The Economy, stupid

[Cknolls]

When Fox asked the Nebraska Democrat if he thought Republicans would vote for the bill in the Senate he responded “I don't even know how many Democrats will vote for it, as it stands today.”

 

 

[Balta1701]

From the "The bonuses are necessary to retain top talent because there's no one to replace them" category:

Banks and brokerages worldwide have cut more than 250,000 jobs since the middle of 2007 as credit losses and write-offs caused the worst financial crisis since the Great Depression. Morgan Stanley eliminated about 1,500 jobs in May and more than 4,000 in November. The firm reported losses in the fourth quarters of 2007 and 2008.

[Balta1701]

The CBO has put out an analysis of the version of the Stimulus package the Senate is taking up. As currently written, 78% of it is out the door 18 months after passage. Clearly, the Democrats are totally refusing to listen to the suggestions of Republicans.

 

I'd personally like to see that amount decrease slightly as more long-term infrastructure (rail, electrical) investments are inserted.

[southsider2k5]

The CBO has put out an analysis of the version of the Stimulus package the Senate is taking up. As currently written, 78% of it is out the door 18 months after passage. Clearly, the Democrats are totally refusing to listen to the suggestions of Republicans.

 

I'd personally like to see that amount decrease slightly as more long-term infrastructure (rail, electrical) investments are inserted.

 

So Barack is going to wait two and a half years to get a real fix for the economy. Boy that's some emergency.

[Balta1701]

So Barack is going to wait two and a half years to get a real fix for the economy. Boy that's some emergency.

Seriously, I'm not going to deal with the logic here...I'm just going to point out; right now, this is the Republican view of the economy.

[southsider2k5]

Seriously, I'm not going to deal with the logic here...I'm just going to point out; right now, this is the Republican view of the economy.

 

I don't care whose view of the economy is, its wrong. If things are really as bad as they are saying they are, then we don't need to be waiting until the economy is projected to be into recovery to fix things. All that tells me is this plan again has nothing to do with a stimulus program. This is the federal government equivalent of golden parachute for decades of being inefficient. We all know how poorly run many of the feds programs are, so what are we going to do? Expand them by about 250,000 employees. I'd rather seem them hand the $800 billion to failing banks. It has a better chance of making it into the economy in, oh I don't know, the next 2 years...

[Balta1701]

I don't care whose view of the economy is, its wrong. If things are really as bad as they are saying they are, then we don't need to be waiting until the economy is projected to be into recovery to fix things. All that tells me is this plan again has nothing to do with a stimulus program. This is the federal government equivalent of golden parachute for decades of being inefficient. We all know how poorly run many of the feds programs are, so what are we going to do? Expand them by about 250,000 employees. I'd rather seem them hand the $800 billion to failing banks. It has a better chance of making it into the economy in, oh I don't know, the next 2 years...

You'd be the first one to point out normally that the Fed has already dispensed $2.5 trillion or so if you count the fed's balance sheet and the 1st part of the bailout.

 

Anyway...I'm just going to keep firing Keynes back at you. To first order, the efficiency of the program does not matter at all. What matters is that the government is the only group with the power to pursue an inflationary track right now, in the midst of what is rapidly turning towards a deflationary spiral. If the government doesn't do this, there's simply no reason to expect a recovery.

[jasonxctf]

interesting stat... the stimulus package of 800 billion only equals $2,500 per taxpayer. that's it, $2,500/person.

[southsider2k5]

You'd be the first one to point out normally that the Fed has already dispensed $2.5 trillion or so if you count the fed's balance sheet and the 1st part of the bailout.

 

Anyway...I'm just going to keep firing Keynes back at you. To first order, the efficiency of the program does not matter at all. What matters is that the government is the only group with the power to pursue an inflationary track right now, in the midst of what is rapidly turning towards a deflationary spiral. If the government doesn't do this, there's simply no reason to expect a recovery.

 

That is a really nice job of nit picking by the way. If the economy is as bad as Obama said it is, spending in 2014, or even 2010 isn't going to do much for it. It needs to be done now. Besides if efficiency doesn't matter, why would the Obama administration be b****ing about Wall Street bonuses or a Lear jet? After all, that is money in the pockets of Americans today, which is way more than the President is proposing. The economy is scheduled to recover on its own about the time Barack is going to be running for re-election, which is a pretty interesting coincidence to say the least. He gets to take credit for the recovery, when in reality, his spending plans effects won't kick in for years, and blame Bush for the times in between. Brilliant.

[Balta1701]

Stolen from Brad DeLong:

WHEN an economy falls into a depression, governments can try four things to return employment to its normal level and production to its 'potential' level. Call them fiscal policy, credit policy, monetary policy and inflation.

 

Inflation is the most straightforward to explain: The government prints lots of banknotes and spends them. The extra cash in the economy raises prices. As prices rise, people don't want to hold cash in their pockets or their bank accounts - its value is melting away every day - so they step up the pace at which they spend, trying to get their wealth out of depreciating cash and into real assets that are worth something. This spending pulls people out of unemployment and into jobs, and pushes capacity utilisation up to normal and production up to 'potential' levels.

 

But sane people would rather avoid inflation. It is a very dangerous expedient, one that undermines standards of value, renders economic calculation virtually impossible, and redistributes wealth at random. As John Maynard Keynes put it, 'there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose...'

 

But governments will resort to inflation before they will allow another Great Depression. We just would very much rather not go there, if there is any alternative way to restore employment and production.

 

The standard way to fight incipient depressions is through monetary policy. When employment and output threaten to decline, the central bank buys up government bonds for immediate cash, thus shortening the duration of the safe assets that investors hold. With fewer safe, money-yielding assets in the financial market, the price of safe wealth rises. This makes it more worthwhile for businesses to invest in expanding their capacity, thus trading away cash they could distribute to their shareholders today for a better market position that will allow them to reward their shareholders in the future. This boost in future-oriented spending today pulls people out of unemployment and pushes up capacity utilisation.

 

The problem with monetary policy is that, in responding to today's crisis, the world's central banks have bought so many safe government bonds for so much cash that the price of safe wealth in the near future is absolutely flat - the nominal interest rate on government securities is zero. Monetary policy cannot make safe wealth in the future any more valuable. And this is too bad, for if we could prevent a depression with monetary policy alone, we would do so, as it is the policy tool for macroeconomic stabilisation that we know best and that carries the least risk of disruptive side effects.

 

The third tool is credit policy. We would like to boost spending immediately by getting businesses to invest not only in projects that trade safe cash now for safe profits in the future, but also in those that are risky or uncertain. But few businesses are currently able to raise money to do so.

 

Risky projects are at a steep discount today, because the private-sector financial market's risk tolerance has collapsed. No one is willing to buy assets and take on additional uncertainty, because everyone fears that somebody else knows more than they do - namely, that anyone would be a fool to buy. Although the world's central banks and finance ministries have been devising many ingenious and innovative policies to stimulate credit, so far they have not had much success.

 

This brings us to the fourth tool: fiscal policy. Have the government borrow and spend, thereby pulling people out of unemployment and pushing up capacity utilisation to normal levels. There are drawbacks: the subsequent dead-weight loss of financing all the extra government debt that has been incurred, and the fear that too rapid a run-up in debt may discourage private investors from building physical assets, which form the tax base for future governments that will have to amortise the extra debt.

 

But when you have only two tools left, neither of which is perfect for the job - credit policy and fiscal policy - the rational thing is to try both, at the same time. That is what the Obama administration in the United States and other governments are attempting to do right now.

[southsider2k5]

Stolen from Brad DeLong:

 

And waiting 2-3 years to do it. You keep leaving that part out. The Obama spending plan is not spending that is happening in a timely enough manner to save the economy. If things are really as bad as Obama saids they are, spending in 2010, which will have no effect in the economy until at least 2011, will do nothing to save the economy in 2009. I don't know how much more clearly I can say this... This plan is a fraud.

[southsider2k5]

And a columnist finally gets it! Why aren't the banks lending? Its the government's laws that are preventing them! I have only been saying this for months.

 

http://www.msnbc.msn.com/id/28985294/

 

NEW YORK - Banks that are being scolded by the government for not lending are blaming a new obstacle: The government itself.

 

Fearing more bank failures, federal regulators are forcing institutions to hold more money in reserve and scrutinizing loans. But bank executives complain that the extra oversight thwarts their ability to quickly pump billions of bailout dollars into the ailing economy.

 

Banks say they are caught in a frustrating Catch-22: How can they make more loans when creditworthy borrowers are scarce, their balance sheets are saddled with bad debt and regulators are hounding them to horde cash?

 

“We want to lend, but the regulators are flat-out telling us, ’Get your capital up.’ Then there’s Congress telling you to lend it all out,” said Greg Melvin, a board member at FNB Corp., a Hermitage, Penn.-based bank that got $100 million in bailout money.

 

“Two arms of the government are saying exactly the opposite thing — it’s ridiculous,” added Melvin, who is also chief investment officer at investment firm C.S. McKee.

 

Regulators say they are only being careful, and they deny slowing lending.

 

“We don’t believe that prudence and increased lending are mutually exclusive — they go hand in hand,” said Andrew Gray, a spokesman for the Federal Deposit Insurance Corp.

 

The tit-for-tat marks the latest problem for the government’s financial bailout, known as the Troubled Asset Relief Program, or TARP.

 

The government rolled out the $700 billion bailout late last year, hoping that injecting money into banks would expand lending and ease the credit crisis. But in a survey released Monday, the Federal Reserve said many banks are making it harder to get credit cards, mortgages and other loans.

 

Regulators have long required banks to keep a minimum level of capital on their books to stay in business. It was typically a figure equal to 10 percent of assets.

 

But as the financial crisis has worsened, many banks say they have been told to keep capital equal to at least 12 percent of assets. At the same time, regulators are combing through banks’ loan applications and flagging those considered too risky.

 

It’s unclear how broadly the stricter rules are being applied. But interviews with bank executives indicate that both healthy and troubled banks are facing more stringent oversight, regardless of whether they have received bailout money.

 

The goal is to keep banks from getting into more trouble. But to comply, some banks say they have little choice but to scale back lending — sometimes even to creditworthy borrowers.

 

Four government regulators oversee the country’s roughly 8,500 federally insured banks and thrifts: the FDIC, the Office of Thrift Supervision, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

 

Regulators shut down 25 banks last year and closed three so far this year because their capital levels fell too low. Meanwhile, regulators have ordered several banks to stop lending until they get more capital.

 

But the credit crisis has made it harder for banks to raise private capital. And the government doesn’t want to give bailout money to banks that might later fail.

 

The federal government has invested almost $200 billion in U.S. banks over the last three months to spark new lending to consumers and businesses. So far, it hasn't worked.

 

The harsh climate has taken a toll on banks such as Los Angeles-based First Federal Bank of California. It was forced to halt lending last month after its regulator, the Office of Thrift Supervision, said it needed more cash to absorb future losses on adjustable-rate mortgages.

 

Chief executive Babette Heimbuch said her bank wanted to keep lending but had a “difference of opinion” with the OTS over what its cumulative losses were and how quickly it will see them.

 

“They basically told us to stop lending,” she said.

 

While the Treasury wants banks to lend, “the regulators have a whole different mindset: They want to protect the insurance funds,” Heimbuch said, referring to money that regulators use to insure bank deposits.

 

Regulators see things differently.

 

William Ruberry, a spokesman for the OTS, said its No. 1 mission is to safeguard the institutions it oversees. He denied that such efforts were slowing lending.

 

“We want our institutions to lend, but we want them to lend in a safe and sound way,” Ruberry said. “We think creditworthy borrowers shouldn’t have a hard time finding loans.”

 

But banking professionals say it’s inevitable that tougher capital requirements for banks will reduce lending.

 

“There’s just no doubt,” said Stephen Wilson, CEO of LCNB National Bank in Lebanon, Ohio, which got $13.4 million in government capital. “If regulators tighten lending standards,” fewer loans will be made.

 

Some of the banks’ biggest critics reject that argument.

 

“I’m skeptical,” Democratic Rep. Barney Frank of Massachusettes, chairman of the House Financial Services Committee, told The Associated Press in an interview. “If you’re a bank that has TARP money, then you have more capital and you should be able to lend.”

 

Frank said the Obama administration would push for more lending by banks that get bailout money. But others fear such efforts could backfire by forcing banks to lower lending standards.

 

“We’re trying to get out of a credit problem, so the last thing you want is for banks to go out and make more bad loans,” said Bert Ely, a longtime banking analyst in Alexandria, Va.

 

William Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, N.J., said regulators have forced his bank to set aside more capital in case their loans go bad — “even though we don’t have any problems.”

 

“We argued like crazy, but they’re just being very cautious,” Dunkelberg said.

 

Could the Obama administration and Congress simply tell regulators to lighten up on the banks?

 

Technically, yes.

 

Eugene Ludwig, a former comptroller of the currency, has advocated a “capital holiday” that would temporarily let banks draw down their capital and unclog lending.

 

But that plan carries risks, too. With less money on their books, banks will have a smaller cushion to protect themselves against losses. They would be at greater danger of failing if the economy worsened.

 

In the meantime, banks are adjusting to life with regulators constantly looking over their shoulder.

 

At First Federal Bank of California, Heimbuch said business is running as normal — albeit with no lending. She said her bank is trying to attract more capital. But she conceded there were no guarantees.

 

“You never know when a regulator is going to say enough is enough,” she said.

 

 

 

[NorthSideSox72]

And waiting 2-3 years to do it. You keep leaving that part out. The Obama spending plan is not spending that is happening in a timely enough manner to save the economy. If things are really as bad as Obama saids they are, spending in 2010, which will have no effect in the economy until at least 2011, will do nothing to save the economy in 2009. I don't know how much more clearly I can say this... This plan is a fraud.

The plan is a wreck, but I wouldn't call it a fraud. Last I saw, a large percentage will be spent by 2010. I am pretty sure this is 2009, and equally sure that the speed at which government could implement these projects (even the worthwhile ones) is not measured in days or weeks - its months.

 

And I am sure you would know as well as anyone, part of the trick here is confidence, and the markets are going to fidget and roll based on the smallest perceived changes (whether real/current or not). The markets move first, and can help propel further confidence. If Obama and Congress can pass a "stimulus" bill that spends a big chunk of money with the perceived goal of helping create jobs, even if the spending is late 2009 or 2010, its going to have a material effect before the money is even spent. Its the mental part of the game. You and I may not buy into it, but a lot of people will, and the markets will price it in ahead of time.

 

Caveat: I am NOT defending the stimulus bill as it stands. Just pointing out that the argument that its material effect is not helpful to the current economy isn't correct.

 

[NorthSideSox72]

And a columnist finally gets it! Why aren't the banks lending? Its the government's laws that are preventing them! I have only been saying this for months.

 

http://www.msnbc.msn.com/id/28985294/

It should also be pointed out, many banks didn't even want the TARP money, and we coerced into taking it. That's right. Many banks were pretty solid still, and were more than happy to ride it out. But the government in some cases basically told these banks to take the money or else. This despite the fact that the government also said the terms of the money could be changed at any time without notice.

 

TARP was a gigantic stick to wield, when a much smaller one was needed. And the whole program was incredibly poorly thought out. We're going to look back at TARP and realize we needed only a small % of what we spent, targeted to specific areas, and that the government's lack of tracking and control made the program a near-failure.

 

Honestly, as much crap as we hear about this "stimulus" bill (some of it rightly), I think TARP will end up being a much bigger waste of money. I was all for helping liquidity and a net, but, this was just done in a terrible way.

 

[southsider2k5]

The plan is a wreck, but I wouldn't call it a fraud. Last I saw, a large percentage will be spent by 2010. I am pretty sure this is 2009, and equally sure that the speed at which government could implement these projects (even the worthwhile ones) is not measured in days or weeks - its months.

 

And I am sure you would know as well as anyone, part of the trick here is confidence, and the markets are going to fidget and roll based on the smallest perceived changes (whether real/current or not). The markets move first, and can help propel further confidence. If Obama and Congress can pass a "stimulus" bill that spends a big chunk of money with the perceived goal of helping create jobs, even if the spending is late 2009 or 2010, its going to have a material effect before the money is even spent. Its the mental part of the game. You and I may not buy into it, but a lot of people will, and the markets will price it in ahead of time.

 

Caveat: I am NOT defending the stimulus bill as it stands. Just pointing out that the argument that its material effect is not helpful to the current economy isn't correct.

 

According to the velocity of money, money spent does not have a material affect on the US economy for at least 6 months, and in reality, it is more like a year. Money spent in 2010 doesn't have a material affect until 2011. That is two years from now. If we are waiting for the markets to "price it in" we are in real trouble, because the markets are down about 20% since election day. This is including the period of time where Obama introduced and detailed this stimulus plan, and its passage has become clear. I would say that means the market has spoken quite clearly on its opinion of the plan. The marketplace seems much more interested in the "bad bank" plan, versus the "stimulus" plan.

 

Here is a nice link on the velocity of money, and how much it has slowed in the economy right now. In other words, it is taking longer for money to move through the economy, and we are going to take longer to move money into the economy. Its a recipe for disaster.

 

http://www.urbandigs.com/2008/12/you_want_..._deflation.html

[NorthSideSox72]

According to the velocity of money, money spent does not have a material affect on the US economy for at least 6 months, and in reality, it is more like a year. Money spent in 2010 doesn't have a material affect until 2011. That is two years from now. If we are waiting for the markets to "price it in" we are in real trouble, because the markets are down about 20% since election day. This is including the period of time where Obama introduced and detailed this stimulus plan, and its passage has become clear. I would say that means the market has spoken quite clearly on its opinion of the plan. The marketplace seems much more interested in the "bad bank" plan, versus the "stimulus" plan.

 

Here is a nice link on the velocity of money, and how much it has slowed in the economy right now. In other words, it is taking longer for money to move through the economy, and we are going to take longer to move money into the economy. Its a recipe for disaster.

 

http://www.urbandigs.com/2008/12/you_want_..._deflation.html

I understand the velocity of money - I was refering to the preternature of confidence and perception of reality.

 

This is where Obama needs to be the salesman he is capable of being. People might dismiss it, but it has a real effect. He needs to get a bill passed and sell it hard. People's view will change, confidence numbers will bounce a bit, and the the panicked savings will subside a bit. That small, subtle set of changes will cause the markets to go up. The question is, can Obama sell well enough to make that happen short term, instead of waiting for the actual job and production numbers to increase (which as you say, could be quite a while).

 

By the way, here is a little prediction I'll make. As you may have noticed recently, people are seeing home prices drop more rapidly, and sales numbers (existing homes) actually level or increase a bit. This is the last hold-outs giving in and dropping their prices. If that is the case, and people are looking to save/invest, and if Congress can pass a serious home buyer tax credit... you'll see the housing market start to show signs of resurrection. So, odd as it seems, Housing may actually be what starts an economic comeback.

 

[NorthSideSox72]

Senate starting their changes to the package. Currently being discussed: added funds to highway, mass transit and water infrastructure projects (from Dems), and mortgage and housing market incentives (from GOP).

 

[Balta1701]

Senate starting their changes to the package. Currently being discussed: added funds to highway, mass transit and water infrastructure projects (from Dems), and mortgage and housing market incentives (from GOP).

Because the only way out of this is to re-inflate the bubble!

[NorthSideSox72]

Because the only way out of this is to re-inflate the bubble!

Lame. How is incenting people to buy homes via tax credits creating a bubble? Its not.

 

[Balta1701]

Lame. How is incenting people to buy homes via tax credits creating a bubble? Its not.

I know. I'm not allowed a little kaperbole now and then?

 

Anyway, actually forcing foreclosure relief on the banks would be a vastly more effective means of helping that market stay some of its losses. The reality in the mortgage market is that the overheated markets are going to decline until people can afford those houses based on the incomes that they have. And since a lot of those markets were dramatically overbuilt, that means that the prices are still going to decline an awful lot.

[NorthSideSox72]

I know. I'm not allowed a little kaperbole now and then?

 

Anyway, actually forcing foreclosure relief on the banks would be a vastly more effective means of helping that market stay some of its losses. The reality in the mortgage market is that the overheated markets are going to decline until people can afford those houses based on the incomes that they have. And since a lot of those markets were dramatically overbuilt, that means that the prices are still going to decline an awful lot.

Many banks are already doing this voluntarily, using TARP money as an offset. Its one of the few things that TARP seems to work well for.

 

[Balta1701]

Many banks are already doing this voluntarily, using TARP money as an offset. Its one of the few things that TARP seems to work well for.

I'm never going to find the source, but I believe I read somewhere a few weeks back that one of those big foreclosure relief plans the government decided to announce last year had so far worked with a whopping 500 people or so.

 

The problem is that given how much these mortgages were chopped up and sold off, every single bank owning a part of it winds up having to agree to rewrite the thing. If some banks think it's easier to just take the write-down, then the rewrite of the mortgage doesn't happen. So far, the voluntary mortgage relief programs have just been epic failures because they've been volutary.

[kapkomet]

I know. I'm not allowed a little kaperbole now and then?

 

Anyway, actually forcing foreclosure relief on the banks would be a vastly more effective means of helping that market stay some of its losses. The reality in the mortgage market is that the overheated markets are going to decline until people can afford those houses based on the incomes that they have. And since a lot of those markets were dramatically overbuilt, that means that the prices are still going to decline an awful lot.

 

Yes!

 

 

[southsider2k5]

I know. I'm not allowed a little kaperbole now and then?

 

Anyway, actually forcing foreclosure relief on the banks would be a vastly more effective means of helping that market stay some of its losses. The reality in the mortgage market is that the overheated markets are going to decline until people can afford those houses based on the incomes that they have. And since a lot of those markets were dramatically overbuilt, that means that the prices are still going to decline an awful lot.

 

This action actually is/would be a contributing factor for banks not being able to lend money. When banks have loans out, they can't loan that money again. If they aren't receiving payment on those loans, meanwhile holding a depreciating asset against that loan, it is adversely affecting their capital ratios. Under Sarbane's Oxley, they have to keep reporting those falling prices against their loans. It means that the bank is stuck with a bad loan on its books, and is unable to lend again.

[kapkomet]

There's a huge debate going on in accounting circles about how to "fair value" these assets (in a bank's case, these are assets). IASB and FASB are studying it and have some proposals on the table. This pronouncement could be one of the biggest in years. Remember, there will be one set of accounting standards in the next 5 years (supposedly) and international views on how this gets booked is currently significantly different then how US companies do it. That's part of why this all started here and have now flushed out in the rest of the world.