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Tag Archive: Fiscal Stimulus

  1. 9 Predictions for 2009

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    Set forth below are my pre­dic­tions for 2009. Let’s hope that at least some of them come true.

    1. Early in 2009, the banks start lend­ing again

      In Jan­u­ary, the banks will real­ize that they can­not avoid lend­ing for­ever. The Fed­eral Reserve will finan­cially pun­ish any bank that refuses to lend by manip­u­lat­ing inter­est rates so that banks that hoard cash lose money. From the indus­try ashes a bank­ing prophet will emerge who will preach the gospel of pos­i­tive net inter­est spread through respon­si­ble lending.

    2. The Obama Admin­is­tra­tion passes the largest fis­cal stim­u­lus pro­gram in the his­tory of the United States

      The fis­cal stim­u­lus plan will be big­ger, bet­ter and more socially respon­si­ble than any­thing the Fed­eral Gov­ern­ment has ever done before. When the pro­gram starts to kick in James Carville will declare Obama has earned his place in his­tory as “one of the greats” and will sug­gest he should be imme­di­ately added to Mt. Rush­more. Oth­ers will declare that the fis­cal stim­u­lus plan proves that Obama is a Marxist.

    3. GDP falls in Q1, sta­bi­lizes in Q2, begins to rise in Q3 and is in full recov­ery by Q4

      Despite most econ­o­mists pre­dict­ing Depres­sion 2.0 and the “end of the world as we know it”, the econ­omy will begin to recover in 2009. How­ever, the day after inau­gu­ra­tion, right wing talk show hosts will declare the begin­ning of the “Obama Depres­sion”. When the econ­omy starts to do bet­ter, the same right wing talk show hosts will pro­claim that Bush was right when he said the econ­omy was “basi­cally sound” and will give Paul­son credit for engi­neer­ing the recovery.

    4. Defla­tion fears give way to infla­tion fears

      It turns out that the Fed­eral Reserve wasn’t able to un-print money any­more than Eve could un-eat the apple. Econ­o­mists will be relieved that they can pre­dict Hyper­in­fla­tion 1.0 and the “end of the world as we know it”.

    5. Europe and Asia do worse than the U.S.

      If you think it is bad here, just go over there. Jean-Claude Trichet will be exiled to the Island of Elba for start­ing his 2007 pre­emp­tive eco­nomic war on infla­tion. Tichet won the war but lost the econ­omy. Lib­eral EU politi­cians will real­ize that exile is very “19th Cen­tury” and Elba is really kind of nice (good wind­surf­ing, scuba and cute female Elbans). Trichet will escape but will be recap­tured and made to work in the ECB audit depart­ment (after all reg­u­la­tory audit work is worse than exile).

    6. Hedge funds, funds of funds and other money man­age­ment prod­ucts are reg­u­lated and taxed.

      Dis­traught for­mer fund man­agers still won’t be able to accept that Mad­off killed the golden goose. Soon, no one will be able to find an investor that actu­ally admits to ever hav­ing put money in hedge funds; it will be as if the indus­try never existed. A rumor will spread that before the end of the Cold War hedge funds were invented by the Soviet Union to destroy Amer­ica. Ann Coul­ter will say that Democ­rats invented the hedge fund indus­try to destroy the Bush legacy.

    7. Obama makes enforce­ment of secu­ri­ties, bank­ing and con­sumer pro­tec­tion laws a priority.

      Wall Street bankers will burn Sarah Palin in effigy. After all, if she hadn’t blown the Katie Couric inter­view things could have been dif­fer­ent. Aspir­ing white col­lar crim­i­nals will have to deal with pros­e­cu­tors and reg­u­la­tors who actu­ally try to do their job. 20 and 30 year old for­mer invest­ment bankers will be found in bars all around Tribeca try­ing to fig­ure out what to do next. Grad­u­ate school will be out because they will all already have MBA’s and their par­ents will refuse to pay for more school. Some will get “real jobs” and hate it.

    8. Stocks go up then down then up then down then up then down. But, major stock indexes end the year up.

      Investors real­ize that mar­ket ana­lysts don’t have a clue whether indi­vid­ual stocks will go up or down. But, liq­uid­ity cre­ated by the Fed­eral Reserve, a slowly recov­er­ing econ­omy and mas­sive fis­cal stim­u­lus all con­spire to push the Dow, S&P and NASDAQ up by year end.

    9. Regional ten­sions rise and coun­tries face inter­nal strife because of the poor global econ­omy. Most of the U.S. is an island of sta­bil­ity.

      Sarah Palin does the ulti­mate mav­er­ick thing and declares that Alaska has seceded from the U.S. and will be its own inde­pen­dent nation. Palin becomes Vice Pres­i­dent (even if it is only Vice Pres­i­dent of Alaska) and Ted Stevens becomes Pres­i­dent. Stevens hopes that by being Pres­i­dent of Alaska he will be able to avoid going to jail. After watch­ing Palin and Stevens, Illi­nois Gov. Rod Blago­je­vich imme­di­ately declares Illi­nois’ inde­pen­dence. Around the same time, dis­senters in China chal­lenge the sta­tus quo (inde­pen­dence isn’t openly dis­cussed because in China exe­cu­tion is the penalty for sedi­tion). Eco­nom­i­cally moti­vated riots break out in Viet­nam and other parts of South­east Asia. See­ing weak­ness in the EU, Rus­sia con­tin­ues to expand its influ­ence. The Mid­dle East remains a prob­lem. But, in a moment of his­toric unity and at a con­fer­ence spon­sored by CNN and Ander­son Cooper, Arabs and Israelis agree that noth­ing has changed and the “world will con­tinue as we know it”.

  2. A Letter To President Elect Obama – How to restore confidence

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    Dear Pres­i­dent Elect Obama:

    As you get closer to inau­gu­ra­tion I would like to make a few sug­ges­tions for your admin­is­tra­tion and its future eco­nomic policy.

    Every­one knows that the econ­omy is in trou­ble and con­fi­dence in the future is low. Con­fi­dence in the United States eco­nomic sys­tem and gov­ern­ment is our nation’s most impor­tant asset. Unfor­tu­nately, this asset has been squan­dered through ad hoc and poorly com­mu­ni­cated pub­lic pol­icy ini­tia­tives. You need to focus on restor­ing con­fi­dence in our eco­nomic sys­tem and gov­ern­ment. How you admin­is­ter eco­nomic pol­icy will count almost as much as the sub­stance of your pol­icy in restor­ing con­fi­dence. I believe that com­mu­ni­ca­tion skills mat­ter, details mat­ter and dis­ci­pline mat­ters. Also, Tru­man was right when he said “The Buck Stops Here”. Mak­ing tough deci­sions and explain­ing them to the Amer­i­can pub­lic is your job and can­not be del­e­gated to lower level offi­cials. It’s your admin­is­tra­tion and your eco­nomic pol­icy, not the Trea­sury Secretary’s.

    Enact­ing the below rec­om­men­da­tions will require tough deci­sions and a thick skin. You will be crit­i­cized by the “talk­ing heads” who are more inter­ested in stir­ring up con­tro­versy than find­ing solu­tions. Stim­u­lus alone isn’t enough to solve our prob­lems. With­out fun­da­men­tal changes in how we do things, I believe the cur­rent eco­nomic prob­lems will get pro­gres­sively worse in wave after wave of bad news.

    My sug­ges­tions for fix­ing the econ­omy are below.

    1.  Pass fis­cal stim­u­lus now and make sure it is mas­sive. The econ­omy is rapidly falling into a defla­tion­ary death spi­ral. Defla­tion is like pour­ing hydrochlo­ric acid on the econ­omy. Half mea­sures won’t work; you need to force feed demand. So please, go for the gusto. $500 bil­lion+ is needed. If the stim­u­lus is too small or doesn’t force demand to rise it will actu­ally make the prob­lem worse because con­fi­dence will be destroyed, peo­ple will get more scared and fur­ther hoard­ing of cash will take place. While imme­di­ate and mas­sive stim­u­lus is needed, it would be nice if the spend­ing also was in projects and pro­grams that actu­ally might have some long term benefit.

    2.  Go slow on bank­ing and secu­ri­ties reg­u­la­tory over­haul; Push hard on enforce­ment. The United States has plenty of rules and reg­u­la­tions but lacks the will to enforce them. It is inex­plic­a­ble why the SEC and other Fed­eral reg­u­la­tors have refused to enforce exist­ing rules that pro­mote full and fair dis­clo­sure, dis­cour­age mar­ket manip­u­la­tion, man­date safe and sound bank­ing prac­tices pre­vent con­sumer fraud and have other com­mon sense objec­tives. For some rea­son, tried and true enforce­ment was sac­ri­ficed on the altar of “free mar­kets”. But, free mar­kets aren’t sup­posed to be crooked mar­kets and it is time that Fed­eral reg­u­la­tors did their jobs and enforced exist­ing law and reg­u­la­tion. I believe that when the cur­rent rules and reg­u­la­tions are enforced you will find that the reg­u­la­tory gaps are small. 

    Oh, by the way, the SEC is a bas­ket case and needs to be restaffed with pro­fes­sion­als that believe in its mis­sion of pro­tect­ing the lit­tle guy, mak­ing sure that mar­kets are free and fair so that the cap­i­tal mar­kets work to everyone’s advan­tage and not just for a few Wall Street insiders.

    3.  Account­ing rules mat­ter; Sus­pend mark to mar­ket account­ing and reform secu­ri­ti­za­tion account­ing. Please get rid of mark to mar­ket account­ing now; it is a bad account­ing rule. When you announce that you are con­sid­er­ing get­ting rid of this rule, watch who gears up the PR cam­paign oppos­ing its elim­i­na­tion. They will be the peo­ple who have been prof­it­ing from mark to mar­ket account­ing. I am will­ing to bet that almost all of the lob­by­ists will be bankrolled by traders and fund man­agers that make money from the rule’s car­nage. After all, mark to mar­ket account­ing makes bet­ting on cor­po­rate value destruc­tion a near certainty.

    If account­ing rules mat­ter, bad reg­u­la­tory account­ing rules mat­ter even more. About 20 years ago bad reg­u­la­tory account­ing rules were enacted that apply to all banks and have the unin­tended side effect of encour­ag­ing the worst excesses of the secu­ri­ti­za­tion mar­ket. These rules reward banks that use the OPM model (i.e., “other people’s money”) to finance assets and penal­izes banks that want to cre­ate well cap­i­tal­ized invest­ment struc­tures. These bank reg­u­la­tory rules vir­tu­ally man­date the “orig­i­nate and sell” model of finance and need to be fixed imme­di­ately. Gen­er­ally accepted account­ing prac­tices have run amok try­ing to work around the bad bank reg­u­la­tory rules. The account­ing indus­try is about to “reform” the rules relat­ing to secu­ri­ti­za­tion account­ing in FAS rule 140 but the new rules con­tinue to make a mess of things. An inter­a­gency ini­tia­tive is needed to fix this mess. And, inter­a­gency coop­er­a­tion will only hap­pen with Pres­i­den­tial leadership.

    4.  Imme­di­ately out­law naked credit default swaps and other credit deriv­a­tives that aren’t tied to own­er­ship of under­ly­ing assets. What­ever ben­e­fit we get from naked credit default swaps is more than off­set by mar­ket abuses from the casino men­tal­ity they encour­age. In a naked credit default swap nei­ther coun­ter­party owns any of the under­ly­ing secu­ri­ties of the com­pany whose credit is being wagered upon. Gen­er­ally, the big money pro­po­nents of naked credit default swaps are spec­u­la­tors who jus­tify them­selves by claim­ing that “price dis­cov­ery” can only be achieved in the CDS casino. I think that prices should be estab­lished by buy­ing and sell­ing actual assets. There is no rea­son to have CDS book­ies tell us what things are worth. By the way, I can’t find any­one who is an insur­ance expert that can explain why credit default swaps aren’t a form of insur­ance con­tract and why they shouldn’t be reg­u­lated as an insurance.

    5.  Form gov­ern­ment spon­sored bond insur­ance com­pa­nies and return Fred­die Mac and Fan­nie Mae to their orig­i­nal mis­sion. Bond insur­ance com­pa­nies played an impor­tant role in the devel­op­ment and oper­a­tion of the cap­i­tal mar­kets. For years these pri­vately held com­pa­nies were the grease that made the wheels of munic­i­pal and con­sumer finance turn. It is not a coin­ci­dence that since the col­lapse of the “AAA” rated bond insur­ance com­pa­nies the cap­i­tal mar­kets have been a sham­bles. For decades the bond insur­ance com­pa­nies had a good busi­ness model. Unfor­tu­nately for a few years the bond insur­ance com­pa­nies did a bad job and as a result blew them­selves up. But, a few years of bad exe­cu­tion doesn’t change the fact that the basic busi­ness model pro­vided value. The gov­ern­ment needs to form and cap­i­tal­ize new bond insur­ance com­pa­nies with the goal of pri­va­tiz­ing them within 5 years when the cap­i­tal mar­kets recover. By the way, this will be the low­est cost and biggest “bang for the buck” mar­ket stim­u­lus that the Gov­ern­ment can do to free up the cap­i­tal markets.

    When they were formed Fred­die Mac and Fan­nie Mae were a form of bond insur­ance com­pany that made it easy for investors to pur­chase mort­gages and mort­gage backed secu­ri­ties. How­ever, over the last 20 years Fred­die Mac and Fan­nie Mae expe­ri­enced “mis­sion creep” and started directly invest­ing in mas­sive amounts of mort­gages. As their bal­ance sheet exploded, Fred­die Mac and Fan­nie Mae crowded out banks, thrifts and other mort­gage lenders and became the world’s largest investor of res­i­den­tial mort­gages. The orig­i­nal idea behind Fred­die Mac and Fan­nie Mae was sound and if re-implemented in a ratio­nal man­ner will pro­vide pri­vate investors with a chance to again put money to work in the insured mort­gage market.

    Mr. Obama, hope­fully you agree that my sug­ges­tions strike a bal­ance of short term stim­u­lus and struc­tural reform so that we don’t have a repeat of the last few years. Good luck as you lead the nation in what will hope­fully be a new and great chap­ter in our history.

  3. CPI Indicates" rel="bookmark">Money Supply and Economic Data Weekly Watch – Deflation Is Worse Than CPI Indicates

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    Last week’s eco­nomic data is under­es­ti­mat­ing defla­tion. On Wednes­day the Bureau of Labor Sta­tis­tics (“BLS”) announced that the con­sumer price index (“CPI”) declined by 1.0% in Octo­ber which was the biggest sin­gle one month reported decline since before World War II. Broad based defla­tion exac­er­bates the already severe credit cri­sis and increases cash hoard­ing by house­holds and busi­nesses. How­ever, CPI defla­tion esti­mates are wrong because defla­tion is much worse than reported and the United States has already entered into a defla­tion­ary death spiral.

    Unfor­tu­nately, many econ­o­mists are look­ing at the flawed his­tor­i­cal and cur­rent CPI data to con­clude that defla­tion isn’t a clear and present dan­ger. Fed offi­cials also don’t seem to under­stand the threat. In a dis­turb­ing denial of real­ity, on the same day as CPI reported broad based defla­tion, Fed Vice Chair­man Don­ald Kohn said that the risk of sus­tained and broadly falling prices was slight.

    Defla­tion destroys cor­po­rate prof­its and is like pour­ing hydrochlo­ric acid on bank loan port­fo­lios because bor­row­ers have less cash and assets to pay back lenders. Obvi­ously, cor­po­rate bor­row­ers that can’t ser­vice their debts because of defla­tion aren’t a very good stock invest­ment. A real life les­son in how defla­tion affects bor­row­ers, lenders and investors is the fall in home prices and the destruc­tion to national wealth that occurred as a result. There are no win­ners in the cur­rent res­i­den­tial real estate price crash as fam­i­lies lose their life sav­ings, lenders fail and 401(k)‘s and other invest­ments crash.

    Defla­tion is here and is prob­a­bly worse than the offi­cial sta­tis­tics indi­cate for the fol­low­ing reasons.

    • BLS is over­es­ti­mat­ing the price level for hous­ing which makes up approx­i­mately 42.4% of CPI.

    Curi­ously BLS is report­ing that hous­ing costs went up 3.2% from Octo­ber, 2007, to Octo­ber, 2008. It isn’t clear whose house went up in value or how hous­ing costs could have pos­si­ble increased. But some­where in the alter­nate uni­verse of BLS sta­tis­tics it must have hap­pened and CPI is sig­nal­ing hous­ing infla­tion. Specif­i­cally, CPI data includes an increase of 2.3% in the cost of home­own­er­ship (through an obscure def­i­n­i­tion of the cost of own­ing a house exclud­ing util­i­ties, fur­ni­ture, heat­ing and other oper­at­ing expenses), 3.7% increase in rent and a 2.0% increase in the cost of fur­nish­ings. Some­how CPI has missed the res­i­den­tial real estate cri­sis and as a result is grossly under­es­ti­mat­ing deflation.

    • BLS is over­es­ti­mat­ing the cost of new and used cars which make up approx­i­mately 7.2% of CPI.

    Sta­tis­ti­cians from BLS prob­a­bly only take mass tran­sit because they can’t have been in a car deal­er­ship lately. BLS is ignor­ing that auto­mo­bile prices are col­laps­ing. BLS esti­mated that the drop in new and used motor vehi­cles was 2.3% from Octo­ber, 2007, to Octo­ber, 2008, which while in the right direc­tion, is still very wrong by a large mag­ni­tude. Read­ing any local paper that runs auto­mo­bile adver­tis­ing quickly val­i­dates dou­ble digit declines in vehi­cle prices.

    • BLS is over­es­ti­mat­ing apparel prices which make up 3.7% of CPI.

    BLS is esti­mat­ing that apparel prices actu­ally increased 0.3% from Octo­ber, 2007, to Octo­ber, 2008 which I find shock­ing. First Cap­i­tal finances scores of apparel man­u­fac­tur­ers and over the last 12 months the prices that retail­ers are pay­ing for goods from our clients has dropped. And, whole­sale price declines are being passed on to con­sumers. As an exam­ple, last week my wife pur­chased cloth­ing for our 11 year old daugh­ter. They went to Macy’s and pur­chased 2 pairs of jeans, a shirt with leg­ging and a shirt with a scarf. The total cost for the 4 gar­ments, includ­ing tax, was $21.57. The price tags on my daughter’s cloth­ing indi­cated an orig­i­nal retail price, includ­ing tax, of $71.57 which means that the mer­chan­dise was dis­counted by approx­i­mately 70%. Recently, my wife and I pur­chased men’s printed tee shirts for our 15 year old son and paid $1.99 per tee shirt. And, last month I pur­chased pants for myself and paid less than $20 a pair. 12 months ago the same pants were sell­ing for $45. BLS hasn’t noticed that apparel retail­ers are going bank­rupt by the dozens and one of the rea­sons for the retail­ing col­lapse is that prices are rapidly falling.

    While on the sur­face falling prices seems to help con­sumers pay their bills, that analy­sis only works if con­sumers also don’t need jobs. Defla­tion has a quick cor­ro­sive effect on the via­bil­ity of employ­ers because they pur­chase goods at one price and then because of defla­tion have to sell their inven­tory at a loss. While a lot of infla­tion feels like an eco­nomic flu, defla­tion is like “car­diac arrest” for business.

    With­out real­is­tic and reli­able eco­nomic sta­tis­tics pol­icy mak­ers can­not do their jobs. More­over, until gov­ern­ment econ­o­mists get “real” about where the econ­omy is, and where it is going, they will con­tinue to destroy con­fi­dence with incon­sis­tent and reac­tive pol­icy solutions.

    Since defla­tion is both real and more severe than being reported, fis­cal and mon­e­tary pol­icy options need to be re-examined through the sharp lens of a “wage price death spi­ral.” The longer gov­ern­ment fails to respond to defla­tion the worse the econ­omy is going to get.

    Since the week end­ing Sep­tem­ber 22nd sea­son­ally adjusted M2 hasn’t changed very much. Dur­ing the same period the Fed­eral Reserve’s bal­ance sheet grew from approx­i­mately $1.1 tril­lion to $2.2 tril­lion. I think that M2’s fail­ure to grow indi­cates a type of cash hoard­ing in accounts that would have been picked up in M3 (if the Fed­eral Reserve still pub­lished the sta­tis­tic) which is con­sis­tent with deflation.

    Dur­ing the 1970’s Pres­i­dent Ford started the WIN cam­paign, i.e., Whip Infla­tion Now, as he used the Pres­i­den­tial bully pul­pit to try to jaw bone infla­tion down. On inau­gu­ra­tion day Pres­i­dent Elect Obama needs to start the DDT cam­paign, i.e., Defeat Defla­tion Today. But he needs to use more than the bully pul­pit to defeat defla­tion, mas­sive emer­gency fis­cal stim­u­lus is needed to shock the econ­omy back to into its nat­ural rhythm before it is too late.

  4. The Argument For A New Fiscal Stimulus Bill

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    I believe that another fis­cal stim­u­lus bill is going to be passed by Con­gress and signed into law by either Pres­i­dent Bush or Pres­i­dent Obama (obvi­ously after his inau­gu­ra­tion). Fis­cal stim­u­lus is the most likely way that the gov­ern­ment will be able to stop the rapid decline of the econ­omy caused by the hoard­ing of cash by banks and con­sumers. When the pri­vate sec­tor hoards cash, mon­e­tary stim­u­lus stops work­ing and the gov­ern­ment needs to step in with fis­cal stim­u­lus to spur demand and help stop hoarding.

    Last Sun­day Robert Reich pub­lished an inter­est­ing blog arti­cle about why fis­cal stim­u­lus is nec­es­sary and how it will spur demand. While I often dis­agree with Mr. Reich, his arti­cle on Sun­day was right on point. Below are some excerpts from Mr. Reich’s arti­cle. If you would like to read the entire arti­cle just hit this link to be redi­rected to Mr. Reich’s blog.

    …The real prob­lem [with the econ­omy] is on the demand side of the economy…

    ….Intro­duc­tory eco­nomic courses explain that aggre­gate demand is made up of four things, expressed as C+I+G+exports. C is con­sumers. Con­sumers are cut­ting back on every­thing other than neces­si­ties. Because their spend­ing accounts for 70 per­cent of the nation’s eco­nomic activ­ity and is the fly­wheel for the rest of the econ­omy, the pre­cip­i­tous drop in con­sumer spend­ing is caus­ing the rest of the econ­omy to shut down.

    I is invest­ment. Absent con­sumer spend­ing, busi­nesses are not going to invest.

    Exports won’t help much because the of the rest of the world is slid­ing into deep reces­sion, too. (And as for­eign­ers — as well as Amer­i­cans — put their sav­ings in dol­lars for safe keep­ing, the value of the dol­lar will likely con­tinue to rise rel­a­tive to other cur­ren­cies. That, in turn, makes every­thing we might sell to the rest of the world more expensive.)

    That leaves G, which, of course, is gov­ern­ment. Gov­ern­ment is the spender of last resort. Gov­ern­ment spend­ing lifted Amer­ica out of the Great Depres­sion. It may be the only instru­ment we have for lift­ing Amer­ica out of the Mini Depres­sion. Even Fed Chair Ben Bernanke is now call­ing for a siz­able gov­ern­ment stim­u­lus. He knows that mon­e­tary pol­icy won’t work if there’s inad­e­quate demand.

    So the cru­cial ques­tions become (1) how much will the gov­ern­ment have to spend to get the econ­omy back on track? and (2) what sort of spend­ing will have the biggest impact on jobs and incomes?

    The answer to the first ques­tion is “a lot.” Given the mag­ni­tude of the mess and the amount of under­uti­lized capac­ity in the econ­omy– peo­ple who are or will soon be unem­ployed, those who are under­em­ployed, fac­to­ries shut­tered, offices empty, trucks and con­tain­ers idled — gov­ern­ment may have to spend $600 or $700 bil­lion next year to reverse the down­ward cycle we’re in…”