the $4 TRillion to $5 TRillion in cash dividends DURING THE FIRST YEAR after passage of the Act did NOT happen.

Thank you.

Your friend,

Solutions


---------------------------- Original Message ----------------------------
Subject: Re: The American Jobs Creation (sic) Act of 2004
From: ReadingLiberally-SaltLake@johnkarls.com
Date: Fri, June 3, 2016 4:23 pm - MDT
To: Solutions
--------------------------------------------------------------------------

Dear Solutions,

Thank you very much for your e-mail.

Both of your questions were answered in several of our Six-Degrees-Of-Separation E-mail Campaigns.

Our 2/12/2014 E-mail Campaign entitled Renewing 1968 Executive Order 11387 To Halt American Job Exports” referenced in its closing footnote the E-mail Campaigns of 11/14/2012 entitled “5 TRillion Reductions in Amn Payroll > Meltdowns” and 5/11/2011 entitled “Taxing the Profits From Exporting American Jobs.”

The following is excerpted from the 11/14/2012 E-mail Campaign entitled “5 TRillion Reductions in Amn Payroll > Meltdowns.”

Please see in particular paragraphs 12-14 which are preceded by the inserted Editorial Notes.


--------------------Excerpt From “5 TRillion Reductions in Amn Payroll > Meltdowns"--------------------

$4 TRillion - $5 TRillion is the amount by which American companies that did not export American jobs are about to be forced, once again, to reduce their payroll and capital expenditures within a 2-3 year time frame.

The former long-time Ernst & Young Senior International Tax Partner (Technical) facilitates a monthly politically-oriented book/study group which for 7 years has recommended policy positions to America’s decision makers and with which I am connected. [He also chaired 1994-1996 the American Bar Association’s International Tax Committee comprising the nation’s top 300 international tax lawyers and featuring 22 working sub-committees.]

He and Ernst & Young and the other “Big Four” CPA Firms designed the structure for U.S.-based multi-national companies (US-MNC’s) to export American jobs while capturing virtually all of their worldwide profits in tax-haven subsidiaries (principally non-resident Singapore subsidiaries) which contracted with factories in such low-wage countries as China to manufacture the US-MNC’s products using the US-MNC’s technology to the US-MNC’s specifications under the US-MNC’s supervision.

Accordingly, virtually all of the worldwide profits of such US-MNC’s were not, by virtue of being captured in a tax-haven subsidiary, subject to U.S. corporate income taxation until such time, if ever, that the profits are repatriated to the US parent corporation as a dividend or a “constructive dividend.” “Constructive dividends” are “investments in U.S. property” which are deemed by Sec. 956 of the Internal Revenue Code to be the functional equivalent of dividends, such as loans to the U.S. parent corporation or investments in U.S. property that is leased to the U.S. parent corporation.

The regular 35% income tax on the profits of the tax-haven subsidiary are not recorded as a “deferred tax liability” under “generally-accepted accounting principles” so long as they are “permanently reinvested” outside the U.S. This test is satisfied with a few brief “boiler plate” paragraphs comprising “pipe dreams” about such things as possible acquisitions and locked away for safekeeping in case an auditor should bother to inquire.

As a practical matter, Sec. 956 of the Internal Revenue Code restricts the US MNC’s that have exported American jobs to have their tax-haven subs loan their accumulated profits from exporting American jobs to UNRELATED American companies that did not export American jobs or, in some cases, invest the profits in U.S. government T-bills.

[US-MNC auditors dutifully recorded that the tax-haven profits were “permanently reinvested” in loans to the US companies that had not exported American jobs and/or in US Government T-bills.]

By 2004, these tax-haven profits had reached the level of $4 TRillion - $5 TRillion. Microsoft alone had more than $1 TRillion in its tax-haven subs, causing its stock analysts, as reported prominently and often in the financial press, to analyze Microsoft as a bank rather than as a software company.

Both the amounts and the character of such investments “stuck out like sore thumbs” in the US MNC’s Form 10-K’s filed each year with the US Securities and Exchange Commission.

At the end of 2004, Congress enacted the so-called American Jobs Creation (sic) Act which permitted the US MNC’s to have their tax-haven subs pay “cash dividends” during the next 12 months of the profits that had piled up over a decade or so from exporting American jobs subject to a special one-time 5.25% corporate income tax rate rather than the normal 35% rate.

As you can appreciate, the American companies that had NOT exported American jobs were not in a position to repay the loans from the tax-haven subs of the US MNC’s within the typically 90-day loan terms.

[Ed. Note – Why The Impact Was 2005-7 Rather Than 2005 Only]

However, virtually all of the US MNC’s that had exported American jobs decided that it was unwise to involve a Bankruptcy Court and instead dictated stiff terms based on how quickly the American companies that had not exported jobs could reduce their payroll and capital expenditures. The $4 TRillion - $5 TRillion of reductions in American payroll and American capital expenditures largely occurred during 2005-2007.

[Ed. Note Re “Cash Dividends” in 2005]

The requirement in the American Jobs Creation (sic) Act to pay $4 TRillion - $5 TRillion in “cash dividends” during 2005 was satisfied by having the banks of the US MNC’s, for a small fee, book a loan to the tax-haven subs equal to the portion of their loans to the American companies that had not exported jobs that could not be repaid immediately and then book an off-setting loan from the US MNC’s after they had immediately received those same amounts as “cash dividends” from the tax-haven subs. “Cash”, of course, in a modern economy is nothing more than a wire transfer and has no more tangibility than a book entry for a “loan.”

[Ed. Note Re Investment of the “Cash”]

The only other significant requirement in the American Jobs Creation (sic) Act was for the dividends from the tax-haven subsidiaries to be invested in American payroll or capital expenditures. This, of course, did not produce an increase in American payroll or capital expenditures because the dividends were “traced to” or “matched with” the normal level payroll and capital expenditures that the US MNC’s have. And the normal cash flow that would normally have funded the normal level of payroll and capital expenditures was now “freed up” on a tracing/matching basis to redeem stock of the US MNC’s.

The American Jobs Creation (sic) Act of 2004 was the result of lobbying by Price Waterhouse (another of the “Big Four” CPA firms) on behalf, initially, of their US MNC’s, though many non-client US MNC’s joined the group. Price Waterhouse hired Bill Archer, the recently-retired Chairman of the House Ways & Means Committee, to do the actual lobbying.

Bill Archer “sold” the key decision makers in Congress on the argument that earnings in the tax-haven subs would be “brought home” to create American jobs, that the earnings would otherwise remain “offshore,” and that tax revenue (albeit at only a 5.25% rate) could be generated but 5.25% is better than nothing.

The “elephant in the room” that nobody in Congress investigated was whether the $4 TRillion - $5 TRillion was really “offshore” or whether it had already been loaned to the American companies that had not exported jobs to pay for payroll and “bricks and mortar.” And whether “round tripping” the $4 TRillion - $5 TRillion from the American companies that had not exported jobs to the US MNC’s to redeem their stock would actually result in a NET REDUCTION in American payroll and capital expenditures of $4 TRillion - $5 TRillion.

[Cynics might suggest that nobody in Congress wanted to ask the obvious question of whether the $4 TRillion - $5 TRillion was “stuffed in mattresses” located in Singapore because they were more interested in receiving “campaign contributions” from Bill Archer’s clients but it is possible that none of them was smart enough to think of the obvious question.]

The rest is history.

Congress was in such a panic that only days after the House of Representatives re-convened in January 2008, it passed the Economic Stimulus Act of 2008 providing most taxpayers with immediate $300 rebates ($600 for most married couples) and investment incentives for businesses. It passed the Senate a week later and was signed into law on 2/13/2008.

----------------End of Excerpt From “5 TRillion Reductions in Amn Payroll > Meltdowns"----------------


You might recall that my daughter Hilary (M.I.T. – double major in Economics and Electrical Engineering) questioned whether the $4 TRillion to $5 TRillion LOAN REPAYMENTS by the CHUMP companies that had NOT exported American jobs, might have found its way back to the CHUMP Companies FOR A BIG NOTHING.

After all, the funds were used by the Tax Haven subs to pay dividends to their U.S. parent companies THAT HAD EXPORTED AMERICAN JOBS. And the parent companies, by and large, had used the funds to redeem their own stock. And the shareholders whose stock was redeemed might have deposited the funds in Commercial Banks. And the Commercial Banks might have loaned the funds back to the CHUMP companies.

HOWEVER, throughout the 2008-20?? Economic Meltdown, newspaper headlines screamed that The Federal Reserve was lamenting the fact that the CHUMP companies were in desperate need of loans WHICH THEY COULD NOT GET!!!

What more evidence does one need???

Thank you again for your inquiry.

Your friend,

John K.

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