For tax cuts to work, regulations that distort the allocation of bank credit to real economy must first be removed

Sir, I refer to Chris Giles interview of Arthur Laffer “Reagan’s tax guru predicts US nirvana” December 8

Let me be brief. Reagan ended his presidency on January 20, 1989. The Basel Accord, with its risk weighted capital requirements, was approved in 1988 but entered into real effect in 1992. Basel II, with its even more distortionary risk weighting is dated June 2004.

I don’t want to rain on anyone’s parade but, whether it is by tax cuts, fiscal deficits, QEs, low interest rates, or by any other thinkable stimulus, for these to work their way entirely into the real economy, the distortions in the allocation of bank credit must be removed.

Sir, as is, tax cuts will not produce what Laffer and other expect, and so resulting public deficits would increase dangerously the levels of public debt.

PS. Let me also invoking the spirit of Charlton Heston in Planet of the Apes: “Keep your stinking monkey paws off our banks, you dirty regulatory ape.

PS. Must one go on a hunger strike to have the Basel Committee on Banking Supervision answer some very basic questions?

@PerKurowski

Whatever, don’t forget the tax bill will be in the mail, quite soon.

A thirty year mortgage of 300.000 dollars at 11 percent rate to the subprime sector will, if made part of a security that because it has a prime rating is discounted at 6 percent, be worth 510.000 dollars. The difference of 210.000 dollars in financial air, pocketed as profit by an intermediary, will most probably be lost completely, no matter what happens to the housing sector. And so, if by any chance these are the kind of loses the governments are helping out with, they will not recover a single cent from it, and the taxpayer will have to make up for it, or it all breaks down in more inflation or in, gulp! … sovereign defaults.

This is why I agree and commend FT on starting to beat the drums on “Austerity must follow a stimulus”. November 13. Let us hope now that the G20 meetings do not take the form of an electoral campaign where only fiscal stimulus and tax rebates are offered and no one even speaks about the tax bill that must follow.

If it would not be for its very tragic implication it would be outright comic to see so many neo-Reaganites preaching the benediction of the Laffer curve, promising less taxes and more fiscal income… and even bail-out profits. What an amazing irresponsibility!

Are you also to tango away your public-debt?

Sir, of course we understand that you do not ask how much it costs when you send out a fire truck to answer an urgent alarm, but from there to imply that it will not costs us any money, as Sir Samuel Brittan, seemingly a Laffer curve believer extraordinaire, like us to think, is a bit too stiff upper lip or too blasé for my taste. “The big myth of taxpayer cost” October 24.

If it was that easy why do we not all have ourselves a couple of fiscal stimulus packages a day? It is just like listening in to the many statements about the US bail-out plan becoming profitable. If so, why does the US Treasury not take over all investment banking activities and save us all from having to pay any taxes?

Incredible amounts of virtual monopoly-money-wealth will burn up in the current crisis but the public debt will remain real; and could become too large to handle and perhaps force you down the Argentinean route, in order to tango it away.