That hot summer romance between investors and the market has cooled off so quickly over the last two or three weeks, to the point where even those hero/heart-throb hedge fund managers are singin' the blues. We feel their pain. To add insult to injury, the sheriff's deputies in Washington are pickin' on them, threatening to close up that lovable loophole that lets them avoiding paying ordinary income tax on their compensation. Oh, how can you kick a fund manager when he's down and bleeding red? (Who's really down, anyway? Hedge fund performance is linked to market volatility, not values.)

National Journal's Clive Crook deftly devalues "starving the beast" as a political tactic, which asserts that tax cuts can put pressure on lawmakers to reduce the size of the government. "Starve the beast" exponents are not demanding packages of lower taxes and lower spending. They are saying that lower taxes will sooner or later wear spending down anyway. When you look at those cases -- instances where taxes have been cut independently, with no connection to new spending plans -- spending does not fall, say the Romers. In fact, it rises a bit. "Starve the beast" does not work.

In his post about the president's call for a corporate tax cut, Matt asks: And what if an unhinged market was the root cause of all this trouble [a potential economic downturn]? I submit that the market is in fact completely hinged. That is: rapid expansion in financial markets (i.e. bubbles) is always followed by rapid contraction (i.e. bubble bursting). Oscillations between growth and contraction is the nature of the market.

More good news from the private equity/hedge fund tax loophole debate today as Shawn Fremstad over at inclusionist.org points out two very wealthy, successful private equity managers are speaking out in favor of closing the loophole. William Stanfill, the founding partner and head of a Trailhead Ventures, and William Gross, the managing director of PIMCO, an incredibly successful bond investment firm that invests $687 billion in assets, have both gone on record, and quite eloquently at that, to say they believe they should be paying the same tax rates anyone else does on their income. Stanfill spoke up as a witness during the Senate Finance committee's latest hearing investigating this topic. Here's one of many excellent and candid passages from his testimony: I can understand why many in my industry want to preserve this special tax advantage. Clearly, it has served US and ME well. The tax subsidy each year to private equity fund, hedge fund, and venture capital fund managers is in the billions of dollars. But I think this special tax break is neither fair nor equitable. After all, a gifted teacher who is training and inspiring and challenging our children and enriching human capital gets no such special treatment. And Gross published his views in a lengthy, but well written monthly column called Investment Outlook that he writes. Gross says: What farce, then, to give credence to current debate as to whether private equity and hedge fund managers will be properly incented if Congress moves to raise their taxes up to levels paid by the majority of America's middle class. What pretense to assert, as did Kenneth Griffin, recipient last year of more than $1 billion in compensation as manager of the Citadel Investment Group, that "the (current) income distribution has to stand. If the tax became too high, as a matter of principle I would not be working this hard." Right. Right indeed Mr. Gross. Kudos to you and Mr. Stanfill! Let's hope more people (including those in Congress) have the same good sense on this issue.