Wednesday, February 11, 2009

So where is the $800 billion coming from?

The short answer is nobody knows. 

Once Congress appropriates this money and the President signs the bill into law all we will know is that around 800 billion dollars will be authorized for spending for the purpose of economic stimulus.  The US Treasury will then go about getting the money for Congress to spend...except it's not there.

The Treasury will go to the Federal Reserve and they will go about doing all that they can to procure the money.  We have no idea what the Federal Reserve will need to do in order to get this much money.  After all of the bailouts it's not likely they will be able to borrow all of it without dramatically raising interest rates.  How will this impact the economy?  The very act of getting the money to stimulate the economy may end up dragging it down further.  The average congressman has NO IDEA what will be required to get the dollar figure they are appropriating.

  1. If it is borrowed interest rates will be forced to rise
  2. If it is monetized then inflation will rise
  3. If it is taxed then the private economy shrinks

It would be nice to hear just once, someone in government (besides Ron Paul) acknowledge that the simple act of securing this money could do great damage alone before it is even spent.

10 comments:

Gino said...

duh,tracy.
we will just print it.
we can do that.
its our currency anyway.

of course, that WILL lead to inflation, which means those 800billion will be worth less when they are spent.
also means we really are not spending 800billion. not in real feb,2009 dollars as approved, anyway.

so, actually we are saving money.
big stimulus = big savings.

oh the beauty of it. i should run for treasury secretary.

Tracy said...

I'm afraid we'll have to probably monetize a great deal of it and that's frustrating because raising interest rates would defeat the purpose of the stimulus...it's doubtful Japan or China would be that interested in Treasury Bills at low rates of return since they already hold so many.

This bill, like so many in the last year of the Bush administration, is very short sighted.

Don said...

As a stimulus bill supporter ("If you can't be a stimulus, be a stimulus supporter.") I actually agree with you in the fact the plan is fraught with danger. However, what I'd like to hear the Senators that are against it, and the bill's other foes, lay out are the actual alternatives.

We've had 8 years of tax cuts, and that's worked out awesome, right?

Printing money seems certain to trigger inflation and I remember how bleak that was when I was growing up.

We could let the market sort it out. I throw that out there in all honesty, even writing from here in NYC where we love government and hate Little Baby Jesus. It seems pretty clear that "stimulus" is a euphemism for "a program to spread the pain of a complete reorganization of the banking landscape out over a long period of time." And I'm not talking about nationalization. It seems that if all this was just left alone and all these banks that made bad loans were allowed to fail, period, and all the hedge funds and retirement funds and investors that bought these securitized debts were allowed to just lose all that money, period...it would all, eventually, sort itself out, and those who were wiser would have the capital to pick up the pieces. I assume that would be the Libertarian answer. I'm not sure that is not a good answer, but I haven't heard anyone just sit down and lay out the complete, hideous picture of what that would do to life in this country. It is infuriating that Henry Paulson apparently did lay all this out behind closed doors to the Senate Finance Committee, a picture so bleak they started moving the TARP funds through at panic speed...but this doomsday scenario that requires all of us to get on the hook for trillions...this briefing has been kept a secret! Seriously, we need to know just how bad it would be so we can make an intelligent decision...

That rant aside, and back to your rock-and-a-hard place-and-another-hard-place question, the borrowing seems the least shitty with the best chance to do something, in my opinion. With interest rates currently at basically zero, it is inevitable they will rise. In fact, until they do we have a monetary policy that is, as I understand it, the Inability to Change Monetary Policy policy.

Are there great choices to make? No. That's kind of what being in a shit storm is all about, no?

Tracy said...

Your assessment of a libertarian answer is pretty close Don. I won't speak for all "L" people out there but these failing banks do hold securities that the market right now can't take a risk on. They would not have to go completely down to nothing as there is a price that these securities would bear. Backing the securities up with borrowed money only sustains the market bubble which caused the problem to begin with. Either way this debt must be liquidated and the force of the market will not be forever fooled by the stimulus.

I explained to Robert the Grump once that this is like selling an old shoelace tied around a $100 bill. The shoelace will never be worth $100...this stimulus will act like price fixing in many areas to protect certain securities from ever reaching a low enough price for there to be a marketable price.

But the stimulus is here and is reality so like you, I'm rooting for a lender...and thankfully it was announced later today that China would reluctantly buy them.

Don said...

Yeah, it always surprises me when they have the gall to say that the reason the government needs to step in is to create a situation where these securitized debts can be priced.

Ummm, I'm just a pinko college dropout, but isn't the problem here the fact that the market HAS indeed done what it does really fucking well and set that price? Just because that price is $0.00 doesn't mean the price doesn't exist. It just seems like they are lying to us, either because they don't want us to "lose faith in our financial institutions"...uh huh...they have bought the banker's BS, or they just don't understand it. It does not seem that complicated. Say my grandmother's entire life savings is tied up in a really nice car, she entrusts me with it and I take that car out for a drunken joyride that ends up with the car wrapped around a tree, burning. When she asks me to put an ad in the paper to sell the car for her, expecting to get enough money to pay her rent, bills, etc., that ad will not receive offers.
What is not needed in that situation is for the government to come in and "create a floor" for the price of the burnt wreck. The market has done that. The floor is Zero. Just because Grandma and I don't like the floor price...that is irrelevant.
Now, as a liberal, I'm happy to have the government come in and say, "We don't want homeless Grandmas on the street, so we are going to work out a way to get Grandma some cash." I would also expect to be jailed. But just call it what it is...

Listening to the news today it did seem like everyone in charge is trying to figure out a way to make their constituencies believe they made the right choices, when I think most Americans, all stripes, believe that all the choices suck and just want them to get going and let all the failures happen as quickly as possible so we can adjust course.
blah, blah, blah...
I can't believe something so boring is going to define our next decade.

robert the grump said...

Why did I know that Tracy was going to whip out that shoelace bit again?

Don, you nailed it. Libertarians believe the market will heal itself. They are the Party of doing nothing and voting no for everything. No wonder Tracy loves the concept of gridlock.

They're right about one thing; eventually, the market would sort itself out. After, oh, twenty or thirty years.

Had FDR not instituted the New Deal and WWII not come along to further induce Government spending, I figure the market would be just about healed from the Great Depression.

Tracy forgets that FDR's crazy spending caused the GNP to go up in double digits every single year the New Deal was funded, and that relieved a lot of pain even if it didn't cure the crisis overnight.

I'll use the metaphor of a nasty cold. When the economy has a nasty cold, you could do nothing and in a couple of weeks, you'd surely feel better. But first you have to suffer for two weeks.

Or, you could take some cold medicine and mitigate the symptoms. You aren't actually curing the cold, but it allows you work instead of laying flat on your back for two weeks. Of course, you have to pay for the medicine at some point.

Libertarians would love to do nothing and let THE MARKET heal itself. I'd rather test Keynesian theory and go with the stimulus package because I don't want to live in a world of 20% unemployment and soup kitchens for the next few years.

Gino said...

liberal politician prefer policies that create soup kitchens.
its how they get elected.

Tracy said...

Robert...care to tell me what FDR's record was on the subject of unemployment prior to WW2? Did the New Deal impact employment statistics in a positve way? Did unemployment drop below say...15% at any given time during that 10 years of miraculous national reclaimation? Go tell your Keynesian ghost stories somewhere else.

robert the grump said...

Keynesian ghost stories...that's AWESOME!

Here's one for you: once upon a time we had a new President who signed the biggest spending bill in history, based on the Keynesian theory that well-targeted government spending can stimulate the economy!

And when I got home from listening to his speech, there was a hook trapped in the door handle of my car!

You Libertarians run the danger of becoming just like the Republicans. Plenty of criticism to offer, but no alternative solutions other than crazy shit like tax breaks for the rich (Republicans) or let the market miraculously heal itself (Libertarians).

These are old, failed ideas and non-solutions. Now get the hell out of the way and make room for a man of action.

Tracy said...

Big government and centralized power are ideas as old as time.

Liberty and Freedom are new ideas and the true liberalism the country needs.