I am not in favor of buying that crappy paper. I would, however, consider using taxpayer money to buy some amount of solid, let illiquid, investments to recapitalize credit markets.

You folks here at OTB have really led the league in discussing this stuff - I appreciate it very much.

Moonbat Boy is working off of a faulty premise, your attempts to counter such an argument also do not work either.

Lowering the capital gains tax isn't to induce people to sell their homes, but is geared towards financial institutions. It will also impact other investors, but that isn't the main thrust. It is to allow financial institutions to write down the toxic paper without a cash infusion.

Or are you really in favor of the government buying that crappy paper?

It's intention is to spur economic activity in the housing sector by allowing people to liquidate other assets and invest them in distressed properties. I'd think that was pretty obvious.

What's less obvious is who would do this, and why?

That would require liquidating profitable assets (which are the only kind that incur cap gains) and investing them in risky ones.

Capital won't move if banks won't loan money to each other.

And just where do banks get the money from?

What would seem to make more sense is an increase in the $3K limit on deducting capital losses from your taxable income. When was that last changed?

I'm all for cutting taxes, but cuts to the cap gains tax by itself just means greater reliance on taxing work.

Supply side solutions always work better.

That's a religious argument. Very few outcomes "always" obtain. The empirical data show far less, but nonzero, support for supply side economics.

Michael Ettlinger and John Irons provide a pretty rigorous but not apolitical long-term study.

If supply side economics came even remotely close to "always" working, its proponents could at least point to the functional form of the Laffer curve.

I think what may make more sense is to allow capital gain losses offset standard taxes. This would allow people to sell sub-prime mortgage securities and take the loss out of their taxes. The securities would be properly valued by the market then which should clean up a great deal of the issue. The government isn't paying out, rather it is not taking in (a delicate distinction I admit, especially depending on what they do with the resulting shortfall). Then you can look to economic stimulus ideas to grow the economy like capital gains tax reductions.

Sigh

Let me see if the code thingy works....

Okay here we go again, a financial institution that has the following,

Good Assets + Toxic Assets (Book Value) = Liabilities

Is considered sound. The problem is that people seem to think reality is,

Good Assets + Toxic Assets (Real Value) < Liabilities

Such an institution would be in trouble, might even fail.

Now, with a capital gains tax set to zero we might have some institutions that are in trouble switching to,

Good Assets(No Cap Gains Tax) + Toxic Assets (Real Value) = Liabilities

Thus restoring the insitution to a healthy status. If it turns out that we have,

Good Assets(No Cap Gains Tax) + Toxic Assets (Real Value) > Liabilities

Then as Patrick noted people like Warren Buffet (and smaller) would see a good investment opportunity buying up the stock and sending the price higher. Thus reassuring people such an institution is indeed sound and to not worry, at least about that insitution. Oh, and these institutions would then start lending money again.

I don't think that a cap gains tax is sufficient to overcome the uncertainty of the value of the mortgage related debt. I see such a suspension as being more part of a plan a year down the road to help the markets recover. I don't see how it helps right now.

If you are looking for certainty then give up right now and move on to another topic. Nobobdy knows how to value these toxic assets which is part of the problem.

Such a measure by itself might return some banks to sound basis which would mitigate the size of the problem and any impending credit crunch. That in turn would limit the severity and possibly the length of the following recession.

Note: I'm not advocating this plan, just laying out how I see it working.

People are watching banks fail, but they're also watching people lose their homes and jobs. If the government did a bit better job showing the benefits to the average man/woman, they would gain quite a bit of ground support.

Unemployment has gone up, but it is by no means at a worrisome level. As for people losing their homes yeah, it is bad, but people also behaved irresponsibly. We don't want to reward that sort of behavior.

Yes, this applies in spades to the current situation on Wall Street but there is the added problem that if you let Wall Street collapse then there will be a credit crunch and that could trigger a recession, maybe a severe one, where unemployment goes up considerably and even people who behaved responsibly lose their homes. This is why the government is looking to intervene. The problem is that it also limits the downside for those in charge of these Wall Street/Financial institutions.

Oh, and bailing out the homeowner directly however wont solve the problem of a credit crunch. That and voters don't have as much lobbying clout as large Wall Street firms.

Welcome to democracy in action.

I don't think that a cap gains tax is sufficient to overcome the uncertainty of the value of the mortgage related debt. I see such a suspension as being more part of a plan a year down the road to help the markets recover. I don't see how it helps right now.

The capital gains tax only comes into play when people sell their assets. You can only sell your assets if there are buyers, and the problem right now is that there aren't any. Why? Because of the credit freeze? Why? Because of the housing market collapse. How? Because now nobody knows what mortage-debt paper is worth right now.

A capital gains tax suspension does ZERO to address the underlying problems. In other situations, it might be a good boost to investment. In this environment, it's totally irrelevent.

But again, the problem is that many large, institutional investors are facing huge capital losses, not gains.

In part yes. This view is from to high a level, IMO.

Financial institutions have assets and liabilities. Right now the problem is that some of the assets are deemed toxic so that their actual price is most likely less, maybe even far less, than what the insitutions have them listed on their books. The rest of the assets are fine. So right now we have a situation that could be like,

Good Assets + Toxic Assets (Book Value) = Liabilities

Such an institution is technically sound. But what everyone is fearing is that the reality is,

Good Assets + Toxic Assets (Real Value) Liabilities.

Then we could see a situation like Patrick describes. This would drive up the stock price of these institutions and send a signal that all is well with that institution and also such institutions will once again loan money.