Monday, October 3, 2016


So Donald Trump lost almost a billion dollars 1995. He then used that "bad year" in a complex tax shelter scheme to avoid paying taxes on things like profits, salary, and interest income in subsequent years.

In tax speak what Trump experienced in 1995 was a "capital loss" which - because of our generous tax laws for the rich - he's able to "carry forward" as a tax credit in subsequent years.

In plain speak, Donald Trump was granted something akin to a perpetual "get out of jail free" tax card. He was granted this for no other reason than our tax laws and favorable legislation tolerates and even coddles bad and incompetent behavior in the market place.

So this is what we have. Donald Trump made bad business decisions (Trump acknowledges paying too much for things like "trophy properties" and airplanes before 1995). Favorable legislation and subsequent tax law allowed him to use his losses to avoid paying taxes in the years that followed. So, yeah, a tax code that was written to help businesses survive a bad year or two, with tax credits and write-offs, morphed into something that became Donald Trump's tax hammock in perpetuity (David Cay Johnston explains the process here, in "The Art of the Steal").

The reality is we shouldn't be surprised by any of this. Donald Trump is a con man. His wealth is a product of inheritance and privilege. The inheritance we understand. The privilege is a bit more complex, but in real simple terms it's exemplified by how Trump can swindle small businesses while taking advantage of generous tax laws that are only available for those big enough to get Congress to write special financial legislation for them.

What this means is that Donald Trump is the poster child of an economy where gaming the system through shady tax write-offs, stiffing suppliers, legal shell games, and bailouts are accepted practices. Wealth creation is replaced by wealth extraction. This is not how private markets are supposed to work.

I wrote about how markets are supposed to work and how they actually work 5 years ago. I'm re-posting it below, with a few small edits to account for The Donald. Enjoy.


We hear it all the time. Don't interfere with the marketplace. Deregulate. Get the government out of the market. Unfettered competition leads to the best possible outcome for everyone because people rationally pursuing profit will enhance both productivity and quality in the marketplace. Like an "invisible hand" the needs of society would be met. In the end consumers get better products. Producers get more money. Workers earn better wages. Everyone wins. 

At least this was the message many believe Adam Smith, the intellectual godfather of capitalism, told us in The Wealth of Nations (1776). It's this belief system that has fed the free market and deregulation push we've seen over the past 35 years. It's what's pushing us today. Unfortunately, much of what Adam Smith wrote was often misrepresented and taken out of context by many of his followers, including Milton Friedman. It's also one of the reasons I wrote The Myth of the Free Market.

To be sure, Adam Smith argued that the state should stay out of the marketplace. But not because he believed market players should be free to do what they wanted. Rather, Smith believed the government should stay out of the market because it usually intervened on behalf of monopoly and privilege. Smith's message was that we shouldn't allow market players run herd over the rest of us. 

Many of today's market players have no clue about any of this. And it shows. In fact, contrary to popular belief, market players like Donald Trump and those on post-bailout Wall Street ignore - or don't recognize - how they have pushed and benefited from the very visible hand of government supports and subsidies, which Adam Smith feared would happen. 

The bailouts, artificially cheap money, and favorable legislation discussed below are just a small peak into the number of supports the state provides "private" market players so they can be successful in the market place.

Talk about a lack of accountability. One of the cornerstones of a competitive market system is the idea that there would be retribution for stupid decision making. In a real market economy you're supposed to go bankrupt and/or lose your business if you make dumb decisions (like gambling, or paying too much for a casino and old planes). Guess what? Increasingly, for America's biggest market players, it's simply not happening. 

Anyone who argues otherwise is either clueless or on crack

Here's a short list of the bailouts Americans have yawned at or supported since Ronald Reagan's "free market" revolution began in 1980:
* Wall Street / Mexico in 1982.
* Continental Illinois in 1984.
* The Discount Window intervention to save floundering banks in the late 1980s.
* Market support after the October 1987 crash.
* The Savings & Loan debacle of 1989-1992.
* Intervention to save the Bank of New England and Citibank.
* The 1994-1995 Wall Street / Mexico rescue.
* The Asian Currency rescue in the late 1990s.
* The Fed-organized LTCM bailout.

Impressive, isn't it? But know one thing. This list is incomplete. 

In virtually every case above we were told, in one way or another, by the Chicken Little's of the financial world (and Washington) that bailouts and subsidies were necessary, or else "prosperity in our time" could end. Markets would collapse, and middle class Americans would be hurt. So we propped up the stupidity with bailouts, rather than "let the market work." We were saved. 

Then 2008 came along. Oops.

The "Greenspan Put" is perhaps the greatest guaranteed money flood in human history. It all began when Alan Greenspan became chair of the Federal Reserve (1987-2006). Instead of letting market players pay for their market stupidity, Greenspan made the decision to push money into Wall Street - the Greenspan Put - every time things looked bleak, or Wall Street created a mess of things. And he did it by making money available at a cheap price (all the while claiming free market principles). 

Coupled with deregulation, this helped to accelerate the markets appetites for bigger and bigger market bets. It didn't matter to Alan Greenspan that the vast majority of trading isn't done by humans buying and selling shares, but by computers and high frequency traders dealing in ever more complex financial instruments). 

With cheap money so readily available accountability on Wall Street took a back seat to the mentality that the The House was backing the markets bets, so why not bet more. The Greenspan Put continued under Ben Bernanke (with QE I and QE II) and, now, under Janet Yellen

If markets are logical, and market players are rational, someone needs to explain why market players need the very visible hand of the government for this: 

You're not smart enough so ... The 401k was created in 1978 by Congress to encourage workers to invest in the market (by allowing employees to defer paying taxes on income they invest). The rules impose strict penalties for early withdrawal (why do we have penalties if market players are rational?). By enticing investors with tax breaks our financial markets have been given an artificial boost, which is good for portfolio and wealth managers who get paid based on fees and volume managed. Don't believe me? Check out what's happened to market activity and volume traded since the 401k and other "invisible hand" of the market tools were invented by Congress ...

The Helmet Laws for brokers ... NYSE circuit breaks are designed to maintain confidence when markets tank by putting a stop to all trading. Apart from this circuit breaker, market players are also allowed to suspend redemption's - which means not allowing clients to sell their investments - in order to stabilize markets that are in a panic. Both make a travesty of market logic and the code of rationality that we're told dominates the market. It rewards gambling and stupidity by telling brokers "we'll control the panic, even if your incompetence starts it."
The "socialize the losses" law (deduction) ... If you sell a stock at a loss you can deduct it (as a "capital loss") from your tax bill. Nice.

The "carry it forward" tax law (deduction) ... Stock losses can be carried forward for tax purposes. Specifically, a banking stock that collapse can be used to offset gains from more successful ventures, or even a portion of your everyday income. 

From propping up the market with the creation of the 401k, to creating market circuit breakers and suspended redemptions, to socializing market losses over a period of years, one thing is certain: market players don't always have to take it on the chin when they make stupid investment decisions. 

There are many more of these legislative and political gifts. The point is it's hard to argue that people like Donald Trump and the millionaire wunderkinds on Wall Street are rugged individualists going it alone in a jungle-like market environment when we look at all the government created, and taxpayer funded, market supports that are out there. 

In fact, in many ways people like Donald Trump and those working on Wall Street have become a walled off, protected, wards of the state. 

Unfortunately, there are plenty of market players like Donald Trump who are delusional and arrogant enough to believe they're actually market giants, slaying market dragons. In reality, monkeys picking stocks randomly could have made money in this state subsidized market environment, as you can read about here

In fact, in our state supported market environment Donald Trump would probably be worth more than he claims if he had just put his money into an index fund.  

Whether Donald Trump would be worth more if he simply invested in an index fund is not as important as understanding this: If Trump had invested in an index fund he would have saved many creditors and small businesses (that he stiffed) the trouble of having to deal with his bankruptcies and the legal threats he regularly uses to avoid paying his bills.

At the end of the day, people like Donald Trump (and the financial mandarins on Wall Street) are the beneficiaries of a massive legislative and financial group hug that's been provided by Washington over the past 35 years. 

When market players like Donald Trump say "Get government off my back" know one thing: It's a hollow battle cry made by people who realize how the state creates the conditions under which wealth is created, but hope you never find out. 


People like Donald Trump don't want the "government off their back" as Ronald Reagan famously cried. After benefiting from generous tax breaks and trillions in bailout cash, it's clear that Donald Trump and others depend on the state for favorable legislation and economic sustenance.

Without favorable legislation and state subsidies, it's difficult to see them as the "successful" businessmen they claim to be. Donald Trump is the poster child for wealth extraction, not wealth creation.

- Mark

UPDATE: "How a simple rule let Donald Trump turn a $916 million loss into a plus" from the NY Times.

No comments: