US 'Economic Stimulus' Budget Review

[Don Corleone]

Okay, Lemur, there comes a point where friendship and decorum dictate that an issue be dropped. I'd say we've passed that point. I plead no lo contesto on the charge of National Review being the print version of Limbaugh's radio show, as I already know you've got your fingers in your ears to any rebuttals.

I thought your point about "homeowners' ability to live with the mortgages they currently have" was very astute. I have wondered about that myself; why do you read and hear about banks (a) jacking up interest to unpayable levels, (b) refusing to negotiate with the homeowner, and then (c) foreclosing? It makes no economic sense on any level. Obviously, people who bought more property than they could handle will have to lose their homes, and that sucks, but what about people who get the (a) (b) (c) treatment? Would a mere $30 billion in the FDIC have stopped that bleeding, as Graham proposed?

Well, this is what happens when you incentivize troubled assets, no? When you make defaulted mortages worth their full value, what reason does the bank have to see to it that the mortage doesn't go into default? So many things about TARP were so poorly thought out (or were shrewdly thought out, but not with the stated goal in mind), and this would be prinicipal among them.

It's not that banks aren't working with homeowners to come to agreeable terms. The healthy ones are actually leading on this. Many reigional and local banks are pro-actively contacting homeowners whose 5-25, 7-23 ARMS are about to convert and working with them to set up terms they can actually meet.

It's the larger banks, the ones that are beating a path to Treasury's front doors, that are putting the thumbscrews to the homeowners. Why shouldn't they? Either the homeowner pays, with everything they've got, and the bank makes unprecedented profits on what is a relatively secure loan, or the homeowner is forced to default, and the Treasury reimburses the bank for the failed loan, and the bank winds up with the collateral, aka the house, to boot. Heads the bank wins, tails, guess what, they win again..

[Crazed Rabbit]

The Congressional Budget Office says Obama's stimulus plan will lead to a lower GDP in the long run.

CR

[Lemur]

Specifically, in the realm of taxes, we need to cut the corporate tax (higher than most of 'socialist' Europe), the capital gains tax, and broadly cut down the huge amount of regulation that makes it much more difficult for small businesses.

Hmm, so in your view, tax cuts really can solve the majority of our current economic problems. Why didn't we see something along these lines proposed while George W. Bush was still in office? Surely an agenda of deep deregulation would have stood a better chance under a Republican President ...

Either the homeowner pays, with everything they've got, and the bank makes unprecedented profits on what is a relatively secure loan, or the homeowner is forced to default, and the Treasury reimburses the bank for the failed loan, and the bank winds up with the collateral, aka the house, to boot. Heads the bank wins, tails, guess what, they win again..

That just makes my head hurt. Ow. Ow.

I'll be quite blunt: I don't have enough of an economics background to know what to root for here. It's clear to me that we are in deep doo-doo. It also stands to reason that if we wait around long enough and do nothing, it will probably fix itself. But nobody knows how long that will take, and nobody really wants a decade of recession. I am leery of the Dems and their porkish tendencies, but then again, over the last eight years I've gotten used to everybody and his dog loading up every bill with pork. The only difference now is that the people doing it have a (D) on their names, and the folks with an (R) have experienced a prison conversion and re-discovered Adam Smith.

I've heard quite a few people drawing comparisons with the Great Depression, often claiming that FDR lengthened the depression, and that only the Nazi menace truly ended the hurting. Does anyone here thing the Great Depression is a useful yardstick? Any lessons we should take from it?

-edit-

The Congressional Budget Office says Obama's stimulus plan will lead to a lower GDP in the long run.

An interesting bit from that:

CBO said there is no crowding out in the short term, so the plan would succeed in boosting growth in 2009 and 2010.

The agency projected the Senate bill would produce between 1.4 percent and 4.1 percent higher growth in 2009 than if there was no action. For 2010, the plan would boost growth by 1.2 percent to 3.6 percent.

CBO did project the bill would create jobs, though by 2011 the effects would be minuscule.

So in the short-term the stimulus would work?

[drone]

An interesting bit from that:

CBO said there is no crowding out in the short term, so the plan would succeed in boosting growth in 2009 and 2010.

The agency projected the Senate bill would produce between 1.4 percent and 4.1 percent higher growth in 2009 than if there was no action. For 2010, the plan would boost growth by 1.2 percent to 3.6 percent.

CBO did project the bill would create jobs, though by 2011 the effects would be minuscule.

So in the short-term the stimulus would work?

The point of boosting growth in 2009/2010 at the cost of long term decline: Nov 2, 2010. Or am I just being cynical?

[Lemur]

Well, not to be too starry-eyed, but I thought the point was to get us out of the liquidity trap.

[Don Corleone]

I personally think the comparisons to the Great Depression are inappropriate. We may find ourselves in our own 'not-so-small' Depression, but the root causes, and therefore the appropriate solutions, only marginally mirror each other.

Some important differences:

-In 1932, agriculture represented a substantially larger portion of our GDP, and we experienced several back-to-back crop failures on cash crops.

-Global currency was experiencing an artificial downward push, because Germany was being forced to make reparations payments and was inflating their money supply.

-We were actually still on the gold standard, so our currencies were technically more closely tied with other currencies that were also on the gold standard.

-With as irresponsible as we currently are, our margin rates are nowhere near what they were in the late 20's. We talk about 5% being riverboat gambling... Joe Kennedy made his bones on Wallstreet by selling 1% margin plays.

-The level of home ownership wasn't what it currently is.

Not to say we don't have our own new issues these days:

-Even the most astute minds on Wall Street are having trouble understanding some of the more advanced mortgage backed securities and credit default swaps. Any layman you meet who tells you they understand it is full of . Paulson himself admitted he couldn't get his mind around the problem, nor could Greenspan. When you hear them say "We don't know how to value the losses", they're not saying "we don't know how much the value has shrunk". They're being literal. They have no earthly idea how to value some of these tools.

-Municipalities are in a precarious position hitherto unthinkable. Arizona, California and about 8 other states are about to default on outstanding bond payments. Just 1 year ago, it was unthinkable that a state bond wouldn't even rate at investment grade. That is going to to torpedo the bond market and artificially hold interest rates up, no matter what the Treasury and the Fed try to do to remedy the situation.

-The average American consumer has a net negative worth. Now, we can argue whether that's because of concentration of wealth by greedy fatcats or foolish consumers, but the net result is the same. The consumer demand market is historically inelastic right now.


In short, we can't keep saying "This is what we did in 1932, and it worked", or for that matter "It didn't work in 1932, so we shouldn't do it know". The two events are similar mainly in their magnitude and reach, not in nature.

Personally, the midst of a deep-reaching recssion is the wrong time to switch economic course. Until now, our economy has increasingly been driven by consumer spending, right or wrong. Making the decision to abandon that plan and rely on government spending to prop up our GDP is going to introduce its own host of problems. I would argue we should focus on bandaging the system we currently have (prop up consumer spending) and when things calm down, evaluate whether we want to rebalance the GDP percentages.

That means addressing the home mortgage crisis from the homeowner side. Neither the Democrats nor the Republicans want to do that. Democrats want to take advantage of the situation to grow government spending as a portion of GDP. They have romantic visions of a new generation of Roosevelt devotees to quasi-socialism (all those comparisons in the news aren't by accident).

But by the same token, now is not the time for trickle-down economics either. No matter how much the Republicans want it to be otherwise, corporate America is not going to generate economic activity with any money they get. Your average CEO is running scared . Any money he can get, he's going to sock away, improve his balance sheet and turn to his investor analysts and point out that he's beating the competition in his sector. That's an incredibly short-sighted view, but that's what they're paid to do. If you're the CEO of Caterpillar, you're not supposed to care about the macro-economy, you're supposed to care about large equipment sales and your own finances.

No, I think the only right answer is to remove both filters to the consumer, government and corporate and find ways to inject capital directly into consumer spending, as its the only way to stimulate economic activity again. However, it has to be large scale. As CR rightly points out, rebates or small cuts aren't going to cut it. You have to convince the average consumer that 1) they're not going to be homeless if they consume and 2) the income truly is disposable, they don't need to sock it away. Otherwise, the consumer is no better than the aforementioned corporate executive.... you'll just wind up with a much larger number of much smaller money pools.

[Don Corleone]

If you want to avoid the Liquidity Trap, all you have to do is declare a moratorium on all Capital Gains taxes.

[Lemur]

Thanks for the analysis, Don. Very helpful.

I still feel as though a crazy amount of political posturing is going on, much of it in bad faith. Take Senator McCain, who campaigned promising that he would bring broadband to rural areas. It was part of his stump speech.

Well, now that he's Senator McCain and not a Presidential Candidate McCain, rural broadband is the definition of wasteful spending.

Sen. John McCain (R-AZ) is employing his classically reductive reasoning to undercut broadband spending. “The American people are figuring it out. This is not a stimulus bill, it is a spending bill," he said Thursday. Of course, the terms "stimulus" and "spending" are essentially synonymous, but the semantic distinction he's making is two-fold: between government and consumer spending, and between short-term and long-term spending. Republicans want short-term capital infused into the economy by way of consumer spending.

Anyway ...