Wednesday, December 7, 2011

Corporations & Banks Now Sit on $3.6 Trillion

But STILL the Republicans want to tax them less!

Corporate America (who haven't been paying their fair share of taxes for the last 25 years) are now sitting right on top of the solution to the nation's employment crisis, according to a new report from a group of University of Massachusetts economists.

If America's largest banks and corporations would just loosen their death-grip on a chunk of the $3.6 trillion in cash they're hoarding, and move it into productive investments instead, the report estimates that about 19 million jobs would be created in the next three years, lowering the unemployment rate to under 5 percent.

"There is no reason that the U.S. needs to remain stuck in a long-term unemployment crisis," Robert Pollin, lead author of the report and co-director of the Political Economy Research Institute, said in a statement accompanying the report's release Tuesday.

The Federal Reserve, ever since December 2008, has been lending banks loads of money at zero or near-zero interest in an attempt to stimulate lending. But far from lending all that cheap money to businesses that could create jobs, the banks have used it to hugely inflate their cash reserves and pay themselves huge low-taxed bonuses.

"Getting the banks and corporations to move their hoards into productive investments and job creation requires carrots and sticks -- policies such as a new round of government spending stimulus as well as taxes on the banks' excess reserves -- that can both strengthen overall market demand and unlock credit markets for small businesses," Pollin said.

Even as the nation continues to confront massive unemployment, the nation's biggest companies have been hoarding cash. Banks have been able to borrow the money essentially for free from the Federal Reserve, so why not? In fact, according to the Federal Reserve (Table L.109, line 28), banks are sitting on $1.6 trillion in reserves -- about 80 times the $20 billion they held in 2007.

Add to that, Recently Bloomberg just reported that documents obtained under the Freedom of Information Act reveals the Federal Reserve acted on their own without even telling Congress of almost $8 TRILLION in taxpayer guarantees to banks. (The Fed lashed out at ‘errors’ in reporting, but the New York Times reports that the Bloomberg writer says, “We have met with the Fed numerous times on this issue and not once has the Fed ever told us our reporting on this issue is inaccurate. We stand by our reporting.”

Corporate fat cats are sitting on mounds of money rather than spending it or investing it in ways that would create jobs. As the Washington Post recently reported, executives at U.S. companies hoarding a record $1.8 trillion in cash are finally dipping into those reserves -- but, amazingly enough, only to buy back their own stock, a move intended to prop up their share prices and pad their bonuses as "pay for performance".

CEOs only earn bonuses when their company “performs.” One measure of that performance: “earnings per share,” or company income divided by outstanding shares of stock. Execs have figured out that they don't have to actually boost earnings to hit their per-share targets. They simply reduce the number of company shares — by having their companies “buy back” shares of their own stock off the open market. U.S. corporations overall have so far this year authorized $445 billion worth of buybacks.

Frank Luntz, a Republican strategist, advised attendees at the Republican Governors Association what to say if they give their employees a bonus. "If you give out a bonus at a time of financial hardship, you're going to make people angry. Call it pay for performance."

They also make money with legal trickery using such schemes as “variable prepaid forward contracts.” (READ Bloomberg: Billionaires Avoid Reporting Cash Gains to IRS)

And the CEOs of the big banks and corporations are also paying historically low capital gains taxes on their executive compensation packages that are paid as stock options and "pay for performance". They are paying less as a percentage of their personal income than most middle-class taxpayers.

NOTE: The middle-class with retirement accounts don't enjoy these tax breaks the way the wealthy do. The character of any gains (including tax favored capital gains) are transformed into "ordinary income" at the time the money is withdrawn from your ROTH IRA or 401k, even though those gains were also made by stocks trades. Why not also tax the ultra-wealthy on their capital gains as "regular income" (35% over $317,150) instead of the historically low 15% they now pay because of the Bush tax cuts?

Hedge mangers greatly benefit from this preferential tax break too. (Read the article: Tax breaks for billionaires), just like members of congress would also benefit from their own insider trading with stock trades.

And remember when Goldman Sachs CEO Lloyd Blankfein had warned his employees to avoid making big-ticket, high-profile purchases? Shhhhhhhhh! And the New York Magazine piece asking if the company is "evil" ?

And amazingly, some of these people (including members of congress) also receive taxpayer subsidies. For years high-priced lobbyists have influenced Congress to rig the tax code in their own favor.

But Senator John Boehner says, "We don't have a revenue problem, we have a spending problem."

Meanwhile, non-financial companies are keeping their profits liquid, rather than plowing them back into investments, to the tune of about $2 trillion. Together, that amounts to almost a quarter of the U.S. gross domestic product. Robert Pollin and his colleagues figured that even accounting for a massive safety cushion, at least $1.4 trillion of those reserves should be considered excess.

The report also notes that small business are having a hard time getting anyone to lend them money.

The report concludes that investing the $1.4 trillion in private businesses would generate an enormous surge in employment. It recommends that the money in particular be channeled toward "small businesses that face larger than normal credit constraints; more labor intensive businesses; and businesses that generate large social as well as private benefits."

Move your checking and your credit card to a nonprofit credit union. It's safe and the decisions they make there aren't based on greed.

Also read: Demand Banks And Other Mortgage Holders Aggressively Write-Down Principal

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  1. "One of the things that happened in 1929 was that a consortium of the biggest banks in the country tried to stop the market from going down," notes Prechter. Those banks failed of course, just as Prechter says they did when the Central Banks tried to prevent the coming financial meltdown in 2008 by offering essentially free credit."

  2. It’s extremely likely that all of the nation’s largest banks would have collapsed over the past three years without enormous help from the Federal Reserve. In any normally functioning market, they would have subsequently had trouble making huge profits. Instead, they’ve gotten bigger and richer.

    When the banking rules are rewritten — as they are every few decades, usually after a crash — the banks also get the chance to play a big role in drafting them...the main participants are the lawyers and lobbyists for the largest financial institutions.

    And being too big to fail generally makes the largest institutions fairly impervious to competition. There are nearly 8,000 banks in the United States, but the top 20 control more than 90 percent of the market. The top three alone control 44 percent.