The Stimulus Package

by JASON | 8:33 PM in |

Economic stimulus refers to the use of fiscal policy -- government spending or tax measures -- to support or revive an economy in recession. In February 2008, as signs of a slowdown emerged, Congress passed a $168 billion package of tax cuts and rebates. Later in the year, after Wall Street crumbled and economic activity contracted sharply, Democrats called for a far larger stimulus, and after his election as president, Barack Obama declared that what he preferred to call a "recovery" package would be his top priority.

On Jan. 28, 2009, the House of Representatives passed an $819 billion stimulus plan by a vote of 244 to 188. The measure passed without a single Republican vote in favor. Intensive negotiations in the Senate led three moderate Republicans to lend their support to an $838 billion version of the bill, getting Democrats over the 60-vote hurdle needed to prevent a filibuster. Final passage of the Senate measure on Feb. 10 by a 61 to 37 vote was followed by a whirlwind round of negotiations with the House that produced agreement the next day on a $789 billion final version of the bill.

In scale and scope, both bills were closer to the biggest stimulus effort of all, the New Deal, than those that had been developed to cope with other postwar slowdowns. In many recessions, no stimulus was adopted at all.

Over the decades since the Depression, a consensus had developed among economists that fiscal policy was an ineffective tool in combating recessions compared with monetary policy, that is, the ability of the Federal Reserve to make more money available -- thereby increasing demand -- by lowering interest rates. The stimulus passed in early 2008 was held up as an example of the shortcomings of fiscal policy. It consisted primarily of tax rebates, and surveys showed that much of the extra money was saved or used to pay debts, neither of which generates direct economic activity.

But in the most dire situations, monetary policy can cease to have traction, when banks are so shellshocked that they are unwilling or unable to make new loans even if a central bank provides the money with no interest charges at all. The United States appeared to be in such a "liquidity trap'' in the winter of 2008 and early 2009, as the credit crisis that followed Wall Street's implosion barely eased even as the Fed reduced its rates to virtually zero.

The final bill includes $507 billion in spending programs and $282 billion in tax relief, including a scaled-back version of Mr. Obama's middle-class tax cut proposal, which would give credits of up to $400 for individuals and $800 for families within certain income limits. It will also provide a one-time payment of $250 to recipients of Social Security and government disability support.

Even trimmed to $789 billion, the recovery measure, signed by President Obama on Feb. 17, will be the most expansive unleashing of the government's fiscal firepower in the face of a recession since World War II. And yet it seemed almost trifling compared with the $2.5 trillion rescue plan for the financial system - a combination of loans to banks and incentives to bring private capital into the banking system - announced on Tuesday by Treasury Secretary Timothy F. Geithner.

In early May, some states and cities began to complain that the money had yet to reach them. Some states have been slow to get their paperwork to Washington; as of mid-May, Virginia had yet to send the Transportation Department its list of road projects.

The Obama administration has committed to spending 70 percent of the money, or $550.9 billion, within the first two years. By that benchmark, an administration official said, the government is 8 percent toward its goal.

The government has reported spending more than $10 billion in stimulus money, and officials have said that the speed will increase as the program grows.

Nearly three months after President Obama approved a $787 billion economic stimulus package, intended to create or save jobs, the federal government has paid out less than 6 percent of the money, largely in the form of social service payments to states.

The stimulus bill has directly injected around $45.6 billion into the economy, mostly to help states cover the costs of Medicaid and unemployment benefits, one-time $250 checks that were mailed to Social Security recipients last week, and income tax cuts that began to take effect this spring.

Although states around the country are beginning roadwork projects, the Department of Transportation had spent only about $11 million on highway projects through the first week of May.

The intent of the stimulus program was to pump money into the economy quickly, and many members of Congress said at the time of its passage that speed was of the essence. But the huge program has been a challenge to administer for both a new administration and for states and local governments grappling with their own fiscal problems.

Some states and cities are beginning to complain that the money has yet to reach them. Others have been slow to get their paperwork to Washington; Virginia has yet to send the Transportation Department its list of road projects.

At the same time, some economists have questioned the administration’s claims that the bill has saved or created 150,000 jobs.

Obama administration officials, however, say the pace of the stimulus program is on schedule, and even if the federal checks are not yet in the mail the effects of the stimulus are beginning to reverberate: the promise of the federal money has been enough to get states to start construction work and to retain some jobs that were in jeopardy.

Couple key points....1) more illusion than reality 2) enticed states to spend more money that they don't have thereby hastening the transition to Federal power....or in other words....oligarchy!

FYI - democracy is a word used to describe the transition from Republic to Oligarchy...

compare the progress of $45.6 billion in spending to the advertised injection time line...

Notice where the spending is....Fed vs State/Private/Individual...

With waves of bad news rolling in from Wall Street and Main Street, the Society of Marketing for Professional Services Foundation held a think tank to explore "The Upside of a Down Economy." Participants at the Feb. 20 conference in Atlanta found little in the way of an upside, but a panel of nine senior industry experts came away with a meaningful to-do list for firms hoping to cope—and even prosper—in an era of diminished opportunity.

Stimulus measures enacted by Congress and the Obama administration, while helpful, will not significantly impact the general outlook for business. The amounts slated for additional federal spending in 2009 in nonresidential construction, one panelist noted, is "just too small to make a difference." Even stimulus spending for state highway work in 2009—the largest section of the stimulus—is "a drop in the bucket," said Laurin McCracken, chief marketing officer for Jacobs Global Buildings NA.

Panelists agreed the virtual collapse of the credit and bond markets for new project financing was the single biggest factor holding back new projects. The stimulus package "pales in comparison to the credit issues we’re facing," said Al Potter, chief strategy officer for Gilbane Building Co.

"The sources of funding are just not there," agreed Art Gensler, chairman of San Francisco-based Gensler. He says there are 250 major projects on hold at his firm. Gensler related a story in which his firm was days away from signing a design-services contract totaling $850 million for a major project in Dubai, only to have the plug pulled. With the current global outlook, he says, "In my lifetime you won’t see another project of that type."

Another less visible issue killing the ability to finance new project starts is the unprecedented overhang of existing commercial mortgage backed securities. Beebe noted that the amount of loans coming due on commercial properties over the next three years, including many that are already financially distressed, "is just staggering." Banks are so highly leveraged with existing real estate loan portfolios that they can’t make new loans, added McCracken. "Until that huge debt load gets corrected, they can’t lend money on new projects," he said.

Turning to the business outlook, all agreed the current economic downturn is fundamentally more severe than previous recessions. Based on recent research, James P. Cramer, publisher of Design Intelligence, Norcross, Ga., estimates that a net loss of $7 billion in design fees will occur over the next 18 months in the U.S. design market. "There will be deep cuts at design firms," in some cases up to 50% of staff, he said.

Potter pointed out that the AEC industry in the U.S. has had a relatively uninterrupted growth for the last 16 years. That run of growth has clearly been interrupted, with owners putting projects on hold and financing almost nonexistent. "This downturn does feel different, doesn’t it?" he asked.

Americans are understandably angered and frustrated over the stimulus bill. But ask yourself this: Why is it the stimulus package is getting so much more attention than the bank bailout plans, both from Congress and the mainstream media?

One possible answer is the stimulus bill is easier to comprehend and there's a relatively straightforward outlet for our anger: Congress, particularly the Democratic leadership for failing to craft a bill that more than three Republicans could support in both Houses (combined).

The issues behind the bank bailout are certainly more complex and there's more-than plenty of blame to go around - from Wall Street fat cats to Congress (both parties) and regulators (of all stripes), as well as the rating agencies and investors, plus individuals who took on way too much debt.

But given the cost of the bank bailout is orders of magnitude more than the stimulus package, and getting the bailout right far more important to our long-term economic health, let's hope Congress (and the media) will now turn its full attention to finding a legitimate solution to the financial crisis.^dji,^gspc,SPY,DIA,QQQQ,XLF,SKF

At your request, the Congressional Budget Office (CBO) has prepared a year-by-year
analysis of the economic effects of pending stimulus legislation. This analysis is based
on an average of the effects of two versions of H.R. 1—as passed by the House and as
passed by the Senate. (The economic effects of those two bills are broadly similar.)

In contrast to its positive near-term macroeconomic effects, the legislation would reduce
output slightly in the long run, CBO estimates, as would other similar proposals. The
principal channel for this effect is that the legislation would result in an increase in
government debt. To the extent that people hold their wealth as government bonds
rather than in a form that can be used to finance private investment, the increased debt
would tend to reduce the stock of productive private capital. In economic parlance, the
debt would “crowd out” private investment. (Crowding out is unlikely to occur in the
short run under current conditions, because most firms are lowering investment in
response to reduced demand, which stimulus can offset in part.) CBO’s basic
assumption is that, in the long run, each dollar of additional debt crowds out about a
third of a dollar’s worth of private domestic capital (with the remainder of the rise in
debt offset by increases in private saving and inflows of foreign capital). Because of
uncertainty about the degree of crowding out, however, CBO has incorporated both
more and less crowding out into its range of estimates of the long-run effects of the
stimulus legislation.

Folks, this is the most frightening statement I've read from the FOMC - ever.

Notice what's missing - the statement just a few days ago from Ben Bernanke in which he said that the economy would recover in early 2010, and the recession would end in late 2009.

If this was the base case the FOMC believed, there would be no reason for the actions taken today. Monetary policy has a six month (or thereabouts) leadtime, which means that should Ben believe what he spewed on 60 Minutes then his actions to date were sufficient to fix the problem, needing only the fullness of time to flow through the system and restart credit creation.

I believe Ben knows what he said on 60 minutes was a lie.

But this action also tells us a few other things about the short term:

The banks aren't in as much trouble as we've been led to believe. That is, imminent business failure is not going to happen; this action had a dramatic and instantaneous impact in flattening the yield curve, which means the banks earn less in net interest margin. In the short term this means that the risk of upside surprises in earnings for next quarter are very real, even if those earnings are "cooked". Short take-away: beware if you're short banks.
Bernanke and pals have in their possession enough non-public information on the credit markets (likely TIC data - that is, foreign investment flows) that they have been effectively forced into doing this, lest something even worse happen immediately. Has China (along with others) finally woken up and said "no mas"? The sabre-rattling makes one wonder, especially in conjunction with this action yesterday.

Now $300 billion in purchases out the curve, to be sure, isn't all that much. In fact its about half of the issue expected over the next three months - significant to be sure, but not huge. More important to the market is the GSE ("agency") debt and coupon being purchased; a program that has been underway for some time, but has now been more than doubled in size. This program would appear to be low risk but really isn't, as Fannie and Freddie (where this paper is mostly coming from) are both bleeding money like crazy, and as such one has to wonder whether these notes being bought are really "money good" or not. The answer is almost certainly "not", which in turn strongly implies that there are monstrous hidden embedded losses that will appear down the road.

The problem with the direct Treasury purchase is the potential precedent.

See, Ben will effectively "overpay" for these bonds. As we saw in England with their buy this results in an immediate "sold to you!" response. Their "bid to cover" was insane, showing that essentially everyone and their brother was attempting to unload these bonds into the Bank of England - knowing full well that once this policy starts it always ends badly, and when you are given the opportunity to sell at higher than actual market value you take it.

The danger is that in trying to suppress the long end of the curve is that it can fail. That is, the move we had today (which was massive) can be fleeting - and then reverse. This of course would force Ben to do it again, and again, and again. Ultimately he could wind up owning the entire long end of the curve or even worse, the entire $6 trillion public Treasury float.

This is the "economic collapse" scenario, because further government spending in such a situation requires the dilution of all existing money in the system by the same amount spent. This is a circle jerk - you're not actually able to spend that money and get the goods and services you want as a government, since you are creating and consuming at the same time. As such the operations cancel each other in effect and the government finds it cannot fund its internal operations with Treasury issuance any more, being forced back onto whatever tax base it has left (which won't be much at that point!)

Here is the problem, graphically illustrated:

see link below for graphic...

Note the breakdown. We are anticipating at least a $1 trillion shortfall this year, and frankly, that's unreasonably "good"; the real shortfall is likely closer to $2 trillion.

So what happens if half of that $2 trillion is no longer "money" from foreigners - it is a circle-jerk from The Fed and Treasury? You can basically remove it, that's what.

Now look at that chart - you can't remove the "net interest" (about $250 billion), because that has to be paid. "Other spending", that is, other than defense, interest, and social programs, is about $700 billion. Defense is also about $700 billion.

If we find ourselves unable to sell debt to actual investors with actual money, and are circle-jerking ourselves; to balance this budget we would need to contract spending to roughly $1.0-1.5 trillion in total.

Since the interest payments are inviolate, that leaves us $1.25 trillion for everything else. Assume we can cut half of the defense budget, and we've got $800 billion left. Cutting "other spending" (that is, all other programs) by 50% would leave us with about $500 billion net-net for social programs - forcing a reduction of about sixty percent in Social Security, Medicare and Medicaid - all at once.

In short this would wind up costing us roughly a 50% across-the-board cut in every program within government on an immediate basis. That in turn would force further reductions in GDP, which would further shrink tax revenues.

You can see where this leads, I'm sure, and it's not pretty.

For more current analysis and news see post...


For my predictions see post....

For possible solutions see post...

for stimulus humor...