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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (31769)	11/21/2003 12:01:17 AM
From: stockman_scott	Respond to of 89467

Mutual fund scandal isn't over ________________________________ By PAUL KRUGMAN SYNDICATED COLUMNIST Wednesday, November 19, 2003 seattlepi.nwsource.com You're selling your house and your real estate agent claims that he's representing your interests. But he sells the property at less than fair value to a friend, who resells it at a substantial profit, on which the agent receives a kickback. You complain to the county attorney. But he gets big campaign contributions from the agent, so he pays no attention. That, in essence, is the story of the growing mutual fund scandal. On any given day, the losses to each individual investor were small -- and that is why the scandal took so long to become visible. But if you steal a little bit of money every day from 95 million investors, the sums add up. Arthur Levitt, the former Securities and Exchange Commission chairman, calls the mutual fund story "the worst scandal we've seen in 50 years" -- and no, he's not excluding Enron and WorldCom. Meanwhile, federal regulators, having allowed the scandal to fester, are doing their best to let the villains get off lightly. Unlike the cheating real estate agent, mutual funds can't set prices arbitrarily. Once a day, just after U.S. markets close, they must set the prices of their shares based on the market prices of the stocks they own. But this, it turns out, still leaves plenty of room for cheating. One method is the illegal practice of late trading: Managers let favored clients buy shares after hours. The trick is that on some days, late-breaking news clearly points to higher share prices tomorrow. Someone who is allowed to buy on that news, at prices set earlier in the day, is pretty much assured of a profit. This profit comes at the expense of ordinary investors, who have in effect had part of their assets sold off at bargain prices. Another practice takes advantage of "stale prices" on foreign stocks. Suppose that a mutual fund owns Japanese stocks. When it values its own shares at 4 p.m., it uses the closing prices from Tokyo, 14 hours earlier. Yet a lot may have happened since then. If the news is favorable for Japanese stocks, a mutual fund that holds a lot of those stocks will be underpriced, offering a quick profit opportunity for someone who buys shares in the fund today and unloads those shares tomorrow. This isn't illegal, but a mutual fund that cared about protecting its investors would have rules against such rapid-fire deals. Indeed, many funds do have such rules -- but they have been enforced only for the little people. In some cases fund managers traded for their own personal gain. In other cases hedge funds, which represent small numbers of wealthy investors, were allowed to enrich themselves. In return, it seems, they found ways to reward the managers. You make us rich, we'll make you rich, and the middle-class investors who trusted us with their money will never know what happened. And there's probably more. During last year's corporate scandals, each major company that came under the spotlight turned out to have engaged in some original scams. By analogy, it's a good guess that the mutual fund industry was cheating its clients in other ways that haven't yet come to light. Stay tuned. Oh, and about that corrupt county attorney: Last year it seemed, for a while, that corporate scandals -- and the obvious efforts by the administration and some members of Congress to head off any close scrutiny of executive evildoers -- would become a major political issue. But the threat was deftly parried: A few perp walks created the appearance of reform, a new SEC chairman replaced the lamentable Harvey Pitt, and then we were in effect told to stop worrying about corporate malfeasance and focus on the imminent threat from Saddam's WMD. Now history is repeating itself. The SEC ignored warnings about mutual fund abuses and had to be forced into action by Eliot Spitzer, the New York attorney general. Having finally brought a fraud suit against Putnam Investments, the SEC was in a position to set a standard for future prosecutions; sure enough, it quickly settled on terms that amount to a gentle slap on the wrist. William Galvin, secretary of the commonwealth of Massachusetts -- who is investigating Putnam, which is based in Boston -- summed it up: "They're not interested in exposing wrongdoing; they're interested in giving comfort to the industry." I wonder what they'll use to distract us this time? ____________________________________________________ Paul Krugman is a columnist for The New York Times. Copyright 2003 New York Times News Service. E-mail: krugman@nytimes.com

To: Jim Willie CB who wrote (31769)	11/21/2003 4:53:58 AM
From: Sully-	Read Replies (3) \| Respond to of 89467

Is the deficit too small? By Richard W. Rahn THE WASHINGTON TIMES Published November 21, 2003 Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute. The conventional wisdom is our federal government deficit is too large. However, the empirical evidence suggests the deficit might be too small. When people worry about the size of the deficit, they are not worried about the deficit in a particular year; what they are worried about is the accumulation of debt that needs to be serviced. Some years, most American families run a deficit (i.e., expenditures exceed income). For instance, most people obtain a mortgage when they buy a home. And the year in which they buy the home, their new debt obligation (the deficit) greatly exceeds their income. This is not a problem so long as the cost of servicing the additional debt acquired each year can be offset by rising incomes. The problem comes when the debt service rises faster than income for an extended time. The same thing is true of government. If government revenue rises faster or the same as the increase in the cost of servicing government debt, there is normally not a problem. Problems occur when debt costs rise much faster than income, which has happened in some states like California. Many people believe the government should not incur any debt and should always balance the budget. However, governments' financing expenditures with reasonable levels of debt can be more sensible than balancing the budget each year or even ever. The reasons for this are straightforward. Improperly constructed taxes, like the income tax, tend to discourage productive work, saving and investment more than issuing bonds does, so citizens are better off when the government engages in prudent borrowing. Also, government never needs to pay off or even reduce its total debt because, unlike individuals, the government lives forever. Recently, a number of presidential candidates and other commentators have charged the current and projected deficits are too big. They claim the deficits will lead to higher inflation, higher interest rates, lower growth and more unemployment. To evaluate these charges, I looked at the numbers for the last 40 years, and you may be surprised at the results. The total federal government debt held by the public (which is the relevant number to be concerned about) dropped from 42 percent of gross domestic product (GDP) in 1962 to a low of 25 percent in 1975, then rose to a high of 50 percent in 1993, and then dropped back to 33 percent in 2001. Currently, debt as a percent of GDP stands at about 35 percent. Since 1963, we have had 14 years when debt has been below 33 percent of GDP and 26 years when it has been higher. Conventional wisdom is that economic performance should have been better in the years when we had less relative debt, but the facts are the opposite. Real economic growth averaged 3.47 percent in the high debt years, which was almost 1 percent higher than the 2.59 percent average growth of the low debt years. Unemployment was also lower in the high debt years averaging 5.65 percent as opposed to 6.43 percent in the low debt years. Inflation averaged a whopping 7.6 percent in the low debt years, almost 3 times as high as the average 2.95 percent of the high debt years. The Congressional Budget Office (CBO) estimates federal debt could grow to as much as 40 percent of GDP by 2005 and then begin declining again. From 1986 to 1999, it was above 40 percent, and we did quite well during most of those years. Recent data showing both much higher economic growth and higher inflation (meaning much higher nominal GDP) than the CBO forecasted means the debt GDP ratio in fact is likely to remain almost constant. What we do need to be concerned about is not the deficit, but the very rapid growth in real, nondefense, discretionary federal government spending, which is up an average of 7.2 percent yearly for the last three years. A continuation of this trend could indeed cause real economic damage. Finally, the analysis of the historical data clearly indicates that if we had properly structured tax cuts (like the first Reagan and the most recent Bush tax cuts) in 1969, 1973, 1979, 1989 and 2000 we may have avoided the recessions, with all their human misery and unemployment, that occurred the year following each of the above dates. Unfortunately, policymakers in all of those years were more preoccupied with reducing the deficits rather than keeping the economy growing. The lesson is clear, economic prosperity can continue, even if the federal government never balances its budget, provided it keeps government spending from growing as a percentage of GDP, and has an ongoing program of removing tax and regulatory impediments to growth. dynamic.washtimes.com.