Tuesday, April 1, 2008

Bob Reich on why we need more regulation

Bob Reich says it all:

"Some of the dollars I'm sending to Washington are now being used to backstop Wall Street investment bankers, hedge fund and private equity managers, and anybody else associated with a borrower that's too big to fail. The reason they're too big to fail is they've borrowed so much from me and from you - from our pension funds and money-market funds - that if they went bust, our savings would disappear. Even the danger of them going bust might make us so anxious we'd demand our money, which would close down the entire financial system.

"The reason they've been able to borrow so much from us without putting up much of their own capital is they're unregulated, and don't have to put up their own money. The tax code also rewards them for borrowing rather than investing, by letting them deduct interest payments on the money they borrow. The tax code also allows them to treat the earnings they get on the investments they make with the money you and I lend them as capital gains rather than ordinary income. So many of them are paying taxes at a lower marginal tax rate than you and I are paying.

"Finally, when the risky investments they've made with our money go bad, we get a housing crisis, and the value of our homes - our biggest assets - plummets. And our pension funds get socked. Yet most of them continue to pull in whopping incomes. James Cayne,the former CEO of Bear Stearns, left the company with a $232 million pay package. That's because when they place risky bets that pay off, they get the windfall, and when their bets go bad they're bailed out with our tax dollars.

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