Insights & Advice


“There is No Easy Out”

Don’t be surprised by the tepid response to the Obama Administration’s $789 billion Stimulus Bill. Most of us, I suspect, were hoping for more (or less) from the government depending upon one’s political philosophy and affiliation.

Those who believe tax cuts are the way to go found that only one third of the package was dedicated to that effort. The cuts were evenly split between small business and individuals. The little guy didn’t get as much as was hoped for in the areas of tax brakes, mortgage credits or tax deductible car loans but did get help in mitigating the impact of unemployment. At the same time states will receive less money than expected.

As a result, economists believe 500,000 less jobs will be created bringing the total down to 3.5 million and over a longer time period. Bottom line: the economy receives less support in the short term which means a longer recession and higher unemployment going forward.

“Wall Street I think is hoping for an easy out on this thing and there is no easy out,” President Obama said earlier this week on “Nightline”.

He was responding to the market’s huge decline on the back of his new Secretary of the Treasury Tim Geithner’s bank rescue plan announcement. The new plan was greeted with disappointment and even derision from many quarters. There were no innovative proposals: no bank guarantees, no bad bank initiative, no nationalization of the banks. All that was offered was a continuation of the failed policy of interventions we have witnessed over the last year and a half.

Geithner proposed the establishment of a $1 trillion private/public fund to buy bad bank assets as well as a new credit facility of another $1 trillion to promote lending to consumers and businesses. All that most investors heard was the additional dollar amounts that were going to be thrown down this black banking hole of the financial sector. So far the tally has reached $10 trillion that has already been spent—enough to pay off every mortgage in America. Does any one of us truly believe that this will be the end of capital injections to the banking sector? I doubt even Tim Giethner believes that.

We have reached a dead-end in dealing with the banking crisis in my opinion. There are three sides to this problem. First are the bond holders and hundreds of thousands of counter-parties to all these toxic assets held by the banks. If these all but worthless assets are allowed to fall all the dominos worldwide begin crashing down. That was what happened when Lehman Brothers went under. We the taxpayers ended up bailing at Lehman’s biggest counter-party AIG, the giant insurance company. The bill for that bail-out is well over $200 billion and climbing. There isn’t enough money to bail-out the entire set of financial dominos.

The second roadblock is our aversion to nationalizing the banks. The “N” word cuts into the very fabric of this nation’s ideals: free markets, the private sector, and capitalism. So far no one, including the president, has had the chutzpah to bite that bullet. And yet Great Britain, another staunch capitalist country and originator of many of our own ideals, has all but nationalized (70% ownership) of their largest bank Royal Bank of Scotland.

Finally, there is Congress and we the taxpayers. There might as well be a sign pasted across the foreheads of every member of the House reading “No more money”. That’s the message they are receiving from their constituents. Are they right?

Everyone willing to give more money to the bankers please raise your hand. Hmmm, I count zero hands.

So if we won’t nationalize, can’t let them go bust and don’t want to spend anymore of our money on the banks what’s left? Now you understand the problem. Given the restraints there isn’t a whole heck of a lot the Treasury can do. But Obama never said he had all the answers. He promised to try different things until something stuck and that’s exactly what he is doing.

Unfortunately the markets want details, a time line, a definitive plan of action and they want it now. Sorry guys, it is going to take months, maybe even years before a workable program is in place.

Yet without a viable financial system all the stimulus packages in the world aren’t going to be very effective and therein lies the rub. Finance greases the wheels in every sector of the economy. Without it no amount of tax cuts, infrastructure spending or other stimulus efforts will have a lasting impact.

So if we on Main Street were looking for an easy out on the back of this stimulus bill I urge you to reign in your expectations as Wall Street is presently doing. The truth is that the government can do just so much to reduce the pain that America is experiencing today. The rest is up to us.

Posted in A Few Dollars More, Macroeconomics