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Tuesday, July 07, 2009

Tax Code Helped Cause Financial Crisis

Budget & Tax News reports on a new study on the effect of tax policy on the financial crisis.

[Author Sam] Eddins also addresses the issue of credit default swaps, one of the more controversial financial instruments, which many economists argue played a role in bringing on the credit crisis. Eddins shows those swaps were influenced by tax policy.

“The purpose of debt securitization products, when viewed through a TAFT lens, is not only diversification and partitioning of risk but also tax minimization,” Eddins writes.

“Credit default swaps are revealed to be a massive tax arbitrage that shifted government tax receipts to Wall Street bonus pools and necessitated the creation of massive quantities of low credit quality debt,” Eddins continues. “The structure of this trade ‘insulated’ Wall Street agents from the credit risk while allowing them to arbitrage the tax savings of their clients as long as counterparties remained solvent.”

The central failure of the credit crisis was not with the market, according to Eddins, and individuals in the markets acted consistently and rationally given the circumstances.

“Rather it stands as an example of the unintended consequence of a tax policy that distorted incentives within the free market system. Regulation cannot control investors from acting in their self interest,” Eddins writes.
The full study is here.  It is complex, but adds one more reason to the list of ways government caused the financial crisis.


Anonymous said...

NB. Government left the keys in the car but Wall Street got in, drove off to a chop shop and cashed out. Then, Wall Street came back and government gave them money to buy a new car. In all of history, there has never been a welfare queen as profligate as the masters of the universe with the taxpayers' money.

Anonymous said...

The author of the report is a total naif. Who does he think wrote the tax code? ACORN? Of course not! The big thieves take care of themselves with whomever is in power. We see it with Pa. and we see it in DC.

Anonymous said...

My heroes are TR and the trust-busters. The free market is not the absence of government. Why should we taxpayers enforce rapacious contracts? Why should we turn our government over to oligarchs who don't even care about America? All these Wall Street types are internationalists, not Americans.

Anonymous said...

NB. Reread this piece again and the other comments and I am fuming all over again. Our Founding Fathers formed a government. That is what they did. They did it to preserve liberty and to protect all of us from tyranny. The Wall Street bankers are tyrants and could care less about our American journey. I don't know how any self-respecting economist could write such drivel. Government did it? The masters of the universe owned the Congress and they owned the Clinton and Bush Administrations. Now they own the Obama Administration. Obama's largest single source of money was Goldman Sachs for goodness sake. They made out like bandits last year and this year. They should be treated like bandits.

Nathan Benefield said...


The Federal Government required banks to make high-risk, subprime loans. They made it much less costly to take these financial risks by interest rates lower than inflation and (as this study showed) tax benefits. And most importantly government (via Fannie Mae and Freddie Mac) paid banks and Wall Street firms for subprime loans.

The financial industry did what the federal government required, encouraged, and paid them to do Are you suggesting government cannot be blamed, even in part.

Anonymous said...

NB. I am saying that the bankers paid for lawmakers to do what the bankers wanted. The bankers extracted maximum personal gain from the system through the lawmakers they owned. When it all blew up and their future enrichment became endangered, they went back to the lawmakers and politicians that they owned and got them to pay with our tax dollars for the mess that the bankers had created. Look where the money went. You want free market, let AIG fail and let all the bankers who gamed the system fail. Instead, the bankers went to Congress and the Administration and got them to dump trillions in taxpayers' money into their pockets. The best compensation year for GSachs bankers was 2007 at the height of the bubble. The second best year was 2008 when the bubble collapsed. Now, we are told that this year will top the other two. Follow the money. Who profited from bubble, collpase and reflation?