Depression Looms Without More Stimulus

Do we really need more economic stimulus? We have already spent trillions of dollars attacking this financial crisis, and unfortunately we also have seen billions apparently wasted by poor policy decisions and implementation. All that aside, according to famed economist Robert Shiller, we need more economic stimulus or else we are likely facing another depression. For more on this, read the following blog post from Mark Thoma.

Robert Shiller says we need to continue with the monetary and fiscal policies we are pursuing, but both efforts need to be larger:

Depression Lurks Unless There’s More Stimulus, by Robert Shiller, Commentary, Bloomberg: In the Great Depression ... the U.S. government had a great deal of trouble maintaining its commitment to economic stimulus. “Pump- priming” was talked about and tried, but not consistently. The Depression could have been mostly prevented, but wasn’t. ...

In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again. We appear to be in a much better situation due to the stronger efforts to date. Still, there is a danger that, because of a combination of faulty economic theory and inadequate appreciation of human psychology, as well as deep public anger, we will not continue with such stimulus on a high enough level. ...

In our analysis of the current economic crisis, we conclude that the government should have two targets. One would be a joint fiscal-monetary policy target. The same kind of expansionary policies embodied in the government expenditure stimulus and tax cuts that are already being tried have to be done on a big enough scale and for a long enough time in the future. ...

The government should also have a credit target. Once again, we are calling for more of the same kinds of existing policies... Achieving this requires new approaches, like those announced by the Bernanke Fed and the Obama administration, but on a continuing and even larger scale. ...

In this crisis, acceptance of these measures is being replaced with outrage. It is increasing the blood pressure of the public, and that can’t continue without damage to our system. ... It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger.

It would be a shame if we are so overwhelmed by anger at the unfairness of it all that we do not take the positive measures needed to restore us to full employment. That would not just be unfair to the U.S. taxpayer. That would be unfair to those who are living in Hoovervilles...; it would be unfair to those who are being evicted from their homes, and can’t find new ones because they can’t find jobs. That would be unfair to those who have to drop out of school because they, or their parents, can’t find jobs.

It is now time to keep our eye on the ball and set clear targets to fix a system that broke when our animal spirits got out of bounds.

This post can also be viewed on economistsview.typepad.com.

Is Obama Killing Capitalism?

Most of Obama's recent moves have been heavily opposed by Republicans, but is he single handedly killing Capitalism — and Wall Street — as some are claiming? Economics professor Mark Thoma thinks that the claim is absolutely absurd, and in fact agrees with Robert Reich that Republicans are more responsible for the falling markets than Obama is. Thoma looks at a couple articles, and gives his input on the subject in his blog post below.

Republicans made the bed, now they want someone else to sleep in it:

Is Obama Responsible for Wall Street's Meltdown? Where Populist Rage is Heading, by Robert Reich: Is Obama responsible for the meltdown of the Dow? The consistently wrong-headed Wall Street Journal's editorial page says so, as does Republican Fox News, CNN's reliably demagogic Lou Dobbs, and now CNBC... CNBC's Jim Cramer, who bloviates nightly about stock picks, says Obama is pushing a "radical agenda" that's destroying investor's wealth. My friend Larry Kudlow, who rants nightly about nearly everything, says Obama is destroying capitalism. CNBC reporter Rick Santelli's ballistic nonsense about Obama's mortgage plan made him a pop-populist icon for a week or so.

The argument that Obama is somehow responsible for the collapse of Wall Street is absurd. First, every major policy that led to this collapse occurred under George W's watch (or, more accurately, his failure to watch). The housing and financial bubbles were created under Bush and exploded under Bush. The stock market began to collapse under Bush.

Second, it's inevitable that stocks, led by the bloated financial sector, would lose their remaining hot air as the new administration begins "stress-testing" the big banks, many of which are technically insolvent. After all, their share prices were built on a tissue of lies and dreams. Other sectors whose values were similarly distorted and distended by years of financial deception and regulatory disregard, such as housing and insurance, will also have to return to the real world before they can recover. Which could mean more stock losses.

Finally, none of the financial wizards who are now charging Obama with leading America into the abyss has offered an alternative plan for getting us out of the mess that, not incidentally, many of these same wizards happily led us into. For years, the Wall Street Journal editorial page and the financial gurus of cable news cheered as Wall Street leveraged its way into oblivion.

This bizarre charge wouldn't be worth mentioning were it not a market test for a more intense attack from Wall Street and Republican media outlets next year as the nation moves into ... range of the 2010 midterm elections. Republicans have made no secret of their wish to blame Obama for the bad economy, and to stir up as much populist rage against his so-called "socialist" tendencies as politically possible. History shows how effective demagogic ravings can be when a public is stressed economically. Make no mistake: Angry right-wing populism lurks just below the surface..., ready to be launched not only at Obama but also at liberals, intellectuals, gays, blacks, Jews, the mainstream media, coastal elites, crypto socialists, and any other potential target of paranoid opportunity.

To complicate matters for Republicans, however, grass-roots populist rage is also building against Wall Street itself, and with some justification. Top Wall Streeters who raked in tens of millions of dollars a year for more than a decade have now effectively eviscerated the pension fund savings of millions of middle-class American workers and destroyed millions of Main Street jobs. The public is understandably appalled that its tax dollars are being used to pay and prop up the very people and institutions responsible for this debacle. And there seems to be no end in sight... Yet no one seems to know exactly where these dollars are going, or why. ...

The Wall Street and Republican media attack machine doesn't know exactly what to make of this. The Wall Street Journal's editorial page, along with CNBC, alternates between attacking Obama for bailing out Wall Street and excusing Wall Street's excesses. But then again, Obama doesn't seem to know exactly what to make of it either. He seems to vacillate as well -- one moment scorning Wall Street, the next moment justifying further bailouts. I do hope he takes a firmer hand, drawing a clearer distinction and making a clearer connection between clearing up these financial balance sheets and helping average people. Otherwise, the next populist uprising will be born in this moneyed quagmire. It is here -- within the muck that was created by AIG, Citigroup, Fannie and Freddie, other giant financial institutions, now in combination with the U.S. Treasury and Fed -- that the public is most confused, bears its most serious scars, and is potentially most burdened in future years...

Why people should ignore Larry Kudlow:

The Housing Bears Are Wrong Again, by Larry Kudlow, NRO, June 2005: This tax-advantaged sector is writing how-to guide on wealth creation.

Homebuilders led the stock parade this week with a fantastic 11 percent gain. This is a group that hedge funds and bubbleheads love to hate. All the bond bears have been dead wrong... So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.

None of this has happened. ... Meanwhile, the homebuilders index has increased 76 percent over the past year, with particularly well-run companies like Toll Brothers up about twice as much. The bubbleheads missed all this because they haven’t done their homework. If they had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades. ...

Which leads to a final thought: Why not apply the same tax laws that have benefited home owners to stock market investors and home buyers? If this were to come about, even more wealth would be created in America, leading to even more new business and job creation. ...

Yes, too bad we didn't make the bubble even bigger. If capitalism is destroyed, something that's highly unlikely, it won't be Obama's fault. It will be the fault of people like Kudlow who "haven’t done their homework" and who opposed any and all attempts to temper the housing bubble through regulation or any other means - see the ridicule of "bubbleheads" above - and who continue to oppose such measures today. Capitalism may change, in fact it needs to change - the excesses that allowed the housing bubble to develop need to be tempered through regulation and other means - but if Kudlow and company have their way and continue to assert that what's good for the rich is good for America, that regulation was the problem not the solution, and that tax cuts are the answer to every problem, the change that is needed won't happen. It's easy to understand why they are so vocal in their opposition to the kinds of changes that are being proposed. The change that is needed to help stabilize the system will bring about destruction (creatively we hope), and people like Kudlow will likely be the ones who feel the brunt of that change as the advantages unregulated markets brought them disappear. But they shouldn't confuse the destruction of the elements that allowed them to take advantage of the system with the destruction of the system itself.

This post can also be viewed on economistsview.typepad.com.

Brits Blame Greenspan For Global Financial Crisis

Everyone is looking for the person responsible for the economic mess the world is in, or at least a fall guy we can blame everything on. According to a recent web poll, Brits believe that former Fed chief, Alan Greenspan, is the man. Truth is no one person is solely responsible for all our economic problems, however, it is still interesting to see who people think the biggest culprits are. Tim Iacono from The Mess That Greenspan Made looks closer at this poll and adds some thoughts of his own, in the blog post below.

It is not at all clear what, if any, significance the survey results attached to this story in the U.K.'s Times Online hold but, when asked which of ten individuals to blame for the current financial mess, fingers were pointed squarely across the Atlantic Ocean at the guy who ran the Federal Reserve for almost two decades.

Are the British that attuned to monetary policy in the U.S. or are they, perhaps, more willing to look overseas for a culprit rather than on their own soil?

(BTW - that little radio button thingy is my vote, just in case anyone was wondering.)

The much better known local boy, Gordon Brown, comes in a distant second (for very good reason, actually) and George W. Bush is even further back in third place.

Interestingly, the three individuals who were probably more responsible than any politician in the world - Fuld, Paulson, and Mozilo - filled the next three spots.

As for the other four, the British are probably about as familiar with the name Hank Greenberg as Americans are with Sants, Goodwin, and Corbert, though, after reading the descriptions provided, these three clearly deserved more votes than they received.

Here's what they had to say about former Fed Chairman Alan Greenspan:

Alan Greenspan was feted for his management of the US economy while he stood in charge of the US Treasury, but has since been put under the spotlight. He was responsible for cutting interest rates to near zero in the US in the aftermath of September 11, flooding the world with cheap and easily available money. Did this pave the way for a “once-in-a-century credit tsunami"? In October last year he said: “I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders.”

Allan Meltzer is a professor of political economy at the Carnegie Mellon University in Pittsburgh, said: “Alan Greenspan was much too afraid of a slowdown or other recession…he allowed the credit to expand too rapidly."

The confusion about the Fed chairman heading up the U.S. Treasury Department may be understandable as we Americans are often confused by the British position of Chancellor of the Exchequer which we'd be just as likely to say headed up the Bank of England.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Stimulus Bill Now Being Debated In Senate

A new $819 billion stimulus bill was passed by the House earlier this week, and the debate has moved on to the Senate, despite major opposition from House Republicans. Not a single Republican voted in favor of the bill according to the Wall Street Journal, but to get the 60 votes necessary to clear the Senate, the bill’s supporters will need to garner at least some Republican votes without losing any of the 58 Democrat senators. To secure those necessary Republican votes, some concessions will likely need to be made. One way or another, it is expected that this bill will be passed, but it remains to be seen how much political capital Obama will have to spend to make it happen.

The major divide between the two parties on the bill basically boils down to the allocation of the funds. Both parties support a stimulus bill in principle, but Republicans want to see the funds going toward things such as tax-cuts where as Democrats prefer government spending. In reality, this debate isn’t new, and considering the heavy numbers advantage that the Democrats enjoy in the House, Senate and now White House, the bill should lean toward their ideology. However, it is likely that Republicans will get a bone or two thrown their way in the process. Obama has stated time and time again that he wants broad, bi-partisan support for this bill, but it is unlikely that Democrats will be willing to give up too much considering their steep numbers advantage.

As a side note, the Wall Street Journal reported the formation of a coalition which backs the stimulus bill and which includes labor and environmental groups. The purpose of the group is to raise pressure on senators—specifically Republican senators—to support the bill. They announced Thursday that they will air ads around the country to encourage Republicans, "to support the Obama plan for jobs, not the failed policies of the past." The ads will run in Maine, New Hampshire, Iowa and Alaska according to the Journal. You can be certain that Democrats will remind Republicans and their supporters that their policies have been nothing but failures of late. The public is largely on board with this sentiment, evidenced by numerous polls. If nothing else we should get a chance to see how these new policies actually work in today’s economic climate.

Is Free-Market Ideology Flawed?

In a controversial article published in the Guardian, Jeffrey Sachs calls out free-market ideology as flawed and applauds the measures being taken by Obama to get the government more involved in business. America is known for its relatively free-market economy, and for years it seemed to work great, but Sachs argues that things have changed. Whether or not one agrees with Sachs it is interesting to hear his perspective on things. Mark Thoma from the Economist's View presents Sach's article in his blog post below.

Jeff Sachs seems to be pleased with the new administrations commitment to "a new age of sustainable development":

Rewriting the rulebook for 21st-century capitalism, by Jeffrey Sachs, CIF, The Guardian: One of President Barack Obama's historic contributions will be a grand act of policy jujitsu - turning the crushing economic crisis into the launch of a new age of sustainable development. ... Obama is already setting a new historic course by reorienting the economy from private consumption to public investments directed at the great challenges of energy, climate, food production, water and biodiversity.

The new president has taken every opportunity to underscore that the economic crisis will not slow, but rather will accelerate, the much-needed economic transformation to sustainability. ... The fiscal stimulus ... will lay down the first steps of a massive generation-long technological overhaul...

Obama has started with the most important first step: a team of scientific and technological advisers of stunning quality... He has also focused on two core truths of sustainable development: that technological overhaul lies at the core of the challenge, and that such an overhaul requires a public-private partnership for success. Taking shape, therefore, is nothing less than a new 21st-century model of capitalism ... committed to the dual objectives of economic development and sustainability...

Consider the challenge of a bankrupt automobile sector... In the Obama strategy, GM will not be closed to punish it... It's worth far too much as a world leader in the electric vehicles of the 21st century. ...

Conservatives are aghast. The bail-out of the auto industry was hard enough to swallow. Government investments in infrastructure and research and development are viewed with scorn, compared with the tried and true (if disastrously failed) tax cuts of the Bush era. Rightwing pundits bemoan the evident intention of Obama and team to "tell us what kind of car to drive". Yet that is exactly what they intend to do (at least with regard to the power source under the hood), and rightly so. Free-market ideology is an anachronism in an era of climate change, water stress, food scarcity and energy insecurity. Public-private efforts to steer the economy to a safe technological harbour will be the order of the new era.

There is plenty of room for blunders... Government activism can founder on the shoals of massive budget deficits, tax-cutting populism pushed by the right, politically motivated investments such as corn-based ethanol..., and more. Yet Obama is absolutely correct that we have no choice but to try...

This post can also be viewed on economistsview.typepad.com.

An Increasingly Popular Alternative To Layoffs

Companies in the U.S. laid off over 2 million jobs in 2008, but another expense cutting measure which is less often utilized also saw a major increase. A growing number of companies are choosing to cut pay rather than cutting jobs. Layoffs are typically preferred over pay cuts because among other things firms are afraid it might lead to an exodus of top workers. However, in this job market that isn’t a big worry. The last time there were nominal pay cuts was back in the Great Depression according to Price Fishback, an economic historian at the University of Arizona, as stated in the Wall Street Journal.

Because they remove spending capital from consumers while fostering additional fear and uncertainty, pay cuts are bad for the economy just as layoffs are. By now, practically everyone knows someone who has been laid off or had a salary cut, and even if one believes that one’s job is secure, the threat of a pay cut is encouragement to spend less. That said, though pay cuts will always be painful—especially if they become more widespread—they are still preferable over layoffs for consumers and the economy. After pay cuts, workers still have a source of income and don’t need to claim unemployment, which saves taxpayer dollars.

The inauguration is tomorrow, and I’ve never before seen this amount of anticipation for a new President. The state of the economy has brought a great deal of excitement, as many Americans believe that Obama is the man to rescue us from this recession. The thinking seems to be that once Bush is out of the White House and Paulson is out of the Treasury, all will be well. It is great to get excited, and Obama just might be the man to bring us out of this economic darkness, but people should remember that these things take time. Obama isn’t a miracle man, and he isn’t going to magically fix the economy. There is a lot wrong with the economy and there is a huge amount of work that needs to be done. We can hope for a quick turn around, but don’t expect it because it is not likely to happen that way.

Most Americans Support New Stimulus Proposal

House Democrats released the latest version of a new stimulus package meant to turn our struggling economy around. Most notably, the stimulus package swelled from $775 billion to $825 billion with a proposed $550 billion in spending and aid to states and $275 billion in tax cuts, according to CNNMoney. Despite the large price tag, Americans are generally perceived to be on board with the plan, according to a recent Wall Street Journal/NBC News poll. 43 percent of the people surveyed called the plan a “good idea,” while 27 percent said it was a “bad idea.” The remaining portion had no opinion either way.

The most pressing concern for the people surveyed was unemployment, followed by the federal budget deficit which came in at a distant second. 63 percent of the surveyed individuals felt that government spending should be the biggest priority of the bill, while 33 percent felt that tax cuts should be the main catalyst.

It would be interesting to compare this current poll to how people felt about these priorities prior to the last stimulus package. I have a sneaking suspicion that more people would have been in favor of tax cuts back then. Because those didn’t work as planned, people are turning to a different strategy to fix the problem.

President-elect Obama is enjoying unprecedented support for his plan and his administration as Americans look to him to get us out of this mess, but if Obama’s stimulus plan doesn’t get succeed, it will be interesting to see how quickly that support wanes. President Bush once had the highest approval rating ever (90 percent in September 2001), and now has the second lowest approval rating ever, only bested by Richard Nixon after the Watergate scandal. The American people are ready for results, and Obama may learn, as George W. did, that opinions can change drastically and quickly.

Obama Plans To Stimulate Economy With Big Tax Cuts

President-elect Barack Obama’s plan to fix America’s ailing economy has become a little clearer with the latest announcements. It appears that the biggest cog in the plan will be around $300 billion in tax cuts. Last year President Bush offered around $130 billion in tax rebates, which only briefly helped spark spending. Obama hopes that his measure has a bigger impact, and is electing to structure it in the form of a tax cut than a tax rebate. Along with the consumer tax cuts, Obama is also planning to cut taxes for businesses as well in an attempt to ward off the increasing level of layoffs and hopefully once again spur business investment. In addition to the tax cuts, Obama’s plan calls for around $200 billion to go to cash-strapped states, according to Daily News.

In total, this new economic stimulus plan could cost as much as $775 billion according to the Daily News. I’ll refrain this time from talking about the potential impact of this plan on the ballooning debt load we will likely leave for our children, but we should always remember that in the end someone has to pay for all these bailouts/stimulus packages. What I want to address is whether or not this program stands a chance. I would love to say that I believe that Obama’s plan is going to fix everything, but I’m just not feeling too confident. This plan is an improvement over Bush’s because it is meant to be lasting, not temporary. The rebates spurred spending for a few months, but the economy just continued to slide once the money was gone. Taxpayers were left with a huge bill and little to show for it other than a delayed recession. Obama’s plan could spread the goodwill out over a much larger period, but the question is whether it will be enough to really push us up and out of this economic rut.

About half of the total stimulus package funds are meant to spur job growth, with a goal of 3 million new jobs. In my mind 3 million seems a little high, and a tad unrealistic for us to obtain, but it sure sounds good. If we can get anywhere close to that number we will be doing extremely well. The plan calls for jobs to be created in infrastructure, energy, education and health care according to ABCNews.com. A major concern here should be how past government job creation movements have panned out: “’Time and again history has proven government-centered job creation doesn't work. Under [President] Carter in the late '70s people had all sorts of plans and ignored larger economic realities,’ former House Speaker Newt Gingrich told ABCNews.com.”

“‘In Japan they spent 13 years building an airport no one [once used]. Under the Socialists the French tried over and over again to create jobs and it didn't work. We know what creates jobs and it isn't putting the Treasury Department at the center of American capitalism. We need an investment strategy that supports the private sector and small entrepreneurial businesses,’ he said.”

Will the plan work or not? If past performance is any indicator it seems likely that this will just end up being another futile—and expensive—attempt to rescue the economy. No one wants to sit idly by and do nothing in the midst of this economic turmoil, but we shouldn’t blindly throwing away money at the problem either. This plan is definitely better than the last one put together by President Bush, but will it be enough? I have my fingers crossed, but if they had odds on this in Vegas I wouldn’t be betting for its success.

The Media Shouldn't Be Blamed For The Financial Crisis

With retirement accounts shrinking across the country, everyone is trying to determine who is to blame for the financial crisis. After all, if we can place blame on somebody we can then burn them at the stake, and it will make us feel so much better, right? Recently the New York Times published a controversial piece that basically blamed the entire financial crisis on President Bush. Several publications have disputed this piece, including Newsbusters, and of course the White House. Surely President Bush had a hand in the economic carnage of 2008, but to say that he was solely responsible for it is pretty ridiculous. There are so many people that have a hand in economic matters of this country, and while the President is the figurehead, he most certainly is not the only one to whom blame is due. So what other names are being thrown out? Greenspan, Bernanke and Paulson are all likely candidates, but according to a recent survey by Opinion Research most Americans think a large portion of the blame falls on the media.

According to the poll 77 percent of Americans believe the media is to blame for stoking the financial crisis by spreading fear among consumers. My first reaction to this was a big, WOW. Yes, the media has spread a bit of fear and panic, and the stories of doom and gloom are certainly helping to sell more papers, but there is another reason why all you see are negative stories: Positive news is next to impossible to come by if you don’t just make it up. If the media had more positive news to cover, you can bet that they would do it.

Americans who wish to bury their heads in the sand can feel free to do so, but personally I want to know what is going on in the financial world and I want the truth, not some lame story meant to make me feel all warm and fuzzy inside. People hoarding their money out of fear fostered by what they have heard from the media may be making matters worse, but it is hard to blame reporters for doing their jobs and reporting the truth. It is falsifying information or misleading readers in some other way that we should scorn. Yet things are getting so bad that in the press release issued by Opinion Research, national expert on corporate liability and white collar crime issues Richard L. Scheff warns that members of the media could potentially be exposed to liability despite apparent constitutional protections.

This is of course absolutely ridiculous. What we are saying is that instead of the hard truth we want our media to report sugar-coated stories to make us feel good about the economy. If you want a bubble, that is one great formula right there: Get the public to buy into a bunch of hype so they can feel confident buying up overpriced assets, ignoring that the bubble will inevitably pop, bankrupting those who believed that everything was coming up roses when the market was really pushing up daisies. The media should be sued were they to feed false hope in this economic environment, but certainly not for reporting the truth. That defeats their entire purpose for existing. For the Americans who can’t handle this hard truth: Good luck to you, as you most certainly are going to need it.

Looking Ahead To The Bubble Of Tomorrow

As we deal with the consequences of the current asset bubbles popping around us, it is hard to give any thought to future bubbles. However, considering all the recent moves that the government has made, we really do need to pay attention to what their ramifications will be. The things that the government has done are unprecedented, and we should expect the next round of bubbles to be the same. James Picerno from The Capital Spectator talks more in depth about this in his blog post below.

Governments are now working overtime in dispensing monetary and fiscal medicines intended to renew, restore and revive battered economies. In time the aid will quicken the economic heartbeat, although exactly when and to what degree is unknown. The patient has for years gorged on any number of goodies, ranging from the sweet treats of leverage and the candied delights of easy money to roller-coaster thrills of irrational investing.

The party, of course, is over, and the cleanup may go on for some time—probably longer than we expect. In a somewhat haphazard and increasingly desperate effort to ease the current and future pain, governments are dishing out unprecedented rounds of stimulus pills. For obvious reasons, everyone's watching each new step in what promises to be a long run of conventional and unconventional programs intent on propping up economies from east to west, north and south and everywhere in between.

But while the lion's share of attention is on the medicines, what might follow once the patient is no longer in imminent danger of cardiac arrest? In a speculative exercise of considering the possibilities, we offer the following thoughts for the post-crisis world order, which one day will arrive, amazing as it seems at the moment.

* Inflation
Yes, inflation. Strange as it sounds to talk about inflation at a time when deflation seems to be stalking the U.S. economy, it's never too early to think about the natural state of economic affairs. One day (don't ask us when), all this stimulus and its baggage will be yours. Pulling back on the sea of money washing ashore will eventually require the mother of all mopping-up campaigns. Assuming, of course, the Fed and central banks around the world have the stomach for the task.

Make no mistake: pulling back will be tough, very tough. Imagine the scenario a year from now. Let's make a big assumption and say that the economy's showing signs of life and GDP manages to post a modest 1% rise in Q4 2009, with more of the same expected for 2010. Higher interest rates would certainly be warranted, relative to the near-zero levels of the moment. Perhaps much higher rates will be required. But will Bernanke and the boys be willing and able?

The political pressure to keep the stimulus going will probably be immense. Meanwhile, warnings of higher inflation at some point are likely to fall on deaf ears for an extended period. Higher inflation, after all, is just what the Fed wanted by lowering rates so low and so arguments for containing the revival in prices will initially dismissed.

Yes, the inflation beast will work his way back into the director's chair. He always does, and he has a thousand tricks up his sleeve. His task will be all the easier if the deflation mindset takes root, which looks increasingly possible.

Nonetheless, some corners of finance are worried about the longer-term risks. That includes the dollar sellers and the gold buyers. Yes, deflation is a risk, but in the long run history tells us that inflation always comes out on top eventually.

What's more, a sudden change in the weather is hardly beyond the pale. Recall that inflation worries were all the rage earlier this year. Yet that fear quickly gave way to deflation. Expecting smooth and gradual changes on the pricing front may be asking for too much in the 21st century.

* Oil
Just as inflation worries have been banished in recent months, so too are the headline-grabbing predictions of $200 oil. These days, that's a forecast with one too many zeroes.

But let's be clear: the recession-inducing fears that are pushing oil lower these days will eventually abate. That doesn't mean oil will suddenly resume its skyward run at the first sign of economic stability. But marginal growth in oil demand isn't dead; it's merely hibernating.

China, India, and, yes, the United States will one day be in need of more oil. Yes, green technology will slow future demand for fossil fuels. But unless you're expecting miracles, the world economy will almost certainly be consuming more oil in 3 to 5 years compared with today. The crowd, however, will be focused on demand trends over the next year or two and thereby conclude that high oil prices are forever gone. Oil companies will be pressured into agreeing, resulting in a sharp decline in searching for and developing new oil fields. Those are the seeds that will push prices higher once more, perhaps to new all-time heights, although probably not for several years.

* The Bubble of 2013?
No one knows where all the stimulus will wind up, but there are pretty good odds (and a fair amount of historical precedent) suggesting that exuberance will eventually reanimate itself with all its immoderate excess intact. Some say that Treasuries are now a bubble waiting to burst, courtesy of interest rates that can only go higher from here. Perhaps, although it's a safe bet that one day, perhaps sooner than we expect, bubble sightings will return.

Bubbles, writes John Kemp of Reuters, are no accident. "It is the direct consequence of the Fed's asymmetric response to shifts in asset prices." Much will depend on whether the reflation policy is, at the appropriate time, wound up and put in the closet. In theory, it's a no-brainer. In practice, there are complications.

Finally, we bring all this up mainly as a reminder that it's always difficult to maintain strategic perspective. Two years ago, when all the major asset classes were rising, few could imagine the current pain of the moment. Similarly, looking at where we're headed several years from now looks about as relevant as studying the moons of Saturn. But the future keeps coming, even if we're not looking. It's tempting to make all our investment decisions based on what happened yesterday, but we're all probably better off keeping our strategic-investing focus on what's likely to unfold several years from now. No easy task, to be sure. Par for the course if you're intent on winning the investment game.

This post can also be viewed on capitalspectator.com.

Another $800 Billion Committed: Crisis Tally Tops $8 Trillion

Yesterday on Bloomberg, I saw a disturbing article that disclosed that the government had already committed $7.76 trillion to fix the credit crisis. This number was staggering to me. I write about this stuff every day and yet even I didn’t realize the tally had gotten that high. The $7.76 trillion number includes the over $300 billion committed to Citigroup, but another $800 billion to free up the credit markets was announced this morning. So far this week—which isn’t even two days old yet—the tally has already surpassed a trillion dollars. This is absolutely insane, and you can bet that there will be more where that came from once the new administration takes over.

I don’t know about you, but these numbers are freaking me out. Sure a lot of these commitments have an investment component, but I don’t believe claims that we will make a bunch of money from these deals. I would consider us lucky if we are able to recover the principal. Things have only gotten worse of late, and we seem prepared to throw as much money at the problem as needed, so what will the final tab be? When will this spending spree stop?

Obama is prepared to open up the taxpayer checkbook when he takes office, recently announcing plans to roll out a new stimulus package estimated to cost $500 billion to $700 billion according to CNN. In addition, his selection for Treasury Secretary, Geithner, has had a huge part in the economic decisions made by Treasury Secretary Paulson, and it seems unlikely that he will stray far from the current path. With these combined factors, we could face countless trillions more before all is said and done. Where is this going to leave our children?

The answer to that question of course is that our children will be unfairly burdened by an absolutely enormous debt. Their financial prospects will be dim as they are forced to deal with higher taxes and other restrictive policies. Personally I find this completely unacceptable, and I hope beyond hope that it doesn’t come to that. I’ve mentioned this before in some of my posts, but to knowingly leave a burden such as this on the future generation is immoral to the fullest extent. We need to pay for our own mistakes, and our own excessive lifestyles. Our children have enough to worry about, and paying for the previous generation’s debt shouldn’t be one of them.

Citigroup Bailout, Deflation And The Worldwide Financial Epidemic

The news of Citigroup's $300 billion bailout seems like déjà vu, and the scary word "deflation" that is being thrown around seems distant compared to everything else we are dealing with. The U.S. is not the only country with problems either, this is without a doubt a global financial epidemic. James Picerno from The Capital Spectator wonders, though, if the cure might be worse than the disease.

Have we seen this movie before? It certainly sounds familiar.

Once again, the government steps in to bail out a financial institution and Mr. Market takes kindly to the idea. Initially. But then reality sets in and the process starts anew. Perhaps it'll be a true sign of a bottom when the Feds engineer a bailout and the market tanks on the news.

But not yet. The latest installment of rescue revolves around the once mighty Citigroup. A giant among giants, this behemoth of financial behemoths surely fits the bill as too big to fail. If such a thing exists as a financial institution that must be saved at any cost, Citigroup looks like the poster boy for this idea.

Total assets for Citigroup were a bit more than $2 trillion in September. For those who like to keep score, that's roughly 14% of the annualized value of U.S. GDP for this year's third quarter.

The days of pulling another Lehman and letting a big bank fail are history. Better to bailout more rather than less and deal with the consequences later. The grand strategy here is that if the government bails out enough banks (and perhaps an auto company or two) while spitting out stimulus in various forms as far as the eye can see, the system will correct itself, or at least stop bleeding. At a time when deflationary risks are rising, this plan is considered prudent and timely by a growing swath of economists and voices from the peanut gallery, including yours truly. The risk of an even deeper implosion of prices and confidence must be avoided lest the vortex of deflation pull everything down the rat hole. Preventing deflation is the last battle in this horror film because once the big "D" takes hold, in sentiment and prices, the challenge becomes much, much tougher.

The problem is that no one's really quite sure if deflation with a big "D" is on our doorstep. Quite possibly it is, or so one could reason after witnessing consumer and wholesale prices fall last month on a scale unmatched since the government began keeping tabs on such things in the late-1940s. Waiting for definitive signs risks letting the monster out of the cage. Decisions, decisions. Nonetheless, there's a strong case for assuming deflation is coming. If we're wrong, we'll have more inflation on our hands than we otherwise would. But the world knows how to fight inflation, even if the political will is sometimes lacking. Attacking deflation, on the other, is another story.

Any way you slice it, there's bound to be more than a little disappointment and finger pointing in the months and years ahead. Indeed, no one should think that the necessary but risky strategy of preventing deflation is destined to end in triumph, or quick results. The stakes are high, in part because the government's moving quickly toward betting the house on a fiscal/monetary solution. On the opposing shore is the unwinding of excess, some of which has been decades in the making. When an immovable force meets government printing presses, the outcome isn't entirely clear.

All the more so if the world is looking for signs, one way or the other, by next Wednesday. It's difficult to gauge expectations as we run from one crisis to another. But this much is clear: the financial and economic problems will take time--years--to solve, and to the extent that the crowd thinks otherwise, the seeds of disenchantment have been planted.

The U.S. economy is sick, and getting sicker. Europe has the disease and Asia is at risk of contracting the same, albeit in a milder form. Looking back on the past five decades offers no clue for what may be coming. Growth has been a constant, according to GDP numbers from economist Angus Maddison, emeritus professor, University of Groningen (Netherlands). As the chart below shows, outright contraction is unknown in the postwar era.

Fifty years is a long time, virtually an eternity for mere mortals studying the past in search of clues about the future. It's all too easy to look at this track record and conclude that real declines in global GDP aren't possible, or are so unlikely as to be unworthy of considering. The IMF forecast, for one, still imagines more of the same with next year's estimate for real global GDP rising by a respectable if not impressive 2.4%.

Of course, the crowd used to think in persistent-growth terms for housing prices, and how they never fall on a year-over-year basis. Oh, sure, that happened in the Great Depression, but such episodes were dismissed as a thing from the past.

Perhaps it's time to consider the unthinkable. We've all received a crash course in just that over the last few months. But has the education so far been sufficient? Or do we still need to spend more time studying?

There are many dangers stalking the global economy, and at the top of the list is the assumption that the governments of the world can spend their way out of the slump on our collective doorstep. In the U.S. alone, the government now stands at the ready to spend $7 trillion--yes trillion with a "t"--to bring financial salvation to the system, according to Bloomberg News. That's the equivalent of three-and-a-half Citigroups, or half the U.S. economy. Scale no longer looks to be a stumbling block.

By spending enough money, governments are likely to keep inflation-adjusted global GDP floating somewhere above zero, if only slightly. That would still bring a fair amount of pain and repricing, but embedded in the expectation is the notion that a floor can be built under the crisis.

Perhaps, although at some point one might wonder if the cure will be worse than the disease. There are some awkward questions that will accompany the mother of all spending sprees now underway. First up: Is there some point at which additional government spending becomes counterproductive because a) it encourages future inflation on a scale that will be excessively burdensome; and/or b) the prospect of the government owning ever-larger chunks of the economy risks institutionalizing mediocrity or worse in the economy?

There are two great episodes of deflation in modern history, and each continues to raise questions about the associated lessons. Yes, spending is the only hope of sidestepping the beast, and if that means artificially engineered demand from the government, so be it. But it's not clear that the strategy leads to happy results all around. Meantime, there's more than one way to fight deflation.

That's not to say we shouldn't try to spend our way out of a deflationary trap. We should. We must. And we will. The risk is real this time, unlike the previous worries over deflation in 2001-2003. But the details of how we engage our anti-deflationary war may matter as much, if not more, as the decision to wage the war in the first place.

The dismal science has precious little experience with fighting deflation and so we must recognize that we may soon be caught up in an economic experiment on a scale that has little or no precedent. By all means, let's fight this war ferociously. But it also needs to be fought intelligently. What exactly do we mean by "intelligently"? We can't say for sure. No one can, and therein lies the greatest risk.

This article has been reposted from The Capital Spectator. The full post can also be viewed on The Capital Spectator.

How Much Damage Can Be Done Before Obama Takes Office?

The economic prospects of this country are getting worse everyday, and the current administration seems content to sit back and do nothing. This transition period, before the new administration officially takes power, has caused problems before, way back in 1932, and we all saw how that turned out. It makes you wonder, just how much can the current administration further mess things up before Obama takes power? Economics professor Mark Thoma looks at an opinion piece from Paul Krugman on the topic in his blog post from Economist's View.

The outlook for the economy is deteriorating, yet economic policy "seems to have gone on vacation":

The Lame-Duck Economy, by Paul Krugman, Commentary, NY Times: Everyone’s talking about a new New Deal, for obvious reasons. In 2008, as in 1932, a long era of Republican political dominance came to an end in the face of an economic and financial crisis that, in voters’ minds, both discredited the G.O.P.’s free-market ideology and undermined its claims of competence. And for those on the progressive side of the political spectrum, these are hopeful times.

There is, however, another and more disturbing parallel between 2008 and 1932 — namely, the emergence of a power vacuum at the height of the crisis. The interregnum of 1932-1933, the long stretch between the election and the actual transfer of power, was disastrous for the U.S. economy, at least in part because the outgoing administration had no credibility, the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action. And the same thing is happening now. ...

How much can go wrong in the two months before Mr. Obama takes the oath of office? The answer, unfortunately, is: a lot. ... The prospects for the economy look much grimmer now than they did as little as a week or two ago.

Yet economic policy, rather than responding to the threat, seems to have gone on vacation. In particular, panic has returned to the credit markets, yet ... Henry Paulson ... has announced that he won’t even go back to Congress for the second half of the $700 billion already approved for financial bailouts. And financial aid for the beleaguered auto industry is being stalled by a political standoff. ...

What’s really troubling ... is the possibility that some of the damage being done right now will be irreversible. I’m concerned, in particular, about the two D’s: deflation and Detroit.

About deflation: Japan’s “lost decade” in the 1990s taught economists that it’s very hard to get the economy moving once expectations of inflation get too low (it doesn’t matter whether people literally expect prices to fall). Yet there’s clear deflationary pressure on the U.S. economy right now, and every month that passes without signs of recovery increases the odds that we’ll find ourselves stuck in a Japan-type trap for years.

About Detroit: There’s now a real risk that, in the absence of quick federal aid, the Big Three automakers and their network of suppliers will be forced ... to shut down, lay off all their workers and sell off their assets. And if that happens, it will be very hard to bring them back.

Now, maybe letting the auto companies die is the right decision, even though an auto industry collapse would be a huge blow to an already slumping economy. But it’s a decision that should be taken carefully, with full consideration of the costs and benefits — not a decision taken by default, because of a political standoff between Democrats who want Mr. Paulson to use some of that $700 billion and a lame-duck administration that’s trying to force Congress to divert funds from a fuel-efficiency program instead.

Is economic policy completely paralyzed between now and Jan. 20? No, not completely. Some useful actions are being taken. For example, Fannie Mae and Freddie Mac ... have taken the helpful step of declaring a temporary halt to foreclosures, while Congress has passed a badly needed extension of unemployment benefits now that the White House has dropped its opposition.

But nothing is happening on the policy front that is remotely commensurate with the scale of the economic crisis. And it’s scary to think how much more can go wrong before Inauguration Day.

This article has been reposted from Economist's View. The full post can also be viewed on Economist's View.

Does Anyone Know How To Fix This Financial Crisis?

I read a couple interesting articles this morning that I thought I’d share. One article talks about how no one, including President-elect Obama, knows how to fix the financial crisis. The other offers a potential solution that will cost more than $1 trillion. I’ll summarize the two articles below:

The first article was written by Russell Roberts, economics professor at George Mason University, and published in Forbes. In his article, Roberts equates this financial crisis to raising children, saying that each one is different and there is no official manual on how to raise the perfect child. He goes through the measures that have already been enacted, saying how each one thus far has failed miserably. Many people have this belief that Obama will miraculously save the day, but Roberts points out that the only solution Obama has really posed thus far is to offer another stimulus package, and idea that has already been tried and failed. Paulson is lost at this point, and he doubts Obama will be the answer either. He ends his article saying:

“What if doing whatever it takes means doing less, rather than more?

That is the conundrum for Obama and the successor to Paulson. The more options there are, the harder it is to know which one is the right one. The more options you try, the more uncertainty is injected into the economy, and the more cautious are investors and employers and consumers.

Nobody knows what it takes to move the economy forward right now.”

The second article was written by Neha Singh and published by Reuters. This article is about the findings of Paul Miller, an analyst for Friedman Billings Ramsey. Miller has come up with a plan to save the U.S. financial system, and it will cost only $1 trillion to $1.2 trillion in additional capital. Basically, he says that in order to restore confidence and improve liquidity in the credit market, this injection needs to happen. In addition, rather than the investments being made via preferred shares or long term debt mechanisms, Miller thinks that in order for the plan to work the investments need to be common equity injections. The following is a quote from Miller: “Debt or TARP capital is not true capital. Long-term debt financing is not the solution. Only injections of true tangible common equity will solve the current crisis.” Miller says that even his plan will take a few years to fix things.

Obviously these two articles have very different views, but one thing they have in common is that they agree that the solutions proposed or enacted thus far have failed.

Of the two views, I tend to side with Roberts, author of the first article. I think that pretty much we are lost in the forest and going around in circles trying to get out, and as they teach you in Boy Scouts, when you get lost sometimes it is best to wait it out.

Miller’s suggestion, on the other hand, I find completely ludicrous. So instead of the government (i.e., taxpayers) getting preferred treatment for their extremely risky investments into struggling companies, they should settle for common equity investments that would surely lose a ton of taxpayer money? Sorry, but that sounds pretty dumb to me. And I’m certainly not willing to lose $1 to $1.2 trillion of taxpayer money to find out that this crazy idea isn’t going to work. There are a lot of ways that we can help the economy with that kind of money that would have a bigger impact. Besides, there is no way that plan would ever get approved without people rioting in the streets and threatening rebellion. People are already outraged at the current investments we are making into these companies, and if we were to take even lesser terms in exchange, look out. The only people who would support this plan would be shareholders in these institutions, and I don’t think anyone feels bad for them at this point.

Bush And Paulson Tell Obama To Clean Up Their Mess

It appears that Bush and Paulson are content to leave their mess for Obama to clean up. Rather than push forward with new initiatives that can help relieve pressure on the financial system, they would rather wash their hands of the situation. Considering the magnitude of our problems, though, the economy might not be able to wait for Obama to take command. Kathy Lien investigates this issue in more depth in her blog post below.

There are increasing signs that the Bush Administration wants to leave the clean up job to Barack Obama.

According to Treasury Secretary Paulson, even though the first half of the $700 billion bailout package is being used up quickly, the Bush Administration will not be asking Congress for the remaining $350 billion.

With 8 weeks to go before Bush leaves office, the current Administration is more focused on wrapping things up than starting new initiatives.

Paulson said it best:

“I’m going to do what we need to do to keep the system strong but I’m not going to be looking to start up new things unless they’re necessary, unless they make great sense” and “I want to preserve the firepower, the flexibility we have now and those that come after us will have.”

This was the same spirit that Bush took at this weekend’s emergency meeting of G20 nations that I talked about this morning. The meeting was a big disappointment as the Group failed to deliver any specific solutions. Instead, they set an action plan for March 31 and another meeting for April 30th. The G20 is clearly waiting for the new Administration to take charge before putting the pedal to the medal. The only question is, will the global economy be able to wait that long.

This article has been reposted from Kathy Lien. The full post can also be viewed on KathyLien.com.

Does The Winner Of Today’s Presidential Election Stand A Chance?

Today is election day, the day Americans get to choose their next leader. This election is considered by many to be one of the most important in recent memory. This is evidenced by the record number of voters expected at the polls this year. With the economy tanking, and so many other problems looming in the U.S., Americans are looking for the new president to come in and make everything better. A lot is going to be expected of the new president, and it certainly is not going to be easy to deliver. This begs the question: Does the next president even stand a chance for success?

My first thought on this is, not really. I don’t think the new president, be it Barack Obama or John McCain, has much hope to be remembered as a successful president. The situation they are going to come into is just too problematic. We are already scheduled to add another $2 trillion to the national debt next year, according to Goldman Sachs as reported by the Wall Street Journal. With this debt level already basically committed, the new president would be hard-pressed to justify even more spending. That means that many promised programs will likely get shelved. While this would certainly be for the greater good, people won’t necessarily remember that part. What they remember is what life was like for them during the term of the previous president. Considering the factors we are faced with today, I don’t see how life is going to get better for Americans, and this is likely to reflect poorly on the new president.

Really, I feel bad for whoever becomes our president-elect today. It was not their failed policies that put the U.S. in the place it is today, but they certainly will have to deal with the mess. They don’t have a hard act to follow, and they will likely be remembered more fondly than their predecessor, but with their hands essentially tied behind their backs it will be difficult for them to be remembered for much of anything beyond the man who preceded them, George W. Bush.

The next president is going to inherit one of the toughest jobs of all time. Americans want change and the president is going to be pressured to deliver, and quickly, without selling out America’s future generations. How are they going to do it? Honestly, I have no idea, and I certainly do not envy the situation they are faced with. I look forward to seeing how they handle it, though, and I wish them the best of luck. No matter which candidate is elected, I know I’m looking forward to change. I am tempering my expectations somewhat, considering the circumstances, but at this point we are in need of new leadership and I hope America chooses the right man for the job.

George W. Bush And His Legacy Of Debt

George W. Bush will be known for many things when his time as president of the United States ends, but one thing sets his time in office apart from all others before him: the incredible amount of debt he was able to add to the country’s balance sheet. He has only got a couple months left in office, but he is doing his best to make those months count and really increase his records. October was the single biggest month in history for marking up additional debt. Last month, we racked up more than $500 billion in new debt, and November just might break that record. When President Bush was sworn into office, the federal debt stood at $5.7 trillion, according CBS News; today it is more than $10.5 trillion. In a little less than eight years, President Bush has managed to almost double the national debt, which is quite an accomplishment.

In the last four months, we have rung up more than $1 trillion in new debt, and at the pace we are going now, we should expect to see another trillion or so added before Bush leaves office. When all is said and done, we could very well be looking at a national debt of between $11 and $12 trillion. These are ridiculous numbers we are talking about here, and I hope that we all can grasp how truly enormous they are.

President Bush’s spending sprees are certainly not going to help the next president at all. The next president is going to inherit a financial situation that is unprecedented, and that will be extremely difficult to manage, to say the least. Each candidate has a long list of changes they would like to make, programs they would like to enact or tax cuts they would like to offer. The truth is with the national debt and economy where they are right now, they are going to be hard-pressed to add anything new to the budget. If they want to have any hope of getting out from under this mess, then they need to raise taxes and cut spending dramatically. The additional money from these activities would then need to go directly to paying down the debt, not to new programs. It is going to be extremely hard to have that sort of fiscal discipline, especially considering the promises the candidates are making to the American people, but it is exactly what we need.

In reality, what do I expect to happen? I think the next president will probably end up enacting some of their key programs regardless of the fact that in so doing, they are adding to the deficit. Their goal will probably end up being to leave office with the national debt only a couple trillion dollars higher. The truth is most Americans are more interested in what they are going to get--tax cuts, health care and so on--than the national debt. Sure, they might know that the debt is trillions of dollars, but what does that really mean? So far it hasn’t hurt our ability to borrow more money, or anything else for that matter. Since it really is not hurting us now, it's no big deal right? Politicians know this is probably how many Americans feel, and as long as they can follow Bush’s poor showing by keeping debt levels lower than he did, no one is really going to pay attention to their spending. Plus they can always blame Bush’s failed policies which they had to deal with, and the added interest payments as well stemming from all the new debt he added.

I sure hope I’m wrong and that the new president really tightens America’s belt to help us get out of this hole, but I seriously doubt it is going to happen. Unfortunately, America still doesn’t get it, and until they do no fiscally sound politician is going to stand a chance of survival. Americans are still all about what’s in it for them right now, and they don’t care about who or what is going to pay for it. The sad part is that it will be future generations paying for our greed, and that just isn’t fair in my book. You can bet that our children will be faced with higher taxes and tougher living conditions because of this national debt. Someday our kids are going to look back at the legacy of George W. Bush and despise him for what he contributed to the situation they are living in. He very well may become the most hated president of all time--assuming, of course, he hasn’t earned that title already.

Bernanke Pushing For Another Stimulus Package

In an effort to stem the financial crisis, Federal Reserve Chairman Ben Bernanke is encouraging Congress to pass another stimulus package when they meet next month. To date, President Bush has said he feels as if passing another stimulus bill would be premature, considering we haven’t given the current stimulus measures time to be fully integrated into the economy, but Democrats hope that Bernanke’s blessing will be enough to change his mind. There are several proposals for a new stimulus package on the table right now, but Democrats would like to see this one include funds to address infrastructure and aid states, according to the Associated Press.

If a new stimulus package is passed, it will probably end up being as much as--or even more--than the previous $168 billion stimulus package passed back in February. In addition to the infrastructure and state aid, there could be another tax rebate included, according to the AP. It makes total sense, too, because if we are going to take bad debts off the books for these financial institutions, then why shouldn’t the government give taxpayers money to pay off their debts? Our nation’s infrastructure is badly deteriorating in many areas, so there is a definite need for something to be done; the infrastructure proposal is a good one, assuming that the projects selected are carefully reviewed. In addition to completing badly needed repairs or upgrades, infrastructure work would also create jobs.

But at what point are we going to say enough is enough? How many bailouts or stimulus packages do we have to pass before the economy is going to turn around? Will the economy even react to any of this? These are all tough questions, ones for which the government doesn’t have answers. At this point, they are determined to do whatever it takes to fix the economy and are content to use a trial and error methodology. I don’t know about you, but I would prefer that the government be a little more conservative with my tax dollars than they have been.

We have already committed around a trillion dollars in financial stimulus aid and so far nothing has worked; at some point we need to cut our losses. I think part of the problem is that since, it is an election year, everyone is trying hard not to lose their jobs--instead of thinking, "What is best over the long term?" they are thinking, "What is going to get results over the next two months?" This is obviously not the mindset we want our leaders to have. I sure hope Bush stands up to this push for another stimulus package and instead lets the next administration evaluate its merits. Hopefully by then our leaders will be thinking straight and have our true interests at heart.

Is Another Economic Stimulus Package Imminent?

Now that the effects of the first economic stimulus package are wearing off and consumer spending is dropping like an anvil, taking America’s economic prospects with it, how long will it be before we see the next brilliant economic stimulus package? The government seems intent on avoiding a recession at all costs, so it seems almost inevitable that a second stimulus package will be unleashed, especially if Obama takes office.

Democrats in House are pushing for more economic aid to be sent out, but in this version they want to see money sent to local governments along with infrastructure improvements and assistance to certain families and workers in need, according to the Economist. Their proposal totals around $50 billion. So far President Bush seems intent to avoid another stimulus package, but who knows if he will change his mind or not. In all likelihood, though, nothing would happen until early next year, under the new President’s leadership. Since Obama has been pushing for a second stimulus package, it seems that if he is elected we can pretty much expect to see one next year, unless the economy makes a miraculous recovery in the second half of 2008 (not likely). McCain, on the other hand, seems opposed to one for the most part, but with Democrats expected to rule in both chambers, according to the Economist, he might be easily swayed if elected.

If I had to guess, I would say chances are more likely than not that we will see another stimulus package. The question that always comes up in my mind though is, “Who’s going to pay for it?” It seems rather silly to tax people in order to give them money back via an economic stimulus, which means we are going to rack up some more IOUs. What’s another $50 billion when you are already $9.9 trillion in the hole, right?

Paris Hilton For President: Energy Policy For People (magazine)

Paris Hilton has recently released a video rebuttal to a rather ill-advised John McCain ad which compares Barack Obama with “celebrities” such as Hilton and Britney Spears, suggesting a lack of substance despite their charisma. The original ad seems desperate and is as insulting to the viewer as it is to those mentioned. Meanwhile, Paris’ ad is actually witty, albeit a touch misinformed about energy policy.

Who would have thought that perennial tabloid darling Paris Hilton could actually deliver a speech more effectively and with greater poise than our president of eight years? It seemed, in fact, that her relevance was beginning to fade until the McCain ad was released. While I doubt that Ms. Hilton will win a single state in November, this may have the unfortunate side-effect of reinvigorating the public’s fascination with her. Thanks, John; I guess we’ll always have Paris. Still, we could do worse than President Hilton: I dare say that she would have looked as convincing as Bush did arriving in a flight suit on the USS Lincoln to announce “Mission Totally Accomplished! Luvz it!” She might even be able to pronounce Sarkozy properly.

But my praise of Ms. Hilton stops there. In the video, she suggests combining the two energy policies of McCain and Obama to help solve the energy crisis. Her suggestion is to allow offshore drilling to tap those rich deposits for cheap, easy fuel as we work on alternatives. Appropriately enough, the last time I used the words “rich,” “cheap” and “easy” in the same sentence, it was to describe Paris Hilton, but unfortunately her plan is as superficial as her cult, and it is flawed for the same reason that McCain’s “solution” is flawed.

Offshore drilling would be a placebo for the problem at best, as the restricted areas would provide only a drop in the proverbial barrel of our oil consumption. Furthermore, it will take several years to construct derricks and refine the crude, providing no immediate relief and precious little when the wells truly begin to produce. All of this assumes that the oil would be sold exclusively to Americans, and we should know by now that this is not a given.

The Paris for President campaign is off to a rocky, though amusing start. I’m afraid she won’t have time to really establish a solid platform by November. That said, I think her decision to start this late in the campaign is a refreshing one. This overextended campaign season has been costly and grueling for everyone involved, and though I can’t get behind Hilton on her energy policy, her frank approach is a balm in this hostile election year. She even may have a running mate selected before the Republicans or the Democrats. She mentions Rihanna, but a ‘Hilton Clinton’ ticket has such assonant appeal, and it’s better to be called assonant than asinine, which is how I would describe the campaigns of other nominees at this point.

Luvz it, indeed.

Mortgage Fraud Still Going Strong And Taxpayers Will Get The Bill

Last Friday the Orange County Register published an article that uncovered the details of a recent real estate transaction which was blatant mortgage fraud and will likely be left on taxpayer’s plates. Reading this article just made me shake my head because it is apparent that banks have learned nothing from the mortgage mess we are in today. If you haven’t read the article I suggest you do so, but I will attempt to summarize it below.

An investor purchased the home on Camile St. in Santa Ana at a foreclosure auction for $304,500, about half of what the home had sold for in 2006. This investor then fixed the home up and flipped it to a Hispanic family for $625,000. On a street where homes are selling in the mid $300,000s, this sales price should be an immediate red flag. However, Wells Fargo which issued a $500,000 loan on the property, didn’t bother looking deeper into the deal. The investor sold the home as a for sale by owner and had a plan in place where he could offer a potential home buyer 100 percent financing, even though that is all but unheard of right now. As part of the sale, the seller paid the $125,000 down payment for the buyer, but that’s not all. The seller also agreed to pay the buyer $30,000 in cash, pay the first 3 months of the mortgage and buy them a 52-inch LCD TV. So the real sales price was around $460,000 once the seller concessions are taken into account.

The author of this article went so far as to call up the mortgage broker, escrow officer, appraiser and even Wells Fargo to get their reaction to the deal; it's no surprise, though, that they all brushed it off, saying the details weren’t their business and that it was between the buyer and seller. Wells Fargo declined to commit on this loan in particular because of privacy issues, but beyond that, the best they could come up with was that they have tightened their lending standards. I don’t know about you, but if this is their idea of tightened lending standards, then they have some problems. I sure hope that Wells Fargo uses this information to take some action against this sort of practice, but I’m not holding my breath.

It gets better though, the Hispanic couple who bought the home claim they were lied to. They said that they were told they were buying the home for $500,000 and that they were going to get 100 percent financing. They didn’t know about the $625,000 sales price till the end when they signed the papers. Translation: Either this couple didn’t bother to read the purchase and sale agreement when they signed it, or else they are lying in order to protect themselves now that this information is on the public radar. My take is it is probably option #2. This couple already owns another home on the same street, so this is not their first time buying a property. In addition, they admitted to noticing the price at closing, but agreed to sign anyway. I think an honest person would have questioned that then and there.

If you ask me, these buyers were in on the deal, along with the seller, mortgage broker, appraiser and escrow officer. They were wooed by the prospects of $30,000 in cash. All they had to do was sacrifice their credit. The investor would pay the mortgage for 3 months, taking away the chance of the bank red flagging the deal for further investigation if the loan goes non-performing right away. After that, the buyers don’t even need to bother paying the mortgage, they can just let it fall back into foreclosure and get lost in the crowd. After all, Camile St. is already a foreclosure haven; what's one more?

So the next question is, who is going to be stuck with the final bill when all is said and done? The buyer? The lender? That would be a no and a no. The buyer has nothing at stake in this deal; in fact, they were paid to buy the home. If you thought the lender, you are also mistaken, because guess what? This was likely a conforming loan. That means it is going to be guaranteed by Fannie Mae or Freddie Mac. Thanks to the new housing bill that President Bush signed into law yesterday, taxpayers are likely going to be the ones to take the hit on this one, as well as for other mortgage frauds out there. It is disheartening to see that obvious cases of mortgage fraud are still occurring. But now that we as taxpayers are ultimately responsible for the bill, this just makes me mad.

Housing Bill Signed By Bush; Now What?

President Bush signed the housing bill this morning, so the biggest housing legislation in decades is now officially on the books. The bill finally came together when opposing sides were able to agree that the bill as is was better than nothing. Republicans got their Fannie Mae and Freddie Mac support and Democrats got their foreclosure bailout. Neither side is 100 percent happy, but then, when does that ever happen in politics? So now that this housing bill is official, what happens? Can we expect to see dramatic changes in the housing market for the better now? Well, not exactly…

It is no secret how I feel about the housing bill, and if you aren’t familiar with my blog, read this prior post on the housing bill to get caught up. There are also officials who share my same discontent for the bill. According to BusinessWeek, a top official in the Bush administration admitted that this housing bill will probably help fewer people than the previous expansion of the FHA. This new housing bill is estimated to help around 400,000 people, compared to the previous FHA bill, which was slated to assist 500,000. This news, of course, made me even more upset because the FHA bill certainly didn’t live up to its billing (see previous post about FHA Secure loans). It turned out that many of the people the FHA bill helped were people who really didn’t even need the help, but instead elected to take a nice little government (read: taxpayer) subsidy for their mortgage. So if this new housing bill is going to help even fewer people, and cost us more, then pardon me if I don’t exude excitement.

I’m not sure of the exact cost of the bill, and to be honest, no one does. It ultimately depends on how many insured loans go bad and whether or not Fannie and Freddie will need the assistance that we are now offering. Estimates from the Congressional Budget Office put the price tag on the Fannie and Freddie package as high as $25 billion. As far as how many of the $300 billion in new FHA loans will go bad, your guess is as good as mine, but I’d assume it will cost us a few billion. In addition, there is a $3.9 billion foreclosure bailout provision included, along with a tax credit for first time homebuyers. I don’t know about you, but all the uncertainty of potential costs is a little scary to me. Sure, officials have made estimates, but those are just that: estimates. This is the equivalent of dropping your car off at the repair shop and getting a repair quote of between $500 and $10,000, but in order to get the repairs done, you have to agree to pay the final tab, regardless of where it might end up. I guess when you have debt approaching $10 trillion, what’s a few billion more?

Housing Bill Set To Pass: Bush Drops Veto Threat

It appears that the proposed housing bill has all but passed now that the threat of a veto from the White House is gone. It is expected that the bill will easily pass through the House and Senate and then be signed by President Bush within the next week or so. Whether this bill will ultimately help or hinder our economy remains to be seen, but unless you are a bank, chances are this bill probably isn’t too exciting for you.

The main opposition to this bill all along has been that it represents a bailout of lenders and really doesn’t offer homeowners much relief. Now that Fannie Mae and Freddie Mac are on the ropes, Bush was willing to cut a deal and withdraw his veto in order to get a support measure for the two companies through. The following are some of the key components of the bill:

• Fannie and Freddie support (see previous post: Foreclosure Bill and $300 billion Housing Bill could pass thanks to Fannie and Freddie)
• Allow the government to insure up to $300 billion in refinanced mortgages
• $4 billion program for local governments to buy and rehab foreclosure properties
• Regulation changes for Fannie and Freddie ($625,000 loan limit, oversight of top executive compensation)
• Raise national debt limit to $10.6 trillion from $9.8 trillion

Of these, the most controversial one has been the $4 billion foreclosure program for local governments. On several fronts it represents a bailout of lenders, and considering the poor lending decisions they made, it is something that is hard to support. We will have to see how the $300 billion allocated for refinanced mortgages ends up helping, but if it goes anything like the other programs which have been rolled out of late, it is doubtful all that many homeowners truly in need will get assistance. Most likely, we as taxpayers will end up subsidizing the mortgages of a few homeowners who probably would have been okay (though they probably would have gone through some struggles) without our help.

Personally I’m against this bill, and I would have loved nothing more than to see it vetoed by President Bush. Unfortunately, it doesn’t appear like that is going to happen. If you want to know why we should be so opposed to this bill, look no further than the last bill component listed above. Our national debt is about to pass $10 trillion, yet we keep throwing more money at every problem we come across. The Fannie and Freddie rescue plan is probably something that needs to be in place, because if they fail, our economy is doomed for the most part. But we really need to look long and hard at whether these companies should be our long-term solution. I can probably live with bailing them out once, and learning from our mistake. But if they just keep doing what they are doing, what is to stop them from needing another bailout down the line? If we hang out an implied government guarantee then taxpayers are in essence subsidizing the shareholders of these companies. This is a long-term problem that needs to be evaluated and addressed. In the meantime, get ready for the latest attempt to resurrect the housing market. This attempt is bigger than ever, but unfortunately I foresee it falling short just like its predecessors. The housing market needs more than this housing bill to turn around--bottom line, it needs to get more affordable for the masses.

Will We See Another Economic Stimulus Package?

After the latest round of unemployment figures, there is renewed buzz for another economic stimulus package. At this point it is just talk, but depending on how the first economic stimulus package pans out, and whether the price of oil comes down, we may see the talk turn to action sooner rather than later.

President Bush has expressed interest in more economic stimuli, but he wants to wait until we can see how the first round performs first. In addition, Bush has his hands full at the moment trying to get his tax cuts to become permanent, according to CNN. A couple of the plans being proposed in the Senate, though, are increasing unemployment benefits and a $300 billion FHA loan boost, according to CNN.

Those of you who are frequent readers of my blog probably know that I wasn’t a big fan of the first economic stimulus plan, and I’m certainly not in favor of another one. Without getting into a full on tirade about how irresponsible our government is, we are more than $9 trillion in debt, and we should not be going further in debt in order to “attempt” to artificially rouse our economy. Contrary to popular belief, we can’t keep borrowing or printing money indefinitely without recourse. We are walking on thin ice right now, and who knows when it is going to break--but the more weight we add, the higher the chance goes.

Ultimately, I expect we will see some sort of economic stimulus because I seriously doubt the first one is going to have the effect that Bush is hoping for. It was a poorly devised plan to begin with, and things are only getting worse for American consumers. When it gets a little closer to election time (assuming the economy doesn't miraculously get better) you can bet that Bush is going to put his best foot forward for the American public in order to attempt to gain support for the Republican presidential candidate: John McCain. He will propose some miracle plan--that is completely full of hot air--which he will claim will fix everything, and then dare the Democrats to shoot it down. As long as Bush does it right and positions it so that the American public agrees with it, then if the Democrats don’t vote it through they will look like the bad guys and then Obama will take the hit. By the time the public finds out that the net effect of this plan leaves us worse than where we started, it will be too late.

I don’t want to be pessimistic, but I have a hard time not being so when talking about our government right now. I hope that the government thinks twice about another stimulus plan, and actually takes into account our budgetary deficiencies, but when has that ever stopped them before? If you are wondering where I am, I’m heading out to get a wet suit, because the water under the ice looks awfully cold.

FHA Secure Loan: Government Foreclosure Help Not Turning Out As Expected

Several months ago the Bush administration came up with a great plan to fix the foreclosure problems plaguing the U.S.: The FHA Secure Loan. This loan was to be made available to homeowners who were having, or had, their variable interest rates adjusted and needed to refinance in order to keep making payments. So just how many people has the FHA Secure program helped avoid foreclosure since its inception? Try 3,000, according to an article from CNNMoney.

Though only 3,000 people have been saved from foreclosure, the FHA Secure program has become widely popular, with over 200,000 loans issued to date according to CNNMoney. While the program was meant to help people avoid foreclosure it has turned out to be a great program for people looking to refinance. The average homeowner refinancing with an FHA Secure loan is saving approximately $400 a month, according to the article.

Many of the people using the FHA Secure program could continue to make their payments without a problem, and additionally many of them even had other options for refinancing out of their existing mortgages. For a program that was meant to help prevent foreclosure, I’m just not sure how effective it is. It is certainly helping people save money, but when the time comes that the government has to start coming good on these guarantees, taxpayers are going to have to foot the bill. Lending out at high LTVs to high risk homeowners is not appealing to banks for a reason, so if we think we are going to avoid having to pay up when all is said and done, we are sadly mistaken.

In my mind if the government is trying to help those who are on the ropes (which I didn’t agree with in the first place), then they can do that, but they shouldn't also offer up resources to those who have other options. This program should be reserved for those who have nowhere else to turn, not those who are just looking to save 0.25 points over what the bank’s other loan program will offer them. Taxpayers shouldn’t have to front the bill when there are others willing and able to do so.

Senate Puts President Bush In His Place But Was It Warranted?

Over President Bush’s pleas to the contrary, the Senate almost unanimously (97 to 1) approved a measure that will halt the further purchase of strategic oil reserves. Since it was passed by such a large majority, the measure cannot be vetoed by the President, so it looks as if President Bush has lost this battle for good. "Why on earth should we be putting oil underground at a time of record high prices?" Sen. Byron Dorgan (D-N.D.), the measure's chief sponsor, argued in a LA Times article. Democrats have been calling for this action for quite some time, but more recently Republicans have taken their side on the argument as well. Considering how much oil has been going up, though, this hoarding of oil might prove to be one of President Bush’s best investment decisions yet.

Under President Bush’s guidance the government has been adding about 70,000 barrels of oil a day, in comparison to the approximately 21 million barrels of oil the U.S. consumes each day, according to the LA Times. Since the amount being hoarded is minimal compared to total usage, the impact of suspending further stockpiling won’t be that great, but some economists figure it could save consumers as much as 3 to 5 cents per gallon on gas, according to the LA Times.

It is not hard to see that the motivations of many of these politicians is to get re-elected, but Bush doesn’t have that problem, so logic would say his only incentive is to do what is best for the country going forward. The main reason he gives for the stockpiling is energy security, which certainly has validity, yet I think it is proving to be an even better investment.

Here are some numbers to consider: Our national oil stockpile sits at approximately 702.7 million barrels, with an average price paid of $28.42 a barrel, according to the U.S. Department of Energy website. Since oil is more than $125 a barrel, that means that thanks to the policies upheld and pushed by Bush, we have created almost $68 billion of “oil equity,” so to speak. Considering many of the other dumb decisions Bush has made over the years, this might actually be one of his better ones, so let’s cut him a little slack. If the U.S. were now to release oil reserves to ease oil prices until we hit the stockpile point we would have been at had we listened to the previous Democratic oil outcries, we would be able to reduce gas prices by much more than the 3 to 5 cents we may see because of the current measure just passed by the Senate. So maybe there really is some method to Bush’s madness.

Recession Has Arrived, Say 71 Percent Of Economists

According to an economic forecasting survey conducted by The Wall Street Journal, 71 percent of the 51 economists polled believe that we are in a recession. This is in stark contrast to the economic poll done by The Wall Street Journal in December, in which only 38 percent of the economists thought the U.S. were even heading towards a recession. If 71 percent of that same pool of optimistic economists thinks that a recession has already arrived, then it is a safe bet that it has.

Let’s all take a minute to remember that recent, laughable announcement from our President Mr. George Bush stating that the U.S. was not facing a recession. Come on, George. At what data were you looking? I know that you have to keep a positive spin on things, but to flat out say that the possibility of recession was slim was simply lying to the American people.

Now that a majority of economists agree that we are in a recession, the next topic to debate is how bad it is going to be. According to the same survey, the economists put the odds of a deep recession at 48 percent. Looking at how overly optimistic the group has proven to be, it is safe to assume that the real odds are significantly higher The problems in the U.S. economy are so numerous that I must believe that the recession will be hard felt and that they won’t be fixed any time soon.

Investors who have not already begun preparing for a recession need to start now and ask themselves certain fundamental questions. During a full-on recession, job cuts are rampant. Do you have adequate savings to get you through in the event of a job loss? Plan for the worst, but hope that it doesn’t come to that. People must also evaluate their investments. The market is going to be very volatile during a recession. Are you properly diversified? Have you considered alternative investments? Many of these will greatly outperform stocks during a recession. For some investment ideas take a look at NuWire’s top 5 recession investments.

President Bush Says “No Recession,” So We All Can Relax Now...

During a news conference yesterday, President Bush said that the country was not recession bound. It appears that everything is going to be okay, and we all can sleep better at night without fear of the scary recession monster.

I don’t know about you, but I’m just not getting that warm and fuzzy feeling. If you believe President Bush, and you feel good about the country’s economic future, then more power to you. I just don’t think I’m ready to drink that Kool-Aid quite yet.

I look at the economy and I still see major issues. Mr. Bush says that the economic stimulus package will be more than enough to fix what ails us, but I look at it and think “what a waste of tax payer money.” Of that $168 billion how much will actually end up back in the economy? 1/2? 1/3 or less? No one can know for certain, but I have a feeling it will not be nearly as much as the Bush clan is projecting.

What I do know is that inflation is running rampant, and it appears that the Fed isn’t going to do anything to slow it down for awhile. Even if Bush and Bernanke pull out all the stops to ward off recession, with what will we ultimately be left? Recession is a natural thing, it happens every once in awhile, and whether or not we want to, we are going to have to face it eventually. If we keep delaying it and delaying it, once it eventually comes it will only come harder. It would be great if we could avoid recession forever, but that only happens in Fantasy Land, and it is high time for President Bush and Bernanke to come back to reality. I know Bush is just trying to delay the recession until after the elections, but come on, man... your legacy is already ruined, and you’re only making it worse.

Meanwhile, investment-wise it pretty much comes down to this: If you believe that Bush and Bernanke have this thing under control, then you want to buy up dollar assets. If you don’t believe Bush and Bernanke are going to pull off a miracle, and are just setting us up for a harder fall, then you want to get out of the dollar.