Posted on 01/26/2008 5:10:52 AM PST by kellynla
Everybody likes "free" money. So it's no wonder that President Bush's plan to give up to $1,200 per family to taxpayers to get the economy moving again will sail through Congress. The logic seems compelling: We face a looming recession because the consumer isn't spending. Give 'em some money to spend! The president's team is hailing the plan as a cheap $150 billion shot in the arm that will check the downturn and get the economy rolling again.
Do you mind if I'm blunt and say that this is the stupidest, most wasteful, and least effective idea possible to reverse the decline in the U.S. economy, a decline that is pulling the rest of the world down with it? The only stimulus this package will generate is a boost to the bottom lines of Men's Wearhouse or Nike or maybe Apple, as if what really ails America is slowing suit, sneaker, and iPod sales. The stimulus plan shows, once again, the cluelessness of this administration about how the economy works, something I find especially depressing given that Hank Paulson, the Treasury secretary who was no lightweight when he ran Goldman Sachs, should know better. He must know the plan will do nothing, other than get some politicians reelected, because it doesn't address the core issue: the decline of home prices in America and the broader financial impact of that decline. Until homes sell for $1,200, this plan's not worth the paper the rebate checks will be printed on.
The fact is, we can attack the root of the crisis, mortgage-related problems, for far less money and resurrect the economy much faster with a couple of simple ideas. First, let's take a hard look at the real cause of the problem: We have too many defaulting mortgages and home-equity loans from people who bought homes-some on speculation, some because they actually wanted to live in them-and could not afford the purchase price. Encouraged by former Federal Reserve chairman Alan Greenspan and current chairman Ben Bernanke, home buyers used exotic mortgages that required them to put little money down to purchase homes that were quickly appreciating in value. Millions of home buyers then took home-equity loans on top of their mortgages to capitalize on that appreciation. Now that home values are declining nationwide and mortgage rates are being reset higher, the buyers can't afford to pay either their first mortgage or the home-equity loan and are facing defaults and foreclosures that threaten to leave them destitute.
It's tempting to suggest an Agricultural Adjustment Act type of program under which we actually obliterate excess homes that can't be sold. That would certainly restore home-price appreciation, but Toll Brothers houses cost a whole lot more than pigs or corn, and even the winners in that game might find that solution excessive.
But there's another strategy that's by far the cheapest and most immediate way to deal with the problem: The Federal Reserve needs to cut the federal-funds rate, the short-term rate that it lowered last week to 3.5 percent, in half, to 1.75 percent, and it needs to do it now. That would be a huge shock treatment that would send mortgage rates plunging and allow home buyers from the 2005-2007 vintage, where the real problems are, to escape the death spiral of adjustable mortgage resets (those rates are pegged to the federal-funds rate). For those who have put down little or no equity and are hanging on, the Federal Housing Administration also needs to guarantee a refinanced mortgage at a much lower rate, which it will be able to do without much risk if the federal-funds rate is cut that low. The FHA is already set up to make just this kind of guarantee (and funded to absorb potential losses). Meanwhile, a huge number of people with good incomes and equity in their homes will be able to refinance their existing mortgages, which would put far more spending money in people's pockets than a onetime $1,200 check. In fact, in many cases it could produce that kind of savings every month.
With short rates this low, people would also come off the sidelines to take advantage of the glut and buy homes. Some would say that the short-term teasers that would be available could cause the same problems we had in the last go-round. But the unscrupulous lenders who made those loans are almost all wiped out, so that's not an issue, and only creditworthy borrowers would be able to take advantage of the new loans, so there is no moral hazard there. Bankers have at last learned to give loans that actually have a chance of being paid back to their own banks instead of shipped off to Wall Street as part of a residential-mortgage bond that no one trusts or wants anymore.
Finally, to ensure that mortgage money is available, banks have to be able to quantify their current losses on their –residential-–mortgage bonds. Right now, most of the toxic instruments the banks hold that might go belly-up are insured by two large financial insurers, Ambac and MBIA. The losses on these pieces of paper are so much greater than those companies can absorb that the banks can't count on getting paid from them in the event of a default. The uncertainty is paralyzing the major banks. What the federal government should do is guarantee the insurance that has already been written, taking warrants in both companies, à la the successful Chrysler bailout of the eighties. If we are worried about the cost of those guarantees, we can limit it, allowing only a 50-cents-on-the-dollar payout on the insurance. With this guarantee in place, banks would be free to make the loans they can't afford to make now and get the economy moving again. Given the low rates that they would have to pay to depositors (they're also keyed to the federal-funds rate), banks could lend at 5 percent, a good deal for borrowers, and still make terrific profits that could be used to offset the losses they would have to take on the portion of their bad loans that are not guaranteed.
What about inflation? We only need a temporary dip in rates, just long enough to refinance everyone, then we can take rates back up again. Frankly, the mortgage mess is so deflationary it wouldn't hurt to have a few months of inflation.
Why hasn't a plan like this been suggested before? We have a Fed that only recently woke up to the crisis and is so ridiculously independent despite its obvious incompetence that it can't be counted on to take rates to levels that would make my plan work. When this problem is fixed, and rates are then brought up higher once refinancing is in place, Congress should investigate why the Fed keeps getting it wrong and whether the power and independence of these unelected academics is a good thing, considering their endless recklessness. Meanwhile, you can spend $150 billion making sure that the mall is jammed for a couple of Saturdays. Or you can spend virtually nothing by slashing rates and offering mortgage-insurance guarantees to banks and get the country moving within a matter of months. It's the free solution to a trillion-dollar problem that will never be cured by a bogus stimulus boondoggle.
And since most consumer products are imported, foreigner economies will be the only ones "stimulated!"
Congress should try balancing the budget, eliminating the IRS & paying down the deficit if it is reeeeeeeeeely interested in "stimulating" the AMERICAN economy!!!
But that would be too logical for the clowns in D.C.!
Are these your quotes are were they taken from the article?
From an economic side, this a rather good stimulus for the economy. Not an end all fix all, but it will keep the economy floating.
For a family that makes $40K a year, this is a minimum of a 3% raise. That's about $100 a month added to their take home (gross) since this money will not be taxed again.
IMO
They are lit rly going to hand us a free english muffin, with butt er and jam on it.
That’s a complete dramatization of course.
“this a rather good stimulus for the economy?”
well you and the clowns in D.C. are the only ones who think so!
we have a HUGE BUDGET DEFICIT and this “stimulus” package will do NOTHING but increase it!
Giving tax rebates to people WHO DON’T EVEN PAY TAXES is ridiculous! And people like me and my family are the ones paying for it without receiving any funds!
That is not only not a “rather good stimulus for the economy”, it is moronic! As I stated, the only economies that will be “stimulated” will be the foreigners’ where most consumer products are made!
I intend to pay this against the principal of my mortgage. It eliminates 6 payments and is leveraged into an additional $5951 of interest that I do not need to pay. This speeds up the day when I have capital to be self employed again.
Perhaps you, like many, believe in the something for nothing propaganda, and think printing more money is the answer?
It seems the political parties are somewhat in a bind.
Should they allow a severe depression to strike, the country will get out of control. (can you say mass rioting in the streets?) Should they keep spending as they are, they keep the "boat" afloat for a while longer.
Either way we will have to "pay the piper".
Enjoy.
Congress should try balancing the budget
Democrat controlled Congress would raise tax rates on the productive to pay the bills for non-productive.
Well, isn't that the point of Bush getiing all warm and huggy with the democrats to pass this travesty? So the crash doesn't happen on his watch.
Maybe it would be a better idea if the feds just left this thing alone. There’s little doubt that the fed’s slashing interest rates to the floor to “spur” the economy is the root cause to the current economic “crisis” – if you believe that there is one – and he said as much in his article. The vast majority of hard working blue collar American’s are having no problem paying their mortgage right now. Sure some are, but I have serious doubts that it’s worth smashing the panic button over, especially to the tune of 150 billions dollars, or bigger more intrusive government regulations. Maybe, just maybe, it wouldn’t hurt the U.S. economy all that much to allow a little correction in home prices that had soared way to high in stead of slashing the short term interest rate to the floor again. If you think there isn’t a boat load of people out there with the money and the interest in dubbing dumb Americans into taking mortgages out with interest rates that can’t afford to buy house they can’t afford your just plain silly. When it happens again, I won’t see it then as the fed’s responsibility to bail dumb Americans out of a stupid financial situation that had they done a little research they would have known better to get into in the first place. Maybe we ought to let these people, and the country at large, learn a less about gambling on rising home prices. We won’t though, cause God forbid that Americans have to suffer the consequences of their own stupidity – it must be shared as a nation, via taxes and bail outs.
"But that's not faaaaair," the Democrats will whine, and enact a bunch of new rules to insure that the same people who got crushed by ARMs last time are crushed again a few years from now.
Well, you can make excuses for Bush, but he was elected to LEAD and as with his refusal to enforce the immigration laws and secure the borders; Bush has failed to LEAD on this issue. “Stimulus” packages have been used before and the only thing they have proved is FAILURE!
And as far as the RE & home loan business goes, anyone who has purchased a home, financed or refinanced a home loan in the last 30 years knows, the whole RE and home loan industry is INUNDATED with CROOKS from Realtors, to appraisers, to loan agents!
The housing market got out of whack in the early part of this decade. It will take quite a while until the amount of housing available and the amount needed meet. Cramer just wants to delay that date.
How can it when it cost money to collect prior to giving it back, as well as the cost of interest on the loan needed to pay for it after the fact? This is redistribution plain and simple. I’ll send mine to charity when the check comes. At least it’ll do SOMEONE some good
Exactly like S/S ... neither "party" will touch it. It doesn't exist.
Obviously, they are not students of history.
“I intend to pay this against the principal of my mortgage.”
Good for you.
The Feds will get it back from you, me and everyone else who actually PAY INCOME TAXES in SPADES...next year and the years to come!
We wouldn't be spending virtually nothing - we would be devaluing the dollar considerably, jacking up inflation, and cutting the values of savings (for those people who actually have savings) to bail out the unwise home buyers. Bob Speculator gets to keep his house but Nancy Fixed Income finds her money going a lot less far at the grocery store.
The difference is that Wall Street bonuses aren't dependent on Nancy Fixed Income's purchasing power...but her subsequent decision to vote for Hillary Clinton might take care of that problem, too. ;)
The "rebate" is not for the likes of you, who would probably just invest it anyway, or some other way as equally foolish, instead of spending it on what it was intended for. You'd probably not think of going out and getting a big screen tv with it.
I don't get it either. I'm not the receiver of free ponies, I am the provider of them to others.
The vast majority of Americans are ok, working people and if this at any time, in any way is a way for them to get back the money they earned, then as sloppy as it is, it is great.
I couldn't care less about the supposed idiot politicians/Bush/Congress thinks about this vis a vis the economy.
I guess we now know what the Dems consideres rich. That figure was always a mystery, but somehow I don’t feel rich.
Well, we borrow the money from China, assorted Arabs, etc - give it to the American people so they can buy goods made in China -- it's a stimulus plan for China. What's not to love? sarcasm / off
How much will I get?
But that would be too logical for the clowns in D.C.!
I don't recall seeing those in the article.
But, thanks for answering my question.
I actually heard people talk about what they’re going to do with their windfall. lol.. How’s about saving it?
This quick fix is more about perception than reality (style over substance). The sheeple “perceive” that Washington cares and is taking steps to make things right. It’s like a placebo. Whether in reality it makes any difference is beside the point.
“who would probably just invest it anyway, or some other way as equally foolish?”
if you think “investment” is “foolish” then your priorities are reeeeeeeeeeeely out of whack!
“You’d probably not think of going out and getting a big screen tv with it?”
Yes I believe sending more money to China instead of paying down the AMERICAN federal and/or personal debt is “equally foolish”!
gezzzzzzzzzzzzzzzzzzzzzzzzzzzzzz...we definitely won’t be contacting you regarding personal, business and/or government money management....that’s for sure! LMAO
True - but perception plays a significant role in the economy.
we definitely won’t be contacting you regarding personal, business and/or government money management....that’s for sure!
You wouldn't know a joke if it jumped up and bit you on the ass would you?
I will not be receiving the "rebate", I am the provider of "rebates" for others.
Reread #21 and try adjusting your funny bone.
Most of our employees (35) will able to participate in the “windfall”, as well to have new equipment to do their jobs that we would not be able to afford otherwise.
They weren’t.
And if you notice those words WERE NOT IN QUOTES!
gezzzzzzzzzzzzzzzzz...try READING before REACTING with your wise crack remarks and making a bigger fool out of yourself!
Now if you have something constructive to add to the forum then do so...otherwise quit bothering me!
Yes, it does. With a news barrage continually bashing the economy, after a while people will be convinced the economy is in shambles, whether it is or not.
“You wouldn’t know a joke if it jumped up and bit you on the ass would you?”
We “know” you! LMAO
If you have something constructive to add to the forum, do so...
otherwise, please leave me off your list of contacts.
Good day!
Alexis de Tocqueville
And those pegged to LIBOR? What about those?
Great point. Economic policy makers are keen enough to keep a "depression" from happening again. Memory is short since the last time "foreign investors" started buying up the US assets (remember that) We had huge infusions of money from Japan buying buildings, land, companies, etc. Those buildings and land and for the most part, companies are still here.
Keeping the boat "afloat" i.e. this booster shot refund, will help the economy along. As i said, it is not a cureall end all, but a comprehensive plan is not only predicated on what a handful of political whores in washington do. The economy itself has a resilience, that i would rather bank on, but anytime the govt. wants to give me back my taxes, I'll take it to the bank. It will be interesting to see how many people send theirs back and and ask that it be applied directly to the National Debt.
Regardless of all the pleading and praying, there is no quick fix for an economic settling. This has been looming for a long time. I understand that more than a lot of people, having bought and sold homes in So, Cal. We go out back in early '06.
It is healthy for our dollar to devalue and have a major influx of foreign investing, it helps our trade deficit in the long run and will be used as the business capital to reinvigorate the cyclical economy, as it has each time it ebbs and flows.
IMO. Would love to hear more economic opinions.
Number 21 was basicly agreeing with you. You failed to see it. I pointed it out to you and you start getting personal. Get a life.
How much will I get?
It ranks right up there with mailing your inbox to yourself.
I promise to buy only American Made arms and ammo! Will that help? Blackbird.
Bandaid applied to the wrong wound.
Lower consumer spending did not cause the problem so one time election year shots won’t cure it. That just kicks the problem down the road.
The unaddressed problem is that incomes have not kept up with inflation and people are feeling the squeeze. Regarding income - with international labor competition, incomes will be stagnant.
Then the wound to be addressed is inflation to keep the income-cost gap from increasing. [keeping costs down by increasing China imports just throws dirt on the wound.]
The only thing more stupid than the Bush Pelosi plan is this “The Federal Reserve needs to cut the federal-funds rate, the short-term rate that it lowered last week to 3.5 percent, in half, to 1.75 percent, and it needs to do it now.”
Why not just throw the value of the dollar on a bonfire? The Japanese had zero interest rates for years and were unable to get out of the muck.
The reason you had the subprime bubble in the first place was the Fed printing money, now they want more of it?
Get this through your heads one and all. As long as the third world continues to advance in civilization by removing socialism. World productivity will continue to increase. If this trend continues there will be NO recession in the US or the world. What we are seeing now is some greedy and foolish people who gambled and lost.
Whine about losing.
Thank you Karl, you are absolutely right.
There is no ‘free lunch,’ and that includes the decision to use monetary policy (meaning interest rates policy). This author is calling for monetary expansion (”an interest rate cut”) which will trigger inflation over time in numerous markets.
Fed interest rate policy is corporate welfare to banks. That is all it is. And these policy moves impose an inflation “tax” on the rest of us.
Here is what I wrote to a student of mine who asked me if the “markets are collapsing” and wondered if she should be worried:
Interest groups (pressure groups, industries lobbying the government), such as banks - which chose unwisely to give out bad loans - tend to gin up the level of hysteria about the collapse of “the whole economy” in order to get special favors from the government.
In this case, it worked — and they got cuts in the interest rate from the Fed, and also planned tax cuts using inflationary finance (again, involving printed money).
No, I don’t agree with this - these policies cause inflation, they add to the money supply, and reduce the purchasing power of retired people, who are living on a fixed income (pension or savings account). The “cost” of poor decisions is borne somewhere — people who pay the inflation tax.
If bankers want to give out risky loans, they should bear the liability for losses for poor decisions, not the rest of economy! And if they do, they won’t make the same mistakes again. However, if the govt. intervenes and protects them, it costs OTHERS (in terms of inflation), and they will have no incentive to stop making these same mistakes, in the future.
Profit & loss are important price signals, and they help redirect resources. When the government intervenes to “protect” inefficient or obsolete companies and industries, it delays important (read: efficient) adjustments of resources.
In short: There is nothing “wrong” with the Market. Have you noticed any large asteroids smashing into Earth lately? I haven’t.
A nice tax cut, and a reduction in the size of government (corporate welfare) would certainly make the economy perform better, yes. But only if SPENDING (subsidies, corporate welfare) is reduced at the same time. Otherwise, the tax cuts will have to be paid for by inflationary finance, or printing money - which has the same negative effects described above (on those who are retired, living on fixed incomes, etc.)
I ignore most of the hysteria whipped up by interest groups, about how “we’re all gonna die!” unless the government does this or that, you hear in the news. It is “spin,” largely put out by industries and interest groups (banks, auto industry, airlines, etc.) to buoy up sagging businesses which just need to re-tool their businesses, improve products, and make better (less risky) lending decisions. I’d advise you do the same.
By the way, I know many people can’t afford their sub-prime loans. That is because they don’t earn incomes sufficient to cover the payments. And THAT is because... they don’t yet have the skills (education, earning power) to BUY a house. These folks can’t have things for free, and others (taxpayers WITH skills) should not bail them out. They need to dump their house, return to an apartment, and GO TO COMMUNITY COLLEGE!!!! It always amazes me that people jack around in High School, do poorly, and fail to go to college — then they have this “selective memory” about how they ended UP poor (read: their own choices, & skill neglect), and expect OTHER PEOPLE to pick up the slack. Lovely. It is just infuriating to hear Poli Sci professors complain about how it is not “just” that some people make more than others, or how it is “unfair” that some do not have “access” to nice homes. No. No no. It is ENTIRELY just. Anyone can become well off, they need to stop making excuses and “make it happen” as Tim on Project Runway says. I am not talking about people who are truly infirm — such as people with Down’s Syndrome or who are without arms & legs, in a wheel chair. I am talking about the average person, of normal intelligence & abilities, who refuses to own responsibility for his/her own economic situation in life. They would have you believe that it randomly rains down money, and it’s “not fair” that some got the money first. Not true - completely untrue, shame on them!
Folks,
I meant to include you all in the “To” field before sending msg. 48 but neglected to do that. So message 48 is for you too.
G.Mason, — did you attend George Mason University? They have a great economics department there.
I mentioned “community college”, because the student to whom I wrote is attending a community college right now. I figured it was a reference to which she could “relate”.
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