Crisis Response
The federal govt has been diligently spending our great-grandchildren’s money in an attempt to stave off the Depression-reference-inspiring plethora of financial issues affecting our entire world. This began with the controlled injections into Bear Stearns and continued through the AIG bailout and really hit its financial pinnacle with the inception of the TARP plan of 2008.
Currently on the docket are measures worth easily double that of the previous attempts, and each merit explicatory intensity- the 2009 Stimulus Plan and the 2nd half of the TARP funds which are about to be distributed.
2009 Stimulus Plan
Since it was first introduced, the plan has ballooned to almost 900bn [as estimated by the Congressional Budget Oversight Committee]. The intended goal of this kind of stimulus plan is to get the economy moving again—to force money, scared to leave its house, back into the general moving stream. In order to ensure that measures being taken are going to be of positive effect in that direction, we need to think about how the economy in the US has normally worked in the last decades—we want to grease the wheel, not reinvent it.*
[*this isn’t to discount the opinion that we should use this opportunity to begin to transform our economy, in fact, I am very much in that crowd… but the intended and stated purpose of the stimulus plan is to get things moving, not change how they move]
People often say that we have a ‘service economy’ or that we have a ‘consumer economy’ … what this means in practice is that we have a system in which we make money selling things [mostly imported from China] to each other. In order to put grease onto that wheel, we need to put money into the hands of people who’re going to spend it.
There seem to be two schools of thought on how to do this- one is to offer tax cuts, and one is to use government spending. I think that there is a way to use each of these avenues to create a combined plan which can work from both directions.
Government spending should be used to make sure that unemployment doesn’t get any higher- the ways this should be focused is on helping states and cities meet their budget shortfalls with the condition that they can’t scale down their staffing. Government spending should also be used in incentivizing burgeoning markets to develop, preferably those that can have ancillary benefits; those of alternative energy and ecologically sustainable food. Examples of this would be hiring alternative energy companies to renovate government buildings, replacing the government auto fleet with alternative energy vehicles, shifting school and state institutional food purchasing to ecologically sustainable distribution, and others. This kind of spending in developing markets will create the need for additional jobs. Since these areas have been cottage industries up to this point, they’ll have to develop infrastructure to handle the increased demand, necessitating heavy hiring.
Tax cuts can also be used to stimulate the economy- but they should be the kind of cuts which provide money for people to spend, not the kind which encourage people to spend.
Most people in this country live hand-to-mouth, paycheck to paycheck. Pawn shops, credit cards, check cashing, layaway plans… all of these exist to service the demographic which spends every dollar it has [the US has a historically low savings rate, and its due to this lower income demographic]. If we can put dollars into those people hands, we can PROMISE that they’re going to be spent- the people living around the poverty line clearly have upward flexibility in their standard of living, and they’ll use whatever monies they have available to do so. The easiest and fastest way to get them those monies is to suspend the Payroll Tax.
You know your tax withholding? Well most of that goes to payroll tax/social security, and if you make more than 100k, you stop paying those taxes. To cut or suspend the payroll tax is to guarantee that you put extra dollars into the hands of the people who’re going to spend it, and disincline it from making its way into the hands of people more likely to save it [the wealthy, for obvious reasons, have high savings rates]. This concept was clearly spoken by Jerry Springer during the exploratory phase of his bid for senate in 2003:
I understand the need to juice up the economy. But why in the world are they giving me a tax cut? Do they think that if I get a large check back from the government that I will suddenly go out and spend more money? Wealthy people like me can and do already buy what we need and want…that’s why we’re called “wealthy.” Instead of giving me a tax cut, how about looking at reducing the payroll tax? 4 out of 5 Americans pay more in the payroll tax than they do in the income tax…yet nobody talks about cutting the payroll tax for regular, ordinary, working folks. I would. Because when you cut the payroll tax for regular people, they will spend every dime of that cut…because they have to. Specifically, i’d like to see major relief on the first $10 to $20 thousand dollars a person earns…everyone spends the first $10 to $20k they earn because that’s what they live on…what they buy groceries with, what they pay the mortgage or rent with; what they make the car payment with. So they’d spend every dime —and that would truly juice up the economy.
Cuts in income tax, capital gains, distribution tax, estate tax, increasing tax credits on large purchases like homes or cars… those are tax cuts which favor the wealthy— when the country’s ills are based in the plight of a working class rife with unemployment and home foreclosure, and you’re going to spend tax money to help alleviate the problems, why would you spend money on people who’re still capable of buying houses or cars? Tax cuts that encourage spending from populations who have the increased possibility of saving are inherently going to generate less economic activity than tax cuts which allow more money to end up in the wallets of people who spend all of their money every week.
[for those of you interested in a description of the same phenomena but economist-ese, please read this: its a report written in December by faculty at Economics Dept at Stanford, Pete Klenow. Totally incredible.]
http://klenow.com/Discussion_of_Payroll_Tax_Cut.pdf
2nd of the TARP
While the dominant proportion of the news is being dedicated to the Stimulus package, Tim Geithner is quietly making changes to banking regulation and preparing to handout the $350bn balance of the TARP bill—he’ll be making a large announcement on Monday.
One of the greatest opportunities we have in this crisis is that we can require greater transparency into the books and asset values of our financial institutions— we can leverage the free money we’re giving them into compulsory adherence to a system which requires them to declare the true value of everything on, and off, of their books. One of the fundamental issues which allowed us to build a financial house of cards was that investors didn’t have a clear picture of the risks associated with the banks different assets. The traunches of mortgage backed securities, Collateralized Loan Obligates, revolving debt backed securities … all of these things fluctuate daily based on variables- respectively foreclosure rates, business loan defaults, credit card writeoffs. Even though the realities of those factors change on a daily basis, the banks holding those assets have been slow to admit value changes. The timing and cadence of admitting those value shifts can be seen in the fact that while foreclosure rates began to climb, and then spike, in late 2006, the banks didn’t begin to write down those losses until q1 of 2008 — what took so long? Why didn’t the banks admit that their assets were consistently diminishing? Simple; because they didn’t have to. It is the responsibility of the government to produce and enforce the rule of law to protect the [economic and other] safety of the citizens of the United States, and individual businesses cannot be expected to act against their interests if they and their competitors are not compelled by the law.
In the face of this need, and opportunity, Tim Geithner is considering a relaxation of the current laws requiring banks to valuate their assets based on market conditions—he wants the banks to be able to effectively set whatever ‘fair’ value they want, independent of market factors [the process of identifying the values of your assets based on current market factors is called ‘mark to market accounting’].
To top this off, In the worst kind of political sleight-of-hand, Obama and the press are chastising the executives, while Geithner is simultaneously promising them greater secrecy to act in whatever manner is in their personal best interest- heavily restricting the bilions of bonus dollars in exchange for deregulating the trillions of asset dollars.
Let’s see what the announcement looks like on Monday.