Archive for January, 2009

Tax Cuts Will Not Stimulate the Economy

Monday, January 26th, 2009

As the song says “Nothing from nothing leaves nothing.” (Billy Preston and Bruce Fisher)

Arguing for tax cuts as economic stimuli in this economy is fallacious because businesses do not have tax payments to cut when they are losing money. (They already can carry back net operating losses for three years to receive refunds and into the future to reduce tax payments when they return to profitability; no new laws are needed for this.) Knee-jerk calls by Republicans for tax cuts makes empty promises to businesses desperate for access to capital to stay afloat, let along pursue opportunities for expansion. The only significant tax payments left to cut are the business contributions to payroll taxes — cuts the Social Security system and Medicare can not afford.
We need capital added to the system by the last one in the game with money to spend, the federal government. Those additional funds must combined with requirements that banks receiving TARP funds resuming normal lending so that companies, including hard pressed not-for-profits (Credit Crisis Is Leaving Charities Low on Cash. http://www.nytimes.com/2009/01/24/us/24liquidity.html?_r=1&scp=3&sq=nonprofit&st=cse) can access the funds they need for operations and, hopefully, the expansion that leads to hiring more workers.

Paul Krugman discusses several other reasons that calls for tax cuts are hollow rhetorical attempts to derail President Obama’s proposal for an economic stimulus plan. He goes as far as using words like “fraudulent” and “bogus” in describing the tax cut arguments. I defer to the Nobel Laureate in determining whether the Republicans actually think tax cuts are the way to go or are just flailing at the President’s proposals based on their never letting real numbers, research and experience get in the way of a political argument. (Bad Faith Economics. http://www.nytimes.com/2009/01/26/opinion/26krugman.html)

Maria Markham Thompson, CPA, CFA
Certified Public Accountant and Financial Writer

Tell FASB the FMV Emporer Has No Clothes

Friday, January 16th, 2009

I shared the following comments in response to Jason Mendelson’s Guest Blog at Venture Beat Blog on FAS 157: It is good discussion with real examples of the fallacies of reporting all assets at “fair market value” in the face and moved accounting, and the many uses of financial statements, back to some sense of sanity.

We had far less hubris about valuation before some people confused numbers that would have been automatically suspect on the back of an envelope with true precision because “its in the computer.” FASB signing off on this nonsense without really, really thinking about the potential behavioral, practical, economic implications, in deference to political pressure, is much like the statement at the Baltimore CFA Society meeting in which it was suggested that “before we repeal anymore Depression ERA securities legislation, we should find out why they wrote it.”

Now that we have opened this Pandora’s FMV Box, the bigger question is how to undo the present state of fear that is crippling markets.

I think we all would be better served by getting off our collective post-Enron high horses. We should only adjust market values for assets regularly traded in transparent markets (listed stocks, Treasuries, rated corporate bonds, etc.) and not do it where the valuation is merely an estimate unsupported by trading activity or other real evidence of impairment, e.g., the building burned to the ground. At the same time, more effort must be made to disclose all of the information we know about illiquid assets (the information used as inputs into the so-called “valuation models”) so that other participants in the market can make their own reasoned conclusions about the prices they are willing to pay in an arms length exchange. We need to get back to the understanding that what someone else is willing pay, not the guesstimate of the present owner, is the correct measure of value.

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Thursday, January 15th, 2009

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