Recession 'Mildest On Record Due To Tax Cuts'

I never considered Enron a major company even when it reached #7 on the Fortune 500 list. A company that trades worthless pieces of paper, and reports gross sales of commodities (instead of profits) as revenue is a third-rate company as far as I'm concerned. This is proven by the fact that energy prices didn't move an inch even after the largest trader of energy contracts went belly-up.

Creating new financial instruments and markets is almost always very beneficial to the economy and society as a whole. Though, as you say, it was the way they were accounted for that caused the big problems, not because they were paper instruments. Every time I read "worthless pieces of paper" I am reminded of nineteenth century and early twentieth century philosophers, economists, and politicians who repeated similar slogans and used them to instigate millions of genocidal murders and the oppression of hundreds of millions more.

And here is a recent article about "things" versus financial "paper things" that might be of interest to you.

Back to Enron-style accounting in the world in general. I contend that the "economic boom" of the late 1990s was primarily driven by tax policy, not by favorable economic conditions. As a result of the 1993 Democratic tax hikes, the U.S. was left with a top income tax rate of 39.6% (I believe the numbers I'm using are correct, but you'll get the point even if they are off by a little bit). After the 1995 Republican tax cuts, the top capital gains tax rate was reduced to 20% for assets held longer than 18 months (later reduced to 12), but income tax rates stayed the same. As a result of this spread between the top income tax rate and the top capital gains tax rate, smart people simply moved their money out of income-producing assets (such as bonds and value stocks) and into assets that produced little income but had enormous potential for capital gains (real estate and growth stocks). In other words, the two strongest areas of the "boom" (real estate and growth stocks) were driven only by people chasing higher after-tax returns.

There are other impacts of tax law on the stock market. Because "bracket creep" has pushed middle-income earners into higher tax brackets, they have been driven to put their money into the last two major tax shelters -- retirement accounts and home mortgages. Much of the stock market growth over the last few years has been driven by nothing more than large institutional investors plowing huge amounts of "play money" (pre-tax dollars) into stock mutual funds. This explains why investors continued to pour money into the stock market even after P/E ratios had reached record levels.

I think you are making a very good point here, and it really points out how the Rat/Communist philosophy of soaking the rich never really works, and the very negative unintended consequences of trying to do so. However, I don't view it as phony baloney accounting, because it's all a matter of money going where its treated best in the marketplace, and as usual the market will eventually self correct. Still, Greenspan's mistake is still the costliest in history as he wrecked the economy when the markets were already entering a corrective phase.

I didn't make my point clear. Options, derivatives, etc. are not "worthless pieces of paper" per se, but from Enron's accounting perspective they sure were. When Enron bought an energy contract for $1 million from one utility and sold it for $1.1 million ten minutes later, they reported the $1.1 million as part of their gross sales.

This was pure bullsh!t, as anyone who has dealt with "pieces of paper" knows. When a company like Merrill Lynch buys stock for their clients, they actually hold the stock for a very short period of time and sell it to the client at a small mark-up of 1/8 of a point or so (this is how they generate commissions). If someone puts in an order with Merrill Lynch to buy IBM at 105-3/8, Merrill Lynch will actually buy it on Wall Street at 105-1/4 and sell it to the client at 105-3/8. If Merrill Lynch decided to report the entire 105-3/8 as gross revenue, then the company would be larger than any 100 companies in the world (combined), except for other brokerage houses. The entire board of directors would also go to jail for fraud. So instead of reporting the 105-3/8 as gross revenue, they report only the 1/8-point commission.

Having said that, there is some truth to the notion that these "pieces of paper" have no "value-added" worth in terms of the overall economy. Because Enron did not "produce" anything, the energy market didn't even hiccup when it went bankrupt. Instead of having 500 firms trading energy futures, there were 499.

Think of it this way: There is no doubt that IBM stock has a value to it just as energy has a value to it. Enron's collapse is comparable to the financial collapse of a single investor who happens to be IBM's largest shareholder. The fact that someone was brought to financial ruin does not impact the financial stability of everyone else who happens to be a shareholder in some of his assets.

BTW, anyone who complains that the U.S. "isn't producing anything" should look at Hong Kong and Singapore, two of the wealthiest areas in Asia despite the fact that they have no natural resources and produce almost nothing.

The key to this interesting paradox is that a nation with no natural resources must rely on something else other than land leases, drilling royalties, export taxes, etc. for tax revenue. Most nations in this situation tax their labor (in the form of income taxes, payroll taxes, etc.), which makes their labor more expensive but also creates incentives for businesses to constantly search for more efficient (and less labor-intensive) ways of doing things.

That is the reason why the most resource-rich areas of the world were probably the last ones to have words like "software" and "automation" translated into their languages.

I think you're being a little too harsh on Greenspan. Sure, he deserves criticism for raising rates in a non-inflationary environment, but even if rates had stayed the same the stock market bubble would have burst.

Consider the following example, which illustrates how idiotic things had become by 1999. I'm not which companies were involved, but the scenario I'm showing actually occurred.

Company A is worth $5 billion. It spins off one part of its operations and creates a new IPO called Company B. The new IPO goes from $10 per share to $150 per share within days. At $150 per share, the "market" is saying that the new IPO has a "value" of $6 billion. This means that the new company now has a higher "value" than the parent company even though the parent company still owns 50% of the new company's stock. Even a third grader would tell you that the math doesn't make sense, especially when you consider that the parent company continued to do business on a daily basis just like it had been doing before. And yet people kept buying that stock at $150 per share!

Alan Greenspan didn't force 100 million amateur American investors into the stock market. In fact, he warned as far back as 1995 that something wasn't quite right in the markets due to the sudden influx of all these ignorant people in the stock market.

I don't think one can be harsh enough on Greenspan. Yes, the market was going to correct, that's why Greenspan should have sat on his hands, but he'd consolidated so much dictatorial power over the years, there was noone who could stop him. Without Greenspan's historical blunder, the correction would have occurred with much less hardship.

Company A is worth $5 billion. It spins off one part of its operations and creates a new IPO called Company B. The new IPO goes from $10 per share to $150 per share within days. At $150 per share, the "market" is saying that the new IPO has a "value" of $6 billion. This means that the new company now has a higher "value" than the parent company even though the parent company still owns 50% of the new company's stock. Even a third grader would tell you that the math doesn't make sense, especially when you consider that the parent company continued to do business on a daily basis just like it had been doing before. And yet people kept buying that stock at $150 per share!

And for how long did this wonderful arbitraging opportunity exist? And what percentage of overall investment capital went into first day IPO madness?

Of course, the little people shouldn't be allowed to invest their money in the stock market.</sarcasm>

In reality most people put their money in mutual funds to let a professional pick stocks, and of those professionals, some goshawful high percentage of them can't beat the indexes.

There was monkey business going on in 1995, but it had nothing to do with amateur investors. It was dollar/yen intervention.

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