Pants on Fire

Pants on Fire

by Paul Christopherson


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Pants on Fire explores the lies that govern America—why people go along with them and what it costs to do so. It reveals the plutocracy that benefits and examines what needs to be done to bring back a true democracy.

It’s no secret: The wealthy demand—and get—what they want from the system at the expense of everyone else. Seven key lies advance their agenda:

• The way to grow the economy is to stimulate the people at the top.
• Loose money is another way to grow the economy.
• The stock market is the best investment and the best economic indicator.
• Executive compensation is tied to performance.
• Regulation is bad; deregulation is good.
• Bailing out Wall Street was necessary to preserve the system.
• The health care question is about who pays.

These beliefs are driving the biggest financial crisis in modern history, fueling unjust wars and contributing to a society ready to explode with anger. Provocative and funny, Pants on Fire goes beyond the lies to provide solutions so that everyone can share the wealth.

Product Details

ISBN-13: 9781450237727
Publisher: iUniverse, Incorporated
Publication date: 07/20/2010
Pages: 116
Product dimensions: 5.50(w) x 8.50(h) x 0.24(d)

About the Author

Paul Christopherson, a native of Minneapolis, was formerly a Wall Street analyst at Kidder, Peabody & Co., and Bear Stearns. In 1992, he co-founded New Vernon Associates, an institutional equity research firm, leaving as chairman in 2008. He is also an ordained Episcopal priest.

Read an Excerpt


Cutting through the Biggest Lies of Twenty-first-Century American Plutocracy

iUniverse, Inc.

Copyright © 2010 Paul Christopherson
All right reserved.

ISBN: 978-1-4502-3772-7

Chapter One

Lie 1.

The Way to Grow the Economy Is to Stimulate the People at the Top.

Trickle-down economics is a lie that has dominated economic policy for more than thirty years now. It says that tax cuts targeted at the people on top will stimulate business investment and entrepreneurship and thereby create jobs and economic growth. All the empirical evidence to the contrary has not been sufficient to discourage the telling of this one. It is the all-purpose big-money lie-if you give me special treatment, others will benefit, so it is in their interests and on their behalf that I want my favored status. In fact, unless I get my specially carved-out graft, I might just lie down on the job, and then God knows what will happen to the American way itself.

The whole argument is transparently silly, or we should urgently be giving breaks to police, firefighters, doctors, and nurses. Otherwise, they all might become dispirited, discouraged from risk-taking, and lie down on the job. It is a marvel today that everybody who does not get capital gains treatment on their earned income does not just go out on strike, shouting, "Enough! Enough of all your bull! We want to be incentivized too." The country now is like one of its big companies-a never-ending river of incentive schemes, performance awards, and retention bonuses for the people at the top, without which they would presumably feel disinclined to do their jobs, combined with a chronically underfunded pension plan for everyone else.

I particularly enjoy the references to entrepreneurship in this connection, since this is something I know a little about firsthand. People become entrepreneurs for a variety of reasons. They may have a need to do it their way, and that need cannot be met inside someone else's structure. Or they may just be bad as employees. Or they may have no alternative. (In my case, all three.) But one thing that does not enter into the deliberations, ever, is a consideration of tax implications. That is just laughable. Tax planning and entrepreneurship are not on the same page; tax considerations do not weigh on the decision to be an entrepreneur. Maybe they should enter in, but they do not.

Still, smart people are just as vocal as ever on trickle-down, as fatuous as it is, so it needs to be addressed. Take the cuts early in the decade on both dividends and capital gains. The tax cut on dividends was supposed to incentivize higher payouts, while the cap gains cut was to stimulate business investment. This was an obvious contradiction. Even if one grants the efficacy of tax incentives (for which there is little historical evidence), they were clearly not operable here, since the two impulses being stimulated are mutually exclusive and would logically cancel each other out. If business investment grows, then liquidation, which is what dividends are, must slow down, and vice versa; incentivizing both capital gains and dividends together is not logically possible. And in the event, following the tax cuts, business investment collapsed, and dividends have been partly replaced with share repurchases. Transparently, the cuts were only about reducing taxes on wealth.

A point about share repurchases. They are not an "investment" or an expression of management's confidence in the outlook, or any such thing. They are the opposite-a slow-motion liquidation of the firm, exactly like dividends. Cash goes down on the left-hand side of the balance sheet, equity goes down on the right, and the firm gets smaller. The stock price may or may not go up in response, but there has been no investment, only disinvestment. Capital appreciation is not the same thing as capital formation. All dividends and share repurchases mean is that the management has run out of capital formation ideas, or at least does not have the patience for them.

Similarly, capital gains cuts do not stimulate investment; they stimulate cashing out. They facilitate doing private equity deals, which have to start with a seller. As with dividends and share repurchases, private equity deals are enabled by reinvesting cash flow below depreciation, which means an accelerated liquidation of the firm, which means job loss and economic drag. After years of watching exactly this scenario unfold, it is incredible that the liars are still beating their trickle-down drum, even with business investment and job creation having collapsed to record lows.

These tax cuts are just a sop to the rich, in the same way as cutting inheritance taxes. The same is true for the 15 percent capital gains tax rate on hedge fund and private equity fee income. In the first half of 2007 alone, private equity and hedge funds spent $5.5 million lobbying for a 15 percent tax rate. As an entrepreneur myself, I know a little about risk-taking, putting up my own capital, and creating jobs, having done it for sixteen years. For just as long, I had to pay taxes at ordinary income rates on my K-1 earnings. The reason was that I never got big enough to buy a U.S. senator. Fee income masquerading as capital gain is polluting what little remains of America's sense of fair play.

The plutocrats also say that U.S. corporate tax rates are too high; at 35 percent, they say, these rates are higher than in other countries, which is driving investment offshore. That is plainly false. Because of all sorts of loopholes-calling profit "international" when it is not (drug companies); "research" tax credit on spending that is marketing expense mislabeled; current taxes turned into deferred and never paid-corporate taxes actually paid to the federal government are unbelievably low. For example, at Dow Chemical, total tax provisions for the three years 2006 through 2008 were $3.066 billion. During that period, Federal income taxes actually paid were $447 million. In other words, the 35 percent statutory rate may or may not be high, but the truth of the matter is that the United States is a corporate tax haven for big multinationals.

Between 2004 and 2008, Pfizer says it got 88 percent of its income from overseas. This, despite charging the highest nonnegotiated prices for its drugs (e.g., Lipitor) in the United States. How can this be? Pharmaceutical companies can transfer new drugs to a holding company in the Caymans, shifting huge amounts of income out of the United States and into offshore tax havens (NYT, February 4, 2010). Drugmakers, and multinationals generally, have one of those bizarre groups, this one called Promote America's Competitive Edge, to camp out in Washington to defend this stuff.

In November 2009, something called the "Worker, Homeownership, and Business Assistance Act" became law. It extended unemployment benefits and renewed the first-time homebuyer tax credit. What it also did-what it really did-was give a $33 billion tax break to big business. It let big companies offset 2008 and 2009 losses against profit from as far back as 2004. This provision, which was hidden from view within the bill, will do nothing to grow the economy or create jobs. It is just another giveaway to big money, which is why it could not stand on its own. Before our government can do something worthwhile, there first has to be a big payoff to people who need it least.

Chapter Two

Lie 2.

Loose Money Is Another Way to Grow the Economy.

The pusher came to the neighborhood over twenty years ago. He got the community hooked by offering the drug very cheaply. He regulated the drug lords, and he had the full cooperation and support of the authorities, who had been bought by the drug lords. All was well for a time. Then the drug lords got greedy. They dispensed too much to their friends. They cut some bad stuff into the pure stuff, bad enough to kill. Also, the pusher's demand expanded faster than the supply being brought into the neighborhood. There was talk in the community of maybe having to take the cure. Some people tried kicking the habit.

After a while, everyone was really starting to feel the painful effects of withdrawal. So the drug lords and the authorities met to decide what to do. They turned to the pusher. The pusher went into his lab and made a lot of junk synthetically. In just one month he put out stuff with a street value of one trillion dollars. He rushed the new bags out onto the street. And, within several months, the addict seemed much improved. Everyone commented on it, how well the addict was responding, how his situation seemed to have bottomed. The media played their part by offering a lot of distractions. And the drug lords and the authorities kept control of the neighborhood.

* * *

The chairman of the Federal Reserve regularly appears before Congress, where he promises to use monetary policy to provide economic growth without inflation. Congress, for its part, speechifies in favor of Fed ease (loose money) and generally praises the chairman for furnishing it. These appearances propagate at least two popular myths. One is that the Fed answers to the people, that the general population is the master it serves. The other is that loose money promotes economic growth.

The truth is, monetary looseness has by now, after over two decades of it, all but killed the American economy. It has been in force and remains so today, because it is what Wall Street wants. The chief drug lord who oversees all this mayhem and pronounces it good is the Federal Reserve, whose chairmen have the public so fooled they keep getting reappointed to more terms by presidents of both parties. In the recent past, trillions of newly printed dollars have gone to Wall Street and the banks, which are the masters the Fed serves, and almost none into the general economy (see Lie 6, "Bailing out Wall Street Was Necessary to Preserve the System").

It was not always this way. Earlier Fed chairmen tried, pretty successfully, to moderate economic swings and prevent bubbles and busts, yielding a "golden age" after World War II of over forty years of well-regulated markets in a sound economy.

One source of much wisdom here is the original Star Trek series from the late 1960s. In one episode, Mr. Scott has climbed into one of the ship's crawl spaces to effect some sort of repair. He is talking by communicator to Mr. Spock, who is on the bridge, thinking. Mr. Spock tells Mr. Scott to reverse polarity, to which Scotty says, "Are ye daft, man, ye'll blow us all up!" Spock says, "Proceed, Mr. Scott, I will explain." Naturally, reversing the polarity saves the day.

Mr. Spock would look at our situation today and recognize that perpetually loose Fed policy does not work, so going on with it, especially harder and faster, is not logical. Lowering the federal funds rate (a short-term rate and the only one the Fed adjusts) lowers the cost of borrowing for banks, prime brokers, and hedge funds, who borrow to build assets and take leveraged positions, but not for the rest of us. Persistent, unrestrained easy money raises the profits for the money changers, who use the cheap funds to inflate asset bubbles and financial markets, but it does not lower the rates for others. It does not affect rates on car loans or credit cards or mortgages, so it has no effect on the real economy.

For a while, the economy got some stimulation indirectly from this asset-inflating effect, but this was only inadvertent. The Fed serves its masters, the banks, and they will only reduce long-term rates, the ones at which the real economy borrows, if they decide to reduce their own net interest margin-i.e., their profits. They do not often decide to reduce their own profits, so Fed policy and the economy are perpetually delinked, unrelated.

In September 2007, Jon Stewart interviewed Alan Greenspan and was able, as no one else has been, to bring out the corrupt nature of the Federal Reserve. Mr. Greenspan seemed to have completely missed it, which was not a first for him.

Jon: And so we're really just deciding, because when you lower interest rate and drive money to the stocks, that lowers the return people get on the savings. Alan: Ah, yes, yes indeed. Jon: So they've made a choice. We would like to favor those who invest in the stock market and not those that invest in the bank, that helps us. Alan: No, that's the way it comes out, but that's not the way it really is. Jon: But explain that to me because it seems that we favor investment, but we don't favor work. The vast majority of people work and they pay payroll taxes, and they use banks. And then there's this whole other world of hedge funds and short betting, and it seems like craps, and they keep saying don't worry about it, free market, that's why we live in those much bigger houses. But it really isn't, it's the Fed or some other thing. No? Alan: You know, I think you'd better reread my book.

This exchange illustrates the way the plutocracy answers truth when it encounters it-with a combination of double-talk, misdirection, and conceit, never a hint of misgiving. The chairman went on with a spiel about a sound money system, reducing uncertainty, human nature, how people interact, and economic activity. It appeared to make no sense either to Jon Stewart or to his audience.

A persistently low Fed funds rate serves an economy based on asset inflation, but the main benefits accrue to finance, to those whose business is borrowing short and lending long. The low borrowing cost to prime brokers and hedge funds is an obvious boon. The cost of servicing bridge loans and leveraged loan commitments on private equity deals is also low, allowing the fund managers to maintain positions and go on collecting fees, and to make distributions to themselves with borrowed money.

All this is to the good, but mainly for the money changers, for the financing activity itself. Contrary to the rhetoric, economic growth is not related to, or dependent on, this activity. All that hedge funds or private equity funds or proprietary trading desks do is churn real assets, which never grow, but just get passed around. If anything, that turnover produces and feeds on layoffs, which are called cost-cutting synergies. This is the activity the Federal Reserve serves, the one it cares most about-the pointless commotion of the financial whirl itself-which it is afraid of slowing.

So, this is today's financial system, the one the Fed pats itself on the back for preserving. How did it come to be this way? A low Fed funds rate created the whole monster.

Pre-Greenspan, banks used to attract deposits. They had to, in order to fund their business. Banks then took the depositors' money and used it to make loans. The interest rate on deposits had to be enough to incentivize savings, which it generally was. Savers used to buy CDs, for example, that yielded 6 percent or more. There was a positive savings rate-people spending less than their income-as a result of these rates.

Saving is really important to a healthy economy. Sustainable full employment comes from healthy business investment, which comes from savings. In fact, business investment equals savings-they are two sides of the same coin; they move together. So, if we cancel terms, we get: full employment comes from healthy savings, and, conversely, zero or negative savings produces zero or negative business investment.

For years now, Fed policy has been aimed at encouraging consumption, which has squelched saving. By 2008, the savings rate actually turned negative, and so did business investment. That is, capital outlays were less than liquidations through dividends, stock repurchases, and mergers. This produced a steadily declining manufacturing base and jobs, which is the problem with the economy. The weak job market has been blamed on technology, Mexican immigrants, and imports from China. The real villain is the Greenspan-Bernanke Fed. Most remarkably, our Fed then accuses other countries of saving too much, and not getting with the borrow-and-spend program. The real problem is that the United States is in liquidation, a mathematical necessity resulting from two decades of the Fed squelching saving.

A major multinational company recently bragged about having cut its capital spending in half. The CEO was practically shouting as he boasted about this. This is prevalent today-negative capital formation and therefore negative job growth. In the long run, job cuts come from capital formation cuts. And the negative capital formation is the mathematical, necessary outcome of a Fed policy that stifles savings. In other words, persistent Fed ease destroys jobs. It is not an economic stimulant; it is a very potent suppressant.


Excerpted from PANTS on FIRE by PAUL CHRISTOPHERSON Copyright © 2010 by Paul Christopherson. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents


Lie 1 The Way to Grow the Economy Is to Stimulate the People at the Top....................13
Lie 2 Loose Money Is Another Way to Grow the Economy....................19
Lie 3 The Stock Market Is the Best Investment, and an Indicator of the Economy....................33
Lie 4 Executive Compensation Is Tied to Performance and Provides Incentive to Perform....................43
Lie 5 Regulation Is Bad; Deregulation Is Good....................57
Lie 6 Bailing out Wall Street Was Necessary to Preserve the System....................73
Lie 7 The Health Care Question Is About Who Pays....................87

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