The performance of the stock market today, March 10, 2009, I believe, provides us with a clear indication of what is predominantly on the minds of investors. The major concern of investors is the value of the assets that are carried by companies on their books, and especially on the asset values on the balance sheets of financial institutions.
I say this because Citigroup has been the “poster child” of what most investors feel is wrong with the financial markets and the economy. The perception is that Citigroup is so weighed down by assets that are not performing and that must be written down that there is little or no hope for its survival outside of a full takeover by the United States government.
Focus has been so strongly focused on the “asset problem” that other institutions, like Bank of America and JP Morgan Chase & Co., have also been affected with concerns about the value of their assets. As a consequence, the stock price of these and other financial institutions have declined drastically due to the uncertainty as to whether or not they are solvent.
The stock market took off right from the opening bell this morning. The cause—a memo written by Vikram Pandit, the chief executive officer of Citigroup, to employees of his organization indicating that Citigroup had been profitable for the first two months of 2009 and was likely to turn a profit for the first quarter of the year. If this happens it will be a sharp turnaround in performance for the company, a move to the black after five consecutive quarterly losses.
There was no indication about any special write-offs or credit losses, but the memo gave hope to the idea that Citigroup, even after such write-downs, would post a profit for the first quarter.
The hope that was forthcoming, I believe, is the hope that Citigroup will now be operationally in the black going forward and that this kind of performance would give them the time and cushion to continue to work off bad assets and take more modest charge-offs against profits in the future.
The hope is certainly not that Citigroup is “out-of-the-woods.” That would be too much to hope for. To me, what is captured in the market response is that Citi may still have time and not be forced into some precipitous governmental takeover action.
Now, let me say that this was just one day and just one piece of action released by someone that needs, in the worst way, to give some sort of encouragement to his troops. Tomorrow is another day and there will be more information and more market maneuvering in the future. But, it was a day in which there was a possibility for hope—no matter have small that hope might be.
The problem had been that investors had perceived asset values declining with no bottom to be seen. And, there was no one or no event in sight that might put a stop to this decline.
This is why I believe that the financial markets have not been giving President Obama and his team “good grades” on their efforts to craft an economic policy and a bank rescue bill. The economic recovery plan was proposed and passed by Congress, yet there was no “bounce” in the market due to this program. So far, any bank rescue bill talked about or outlined has been deemed a dud.
It is this latter failure that the financial markets have been reacting to. To the financial markets the concern over asset values has dominated everything else. The recovery plan does not address this issue and so does not provide any confidence to investors over possible bankruptcies and takeovers related to institutions that are insolvent due to the bad assets on their books. Expenditures on infrastructure and education and health care and so on are one thing, but a stimulus package like the one that passed Congress cannot prevent a collapse of the financial system as the value of assets plummet and are recognized.
And, so the memo relating to the two-month performance of Citigroup hit the market and gave investors some encouragement that there might be some possibility that the problem related to asset values maybe…just maybe…could be worked out. And this attitude spread to other companies and other areas in the stock market.
We see that the stock of Bank of America Corp. rose 28 percent, the stock of JPMorgan Chase & Co. rose 23 percent, and the stocks of PNC Financial Services and Morgan Stanley increased by double digit numbers. Of especial interest is that the stock of GE rose by 20 percent reflecting the spillover of the positive attitude given to the banks was also given to GE and the concern over the fate of GE Capital.
Again, all of these companies have seen the price of their stocks decline in the past six months or so because of the concern over the value of their assets.
As mentioned, stocks rose from the opening bell, seemingly responding to the contents of the Pandit memo. But, the market responded to other news that they interpreted in a positive manner.
Fed Chairman Ben Bernanke gave a speech that reinforced the “good news” coming out of Citigroup. In this speech, Bernanke discussed the need for moving onto a new regulatory system. The part of his statement that market participants focused upon was Bernanke’s claim that the accounting rules that govern how companies value their assets needed to be changed. The Fed Chairman was careful to say that he did not believe that the mark-to-market accounting rules should be changed. Still he did talk about how asset values should be treated and investors reacted to this in a positive way. Again, the focus of the market was on asset values and little else.
There was one other bit of news that the financial markets reacted to in a positive way and that was the comment of Barney Frank about the “up-tick” rule. This statement, although important in itself, was only a side-show in the movement of the stock market today. Its just that when the good news is poring in, look out!
The important take away about the performance of the stock market today is that the major focus of the investment community is on the value of the assets on the balance sheets of banks and other organizations in this country. This message should be read loud and clear by the Obama administration. Spending plans are fine, but the recovery of the country depends very heavily on what is done about the value of the assets on the books of banks and other organizations and how losses in value are going to be worked off.
This is important too because of what is on coming in the future. It seems as if the credit problem is going to accelerate as the defaults rise on credit card debt, as interest rates need to be reset on Alt-A and option payment mortgages over the next 18 months or so, and the looming bust in the commercial real estate market. The asset value issue is not going to go away soon.
So, we got a rise in the stock market. We may get several more in the next week or so. I don’t believe anyone can predict the movement in the stock market over the coming six months. There are still too many uncertainties. And, even if the stock market were to rise over the next six months, my bet is that the asset valuation problem is still going to be with us. And, in all likelihood it will still be with us next year at this time.
Showing posts with label stimulus package. Show all posts
Showing posts with label stimulus package. Show all posts
Tuesday, March 10, 2009
Sunday, February 1, 2009
Concerns about the Obama Stimulus Plan
As the Obama Stimulus Plan becomes more and more of a reality, many different people are asking many different questions about it. To me, there are four basic issues that need to be debated very seriously before any such plan is passed by Congress. The first question is…how fast do we really need to move in passing such a plan? Second…how big does the stimulus package really need to be? Third…how is all the debt created by such a plan going to be financed? And fourth, can the stimulus really be withdrawn once the crisis is over?
In terms of speed of enactment we hear over and over again that speed is of the essence. Things are really bad…and things are going to get a lot worse. We need to get into the game and do something as quickly as possible!
We heard this argument before, not too long ago. It was reported in the Wall Street Journal, that “Federal Reserve Chairman Ben Bernanke reached the end of his rope on Wednesday afternoon, September 17.” Bernanke was reacting to things falling apart in the financial industry. He called Treasury Secretary Hank Paulson and said that the administration had to move. Thursday September 18. Paulson responded that he was “on board”. Bernanke insisted that Congressional leaders had to be assembled…which Paulson set up for that Friday evening. Bernanke read them the riot act at that meeting and insisted that a bill…what became TARP…be enacted no later than Monday or everything would fall apart. (For more on this see my post on Seeking Alpha of November 16, 2008, “The Bailout Plan: Did Bernanke Panic?”) The bill was not enacted that Monday and the last half of the TARP money was not released until just recently.
Now we are hearing the call again. We must hurry. The Obama Stimulus Plan has been put on the fast track…and the pressure is on to get the plan enacted by Congress by President’s Day, February 16. But, does this plan really need to be enacted that quickly? Is it better to have any plan by President’s Day or is it better to have a plan that works?
It seems to me that the pressure to get something done quickly has important implications for the second question asked above. Since so little is known about how effective the plan will be…the issue becomes…MORE IS BETTER! Given the uncertainty of how the plan will work, it is important to throw as much as possible against the wall in the hopes that some of it will stick.
Wow! What a way to run a government! But that is what Bernanke/Paulson did.
And, this approach gives rise to the new justification for the program…confidence. The argument goes that “If the government shows that it is serious in ending the recession and this seriousness is reflected in the size of the stimulus package…this will spur on an increase in confidence…which is just what the economy needs right now!”
Let me get this straight. It doesn’t really matter whether or not the stimulus plan works…what is important is that the stimulus plan be very large…so that people will regain confidence.
And, if this is the underlying theory behind the stimulus plan…how is this going to raise the confidence of the world wide investment community…which relates to the third question presented above…to invest in the debt of the United States government?
Oh, well…the United States dollar is the world’s reserve currency and the United States debt is the place for world investors to go when there is a “flight to quality” in world financial markets. Given this fact, people will continue to flock to United States Treasury issues. No doubt about it!
As Alice Rivlin, economist of the Brookings Institution, former member of the Board of Governors of the Federal Reserve System, First Director of the Congressional Budget Office, and Director of the Office of Management and Budget (a cabinet position and appointed by President Bill Clinton a Democrat) recently testified before Congress…”We seem to be counting on the Chinese to keep investing to pay for this (the U. S. deficits) and we’re assuming that the rest of the world isn’t going to lose confidence once we use this moment to spend on a whole range of programs. And, I’m not sure that’s the right assumption.”
Rivlin also has something to say about the fourth question…the question about what happens in the long run. She states that “Because we’re doing this outside the budget process, it means that no one has to talk about what the long-term effects of any of this might be.” That is, what is going to happen beyond the short run if much of this expenditure is still going into the economy as the economy begins to grow again. No one is anticipating how this situation might be dealt with.
As Niall Ferguson, who shares his time between Harvard University and Oxford University, stated recently at Davos…and I am paraphrasing…the new administration seems to believe that by creating an impressive amount of new leverage that it can resolve a financial crisis created by an excessive amount of leverage.
So, I go back to the first question…do we really need to rush so quickly? Yes, I agree with President Obama…he won…he gets to set the table. But, does he want to do it right…or does he just want to do it?
The Congress is supposed to be a deliberative body…it is supposed to mull things over…kick them around…debate and dialogue with one another. Isn’t it better to get something right…than to not do something well…or to do something that may not work?
Projects should not just be put into a stimulus plan…just because they are a “good idea” or because “they are something we want to do and they are available.” Projects, to be included, need to have some real justification for their inclusion in such a plan…the benefit of the project (the whole flow of benefits accruing from the project) should exceed the social cost of the project. Questions should be asked about the timing of the project and when the expected benefits are expected to be received. The Congress should be very intentional about what it is going to do…how much it is going to spend. Success of execution should be the key criteria as to whether a project gets included in the plan…not just the speed of passing the bill.
If Congress were to judge the plan…the whole plan as well as the components of the plan…in this fashion, then something more specific could be said about the size of the plan. Given that every element of the plan could stand up to some form of cost-benefit analysis then the size of the plan would be less of an issue. We would have some rationale for the size of the plan…it would not be a question of hoping some of the material thrown against the wall would stick! The parts of the plan would be chosen because they work…not because they make the plan “large”.
There still will remain questions about financing a stimulus plan. A plan constructed as suggested above would still result in the creation of a lot of new debt the United States government would have to issue. But, the investment community would have more justification to “trust” the plan because the Congress has done its homework…and, if the Congress had done its homework there would be something to say about how the debt will be financed and paid down in the future. That is, the United States government would be acting like a responsible steward of its fiscal responsibilities, something world financial markets have not seen for eight years or so.
To me, this is a crucial issue the Obama administration and the United States government has to deal with…restoring confidence in the fiscal credibility of the United States…something that Bush43 fell far short of doing. Rushing into the fray with a hastily constructed, ill-conceived stimulus plan, one that relies on the Chinese and the rest-of-the-world to finance with no thought for the future is not going to resolve the financial and economic mess we are now experiencing.
In terms of speed of enactment we hear over and over again that speed is of the essence. Things are really bad…and things are going to get a lot worse. We need to get into the game and do something as quickly as possible!
We heard this argument before, not too long ago. It was reported in the Wall Street Journal, that “Federal Reserve Chairman Ben Bernanke reached the end of his rope on Wednesday afternoon, September 17.” Bernanke was reacting to things falling apart in the financial industry. He called Treasury Secretary Hank Paulson and said that the administration had to move. Thursday September 18. Paulson responded that he was “on board”. Bernanke insisted that Congressional leaders had to be assembled…which Paulson set up for that Friday evening. Bernanke read them the riot act at that meeting and insisted that a bill…what became TARP…be enacted no later than Monday or everything would fall apart. (For more on this see my post on Seeking Alpha of November 16, 2008, “The Bailout Plan: Did Bernanke Panic?”) The bill was not enacted that Monday and the last half of the TARP money was not released until just recently.
Now we are hearing the call again. We must hurry. The Obama Stimulus Plan has been put on the fast track…and the pressure is on to get the plan enacted by Congress by President’s Day, February 16. But, does this plan really need to be enacted that quickly? Is it better to have any plan by President’s Day or is it better to have a plan that works?
It seems to me that the pressure to get something done quickly has important implications for the second question asked above. Since so little is known about how effective the plan will be…the issue becomes…MORE IS BETTER! Given the uncertainty of how the plan will work, it is important to throw as much as possible against the wall in the hopes that some of it will stick.
Wow! What a way to run a government! But that is what Bernanke/Paulson did.
And, this approach gives rise to the new justification for the program…confidence. The argument goes that “If the government shows that it is serious in ending the recession and this seriousness is reflected in the size of the stimulus package…this will spur on an increase in confidence…which is just what the economy needs right now!”
Let me get this straight. It doesn’t really matter whether or not the stimulus plan works…what is important is that the stimulus plan be very large…so that people will regain confidence.
And, if this is the underlying theory behind the stimulus plan…how is this going to raise the confidence of the world wide investment community…which relates to the third question presented above…to invest in the debt of the United States government?
Oh, well…the United States dollar is the world’s reserve currency and the United States debt is the place for world investors to go when there is a “flight to quality” in world financial markets. Given this fact, people will continue to flock to United States Treasury issues. No doubt about it!
As Alice Rivlin, economist of the Brookings Institution, former member of the Board of Governors of the Federal Reserve System, First Director of the Congressional Budget Office, and Director of the Office of Management and Budget (a cabinet position and appointed by President Bill Clinton a Democrat) recently testified before Congress…”We seem to be counting on the Chinese to keep investing to pay for this (the U. S. deficits) and we’re assuming that the rest of the world isn’t going to lose confidence once we use this moment to spend on a whole range of programs. And, I’m not sure that’s the right assumption.”
Rivlin also has something to say about the fourth question…the question about what happens in the long run. She states that “Because we’re doing this outside the budget process, it means that no one has to talk about what the long-term effects of any of this might be.” That is, what is going to happen beyond the short run if much of this expenditure is still going into the economy as the economy begins to grow again. No one is anticipating how this situation might be dealt with.
As Niall Ferguson, who shares his time between Harvard University and Oxford University, stated recently at Davos…and I am paraphrasing…the new administration seems to believe that by creating an impressive amount of new leverage that it can resolve a financial crisis created by an excessive amount of leverage.
So, I go back to the first question…do we really need to rush so quickly? Yes, I agree with President Obama…he won…he gets to set the table. But, does he want to do it right…or does he just want to do it?
The Congress is supposed to be a deliberative body…it is supposed to mull things over…kick them around…debate and dialogue with one another. Isn’t it better to get something right…than to not do something well…or to do something that may not work?
Projects should not just be put into a stimulus plan…just because they are a “good idea” or because “they are something we want to do and they are available.” Projects, to be included, need to have some real justification for their inclusion in such a plan…the benefit of the project (the whole flow of benefits accruing from the project) should exceed the social cost of the project. Questions should be asked about the timing of the project and when the expected benefits are expected to be received. The Congress should be very intentional about what it is going to do…how much it is going to spend. Success of execution should be the key criteria as to whether a project gets included in the plan…not just the speed of passing the bill.
If Congress were to judge the plan…the whole plan as well as the components of the plan…in this fashion, then something more specific could be said about the size of the plan. Given that every element of the plan could stand up to some form of cost-benefit analysis then the size of the plan would be less of an issue. We would have some rationale for the size of the plan…it would not be a question of hoping some of the material thrown against the wall would stick! The parts of the plan would be chosen because they work…not because they make the plan “large”.
There still will remain questions about financing a stimulus plan. A plan constructed as suggested above would still result in the creation of a lot of new debt the United States government would have to issue. But, the investment community would have more justification to “trust” the plan because the Congress has done its homework…and, if the Congress had done its homework there would be something to say about how the debt will be financed and paid down in the future. That is, the United States government would be acting like a responsible steward of its fiscal responsibilities, something world financial markets have not seen for eight years or so.
To me, this is a crucial issue the Obama administration and the United States government has to deal with…restoring confidence in the fiscal credibility of the United States…something that Bush43 fell far short of doing. Rushing into the fray with a hastily constructed, ill-conceived stimulus plan, one that relies on the Chinese and the rest-of-the-world to finance with no thought for the future is not going to resolve the financial and economic mess we are now experiencing.
Sunday, January 25, 2009
How Effective Might the Stimulus Plan Be?
The Obama stimulus plan totals $825 billion. This plan is a combination of spending plans and tax relief. The dollar amount needed to be large, we are told, because the American economy is tanking and a lot of effort needs to be exerted to stop the decline and re-establish positive growth once again. Of course, we were told similar things when the legislation relating to the TARP was introduced. We have also been told that the number needs to be large because we don’t really know how much stimulus will be needed to jump-start the economy so we need to throw a lot of cash at the problem in hopes that the effort will be large enough to do the job.
The problem is…how much extra spending will $825 billion of stimulus create in the economy. In the simple Keynesian model this $825 billion will generate something more than $825 billion as new investment and new spending is created from the initial stimulus. The word going around is that the Obama economists are using a “multiplier” of 1.5. Thus, $825 billion in new spending and tax cuts will actually result in another $412.5 billion in spending raising the total affect on the economy to $1.2375 trillion…a hefty sum.
On Thursday, the Wall Street Journal printed an opinion piece by Harvard economics professor Bob Barro (http://online.wsj.com/article/SB123258618204604599.html?mod=todays_us_opinion)
who argued that the “multiplier” might be something different from 1.5 and might even be as low as zero! Barro contended, supported by his research, that even in times that are most favorable for the multiplier to be toward the higher end of this range, war times, the multiplier comes out to be no higher than 0.8. That is a stimulus plan that totaled $825 billion, could only expect to produce about $660 of real Gross Domestic Product not $1.2375 trillion. But, he adds, this estimate of 0.8 is probably optimistic.
Why would the final impact of the stimulus package be less than the amount of the stimulus package itself? There are several reasons. For one, the government expenditures could be expected to be a substitute for private investment or other private expenditures. Furthermore, whether or not the tax cuts are spent is another question. In the recent Bush43 tax rebate program much of the rebate money either went into savings or it went to pay off existing debt. In a poll released in the middle of last week, pollsters found that, on average, people would apply 70% to 75% of any tax relief from the stimulus plan to savings or to paying off existing debt. So there are arguments…and empirical support…for the contention that the “multiplier” may not be as high as 1.5 and might realistically be below 1.0.
The threat to save or pay back debt is real…not only for consumers…but also for businesses. Some economists who have studied recessions and depressions talk about a period of time called a debt/deflation. In periods like these the future looks bleak…and economic units…consumers and businesses…try to pull back and restructure themselves on a sounder financial basis. That is, they want to reduce the leverage that is on their balance sheet and get away from owing money. The first concern has to do with being unemployed or faced with going out of business…economic units want cash or, at least, near-cash items so as to be able to bridge a period when cash inflows might be low. And, if there is a possibility of deflation, people want to reduce the amount of debt on their balance sheets because the real value of debt and debt payments increase when prices are falling.
Some “Keynesians” have tried to incorporate these ideas about debt/deflation into their economic models. Hyman Minsky was one of the most prominent economists to explicitly discuss the impact of the capital markets on economic expansions and contractions. However, most of the empirical models used by policy makers do not take account of capital market effects on economic activity. (For a discussion of the economic model used for policy forecasting in the Federal Reserve see “Ben Bernanke’s Fed: The Federal Reserve After Greenspan” by Ethan S. Harris, Harvard Business School Press.) It is hard to contemplate “multipliers” as high as 1.5 if one considers these capital market issues.
For people to spend or borrow (if they could borrow) they need to have at least a somewhat optimistic view of the future (even for the possibility of inflation) to maintain or increase spending by either reducing savings or by borrowing. The obvious psychological impact hoped for from the stimulus package is that economic units will have enough confidence in the future or will even be willing to borrow and pay back loans with cheaper real dollars to keep spending or even increase spending. The Obama team is intending to use the rest of the TARP funds released by the Congress ($350 billion) to get people borrowing again.
Of course the concern about achieving this latter effect is the concern over the creation or the re-enforcement of moral hazard in the economy. If the government continues to “bail out” not only financial institutions but businesses, families, and other economic units, these economic units will continue to take on more and more risk in the future because they know that the government will supply a safety net to protect people from their foolish bets. The economists who argue from the viewpoint of the debt/deflation hypothesis contend that sooner or later the economy will take on so much debt that the debt/deflation cannot stop until people finally work off their extreme financial imbalances and return to more normal debt loads and positive amounts of saving. Some of these economists believe that this time has arrived and the economy cannot be turned around until economic units have worked off their excessive debt burdens and taken on a more conservative view of their economic future.
To get a zero multiplier (see the Barro article and Barro’s textbook “Macroeconomics: A Modern Approach” published by Thomson South-Western) one must argue that economic units will anticipate the increased real economic costs, real future taxes, or inflation that result from the way in which the stimulus package is financed and re-arrange their economic and financial activities to be able to cover the future government levies. A zero multiplier means that for every $1.00 the government puts into the stimulus plan, economic units will remove $1.00 from the spending stream. Thus, the $825 billion stimulus plan would increase real Gross Domestic Product by…ZERO DOLLARS!
What is the alternative to the type of stimulus plan proposed by the Obama administration? Barro argues that things must be done to encourage business commitment and innovation. His favorite idea is to eliminate the federal corporate income tax. If people are to be put back to work again…businesses must be hiring. In order to do this the energy and the foresight of the American business community must be put back to work again. The concern with massive public-works programs is that they will just substitute for the innovation and entrepreneurial leadership that still exists in the country and could produce real growth but needs to have the appropriate incentives.
So, what will be the impact of the Obama stimulus plan? You take your guess…I’ll take mine. My guess is that the multiplier is less than 1.0 and is maybe as low as 0.4. A reason for this pessimistic view of the multiplier is that we are at the stage where people/families and businesses finally have to fully restructure their finances to get balance sheets back into some form of conservative position. After many, many years of chasing dreams through betting on rising inflation with increased leverage and new financial instruments…the economy finally needs a break…needs to catch its breath and settle down for awhile.
I could be wrong. The American government could throw so much money at the economy that rising inflation and increased leverage becomes “the thing” again. If such is the case…then we are just postponing for another time, dealing with the monster that the government has created in the first place.
The problem is…how much extra spending will $825 billion of stimulus create in the economy. In the simple Keynesian model this $825 billion will generate something more than $825 billion as new investment and new spending is created from the initial stimulus. The word going around is that the Obama economists are using a “multiplier” of 1.5. Thus, $825 billion in new spending and tax cuts will actually result in another $412.5 billion in spending raising the total affect on the economy to $1.2375 trillion…a hefty sum.
On Thursday, the Wall Street Journal printed an opinion piece by Harvard economics professor Bob Barro (http://online.wsj.com/article/SB123258618204604599.html?mod=todays_us_opinion)
who argued that the “multiplier” might be something different from 1.5 and might even be as low as zero! Barro contended, supported by his research, that even in times that are most favorable for the multiplier to be toward the higher end of this range, war times, the multiplier comes out to be no higher than 0.8. That is a stimulus plan that totaled $825 billion, could only expect to produce about $660 of real Gross Domestic Product not $1.2375 trillion. But, he adds, this estimate of 0.8 is probably optimistic.
Why would the final impact of the stimulus package be less than the amount of the stimulus package itself? There are several reasons. For one, the government expenditures could be expected to be a substitute for private investment or other private expenditures. Furthermore, whether or not the tax cuts are spent is another question. In the recent Bush43 tax rebate program much of the rebate money either went into savings or it went to pay off existing debt. In a poll released in the middle of last week, pollsters found that, on average, people would apply 70% to 75% of any tax relief from the stimulus plan to savings or to paying off existing debt. So there are arguments…and empirical support…for the contention that the “multiplier” may not be as high as 1.5 and might realistically be below 1.0.
The threat to save or pay back debt is real…not only for consumers…but also for businesses. Some economists who have studied recessions and depressions talk about a period of time called a debt/deflation. In periods like these the future looks bleak…and economic units…consumers and businesses…try to pull back and restructure themselves on a sounder financial basis. That is, they want to reduce the leverage that is on their balance sheet and get away from owing money. The first concern has to do with being unemployed or faced with going out of business…economic units want cash or, at least, near-cash items so as to be able to bridge a period when cash inflows might be low. And, if there is a possibility of deflation, people want to reduce the amount of debt on their balance sheets because the real value of debt and debt payments increase when prices are falling.
Some “Keynesians” have tried to incorporate these ideas about debt/deflation into their economic models. Hyman Minsky was one of the most prominent economists to explicitly discuss the impact of the capital markets on economic expansions and contractions. However, most of the empirical models used by policy makers do not take account of capital market effects on economic activity. (For a discussion of the economic model used for policy forecasting in the Federal Reserve see “Ben Bernanke’s Fed: The Federal Reserve After Greenspan” by Ethan S. Harris, Harvard Business School Press.) It is hard to contemplate “multipliers” as high as 1.5 if one considers these capital market issues.
For people to spend or borrow (if they could borrow) they need to have at least a somewhat optimistic view of the future (even for the possibility of inflation) to maintain or increase spending by either reducing savings or by borrowing. The obvious psychological impact hoped for from the stimulus package is that economic units will have enough confidence in the future or will even be willing to borrow and pay back loans with cheaper real dollars to keep spending or even increase spending. The Obama team is intending to use the rest of the TARP funds released by the Congress ($350 billion) to get people borrowing again.
Of course the concern about achieving this latter effect is the concern over the creation or the re-enforcement of moral hazard in the economy. If the government continues to “bail out” not only financial institutions but businesses, families, and other economic units, these economic units will continue to take on more and more risk in the future because they know that the government will supply a safety net to protect people from their foolish bets. The economists who argue from the viewpoint of the debt/deflation hypothesis contend that sooner or later the economy will take on so much debt that the debt/deflation cannot stop until people finally work off their extreme financial imbalances and return to more normal debt loads and positive amounts of saving. Some of these economists believe that this time has arrived and the economy cannot be turned around until economic units have worked off their excessive debt burdens and taken on a more conservative view of their economic future.
To get a zero multiplier (see the Barro article and Barro’s textbook “Macroeconomics: A Modern Approach” published by Thomson South-Western) one must argue that economic units will anticipate the increased real economic costs, real future taxes, or inflation that result from the way in which the stimulus package is financed and re-arrange their economic and financial activities to be able to cover the future government levies. A zero multiplier means that for every $1.00 the government puts into the stimulus plan, economic units will remove $1.00 from the spending stream. Thus, the $825 billion stimulus plan would increase real Gross Domestic Product by…ZERO DOLLARS!
What is the alternative to the type of stimulus plan proposed by the Obama administration? Barro argues that things must be done to encourage business commitment and innovation. His favorite idea is to eliminate the federal corporate income tax. If people are to be put back to work again…businesses must be hiring. In order to do this the energy and the foresight of the American business community must be put back to work again. The concern with massive public-works programs is that they will just substitute for the innovation and entrepreneurial leadership that still exists in the country and could produce real growth but needs to have the appropriate incentives.
So, what will be the impact of the Obama stimulus plan? You take your guess…I’ll take mine. My guess is that the multiplier is less than 1.0 and is maybe as low as 0.4. A reason for this pessimistic view of the multiplier is that we are at the stage where people/families and businesses finally have to fully restructure their finances to get balance sheets back into some form of conservative position. After many, many years of chasing dreams through betting on rising inflation with increased leverage and new financial instruments…the economy finally needs a break…needs to catch its breath and settle down for awhile.
I could be wrong. The American government could throw so much money at the economy that rising inflation and increased leverage becomes “the thing” again. If such is the case…then we are just postponing for another time, dealing with the monster that the government has created in the first place.
Sunday, January 18, 2009
Can an Economic Expansion take place without the Banking Sector?
The Obama team has put forward the outline of its economic stimulus plan. The United States Congress has released the last $350 bill of the TARP funds. Will this get the United States economy going again?
It seems to me that the answer to this depends upon whether or not the United States economy needs a banking sector to accompany the journey. Again, the earnings reports coming out of the financial sector last week hardly gives us much confidence that banking institutions are in any kind of shape to contribute to a regeneration of economic growth.
Losses are still huge…and one doesn’t gain much confidence from the executives running these institutions that the flow of losses is over. And, it is in the larger financial institutions that the problems are so great. But, this doesn’t mean that smaller institutions are out of harm’s way.
The fundamental issue is about the value of the assets the banks are holding. I don’t see or hear anyone claiming that bank managements really have their arms around the valuation problem. And, after all we have heard from bank presidents trying to build up confidence in their institutions, very little faith can be taken from anything else they might say. My strong feeling is that banks still do not know how deep their problems are right now and whether of not many of them are still solvent. This is a scary fact.
But, that is the past. We are only at the beginning of the real economic slowdown. Bankruptcies are on the rise and will continue to do so through the first half of the year. With the tremendous slowdown in retail sales in the fourth quarter of 2008 the accounting results for the end-of-the-year are bound to be horrible. What will be the fallout from these results is any one’s guess right now. There will not be bail outs for many or most of these poor performers and so there will be more and more doors shut going forward.
One suggested solution to arrest some of these closures is mergers or acquisitions. However, given all the uncertainty that exists in the economy at the present time…who wants to buy anything…and at what price.
Two cases, both in the news, should serve as examples: first the acquisition of Merrill Lynch by Bank of America; and second, the liquidation of Circuit City. The case of Bank of America is a sad one indeed…regardless of how you read the tea leaves. Merrill Lynch…like Citigroup…like AIG…and so on…didn’t know the value of its assets. The CEO of Bank of America wanted Merrill…very badly. Did BOA not do its due diligence? Did it do a crappy job? Did the hubris of the chief executive, as in many other cases in both good times as well as bad, go into the deal with blinders on? Did BOA try to get out of the acquisition of Merrill and the government would not let them out?
Whatever, the Bank of America/Merrill Lynch is a deal that went very, very badly. But, I go back to my main point…Merrill Lynch did not have a good handle on the value of its assets. They may have thought that they did…but they didn’t! And, this seems to be the story over and over again.
Financial institutions do not seem to have any real idea of what is the value of their assets. So, beware…mergers and acquisitions are dangerous to your health!
And, hence, we can move on to Circuit City. The rumor was that Circuit City had three parties that were potentially interested in acquiring the company. All three apparently were not willing to pay a price sufficiently high that would exceed what Circuit City thought they could gain by selling off inventories and closing their doors. Again, here is a bet the potential acquirers were not willing to make…a bet on the value of the assets of Circuit City. And, this seems to be the other side of the Bank of America/Merrill Lynch transaction…how can a company buy someone else when they don’t have a good feel for what the underlying assets are worth.
This gets us into the second part of the dilemma of the banks…making loans. If the banks don’t know the value of the assets on their books, how likely is it for potential borrowers to know the value of the assets on their books…consumers as well as businesses? Not very likely at all!
Why should banks get criticized for not lending to potential borrowers and potential acquirers of businesses be excused from any criticism? What is the difference between a potential acquirer that is not willing to pay very much to obtain the assets of another company and a bank that is not willing to loan money to someone because if, in both cases, the value of the assets of the potential acquisition or the potential borrower is highly uncertain? What I am saying is that right now there is so much uncertainty over who is going to be around in the future and what can be salvaged from existing economic units the people are unwilling to commit any more resources for lending or for acquiring.
Furthermore, why should banks be lending more when they are facing over the next two years or so at least two periods where there will be major adjustments of interest rates on mortgages and other loans on assets. These repricings may create many more foreclosure or bankruptcy problems on the banks and this would mean that banks would need even more resources to back up the decline in the value of their assets.
The question that still remains to be discussed is the solvency issue. Financial crises generally follow the pattern that first there is the liquidity crisis. Then there develops the asset crisis. Finally, there is the solvency crisis.
We finished with the liquidity crisis in December 2007. The asset crisis hit in March 2008 and grew into and through the fall of that year. We are, I believe, in the period of the solvency crisis…the life and death struggle of a large number of financial institutions.
Hopefully, TARP has provided a little relief toward the solvency of banks. The big question is whether the funds that have gone to bank capital have reached any where near the total that will be needed. If banks do not know the value of their assets now, there are still big holes to be filled in balance sheets…existing bank capital may be no where near that needed to keep the banking system going. In addition, if there are still shocks that the banks must face in terms of future bad loans…even more pressure is going to be added to the capital needs of the banking system.
There are two issues here. First, how is the government going to keep those banks that are relatively healthy going? Second, how is the government going to close those banks that are not healthy and how is the government going to dispose of the assets of these banks? In the first case…and I never ever thought I would ever be in a situation where I would be saying this…the government may have to nationalize a fair portion of the banking industry…more than it already has.
In the second case, the government is going to need something like the Resolution Trust Corporation (RTC) to manage the assets it takes over from the banks that have to be closed. Furthermore, it would seem as if the government would have to come up with a relatively large amount of funds to cover the losses on assets that would have to be shelled out in the closing of these banks. Many analysts have argued that this is not such a bad solution since the original RTC, formed in 1989 actually made money in its asset sales. However, this organization sold into a rising housing market. A rising market does not seem likely in the near future.
Now back to the original question. Can an economic expansion take place without a banking sector to support it? My feeling is that it would be very hard for an expansion to take place under such circumstances. If the banking system is not functioning…even a large economic stimulus package will not be very effective in getting the economic system going again.
It seems to me that the answer to this depends upon whether or not the United States economy needs a banking sector to accompany the journey. Again, the earnings reports coming out of the financial sector last week hardly gives us much confidence that banking institutions are in any kind of shape to contribute to a regeneration of economic growth.
Losses are still huge…and one doesn’t gain much confidence from the executives running these institutions that the flow of losses is over. And, it is in the larger financial institutions that the problems are so great. But, this doesn’t mean that smaller institutions are out of harm’s way.
The fundamental issue is about the value of the assets the banks are holding. I don’t see or hear anyone claiming that bank managements really have their arms around the valuation problem. And, after all we have heard from bank presidents trying to build up confidence in their institutions, very little faith can be taken from anything else they might say. My strong feeling is that banks still do not know how deep their problems are right now and whether of not many of them are still solvent. This is a scary fact.
But, that is the past. We are only at the beginning of the real economic slowdown. Bankruptcies are on the rise and will continue to do so through the first half of the year. With the tremendous slowdown in retail sales in the fourth quarter of 2008 the accounting results for the end-of-the-year are bound to be horrible. What will be the fallout from these results is any one’s guess right now. There will not be bail outs for many or most of these poor performers and so there will be more and more doors shut going forward.
One suggested solution to arrest some of these closures is mergers or acquisitions. However, given all the uncertainty that exists in the economy at the present time…who wants to buy anything…and at what price.
Two cases, both in the news, should serve as examples: first the acquisition of Merrill Lynch by Bank of America; and second, the liquidation of Circuit City. The case of Bank of America is a sad one indeed…regardless of how you read the tea leaves. Merrill Lynch…like Citigroup…like AIG…and so on…didn’t know the value of its assets. The CEO of Bank of America wanted Merrill…very badly. Did BOA not do its due diligence? Did it do a crappy job? Did the hubris of the chief executive, as in many other cases in both good times as well as bad, go into the deal with blinders on? Did BOA try to get out of the acquisition of Merrill and the government would not let them out?
Whatever, the Bank of America/Merrill Lynch is a deal that went very, very badly. But, I go back to my main point…Merrill Lynch did not have a good handle on the value of its assets. They may have thought that they did…but they didn’t! And, this seems to be the story over and over again.
Financial institutions do not seem to have any real idea of what is the value of their assets. So, beware…mergers and acquisitions are dangerous to your health!
And, hence, we can move on to Circuit City. The rumor was that Circuit City had three parties that were potentially interested in acquiring the company. All three apparently were not willing to pay a price sufficiently high that would exceed what Circuit City thought they could gain by selling off inventories and closing their doors. Again, here is a bet the potential acquirers were not willing to make…a bet on the value of the assets of Circuit City. And, this seems to be the other side of the Bank of America/Merrill Lynch transaction…how can a company buy someone else when they don’t have a good feel for what the underlying assets are worth.
This gets us into the second part of the dilemma of the banks…making loans. If the banks don’t know the value of the assets on their books, how likely is it for potential borrowers to know the value of the assets on their books…consumers as well as businesses? Not very likely at all!
Why should banks get criticized for not lending to potential borrowers and potential acquirers of businesses be excused from any criticism? What is the difference between a potential acquirer that is not willing to pay very much to obtain the assets of another company and a bank that is not willing to loan money to someone because if, in both cases, the value of the assets of the potential acquisition or the potential borrower is highly uncertain? What I am saying is that right now there is so much uncertainty over who is going to be around in the future and what can be salvaged from existing economic units the people are unwilling to commit any more resources for lending or for acquiring.
Furthermore, why should banks be lending more when they are facing over the next two years or so at least two periods where there will be major adjustments of interest rates on mortgages and other loans on assets. These repricings may create many more foreclosure or bankruptcy problems on the banks and this would mean that banks would need even more resources to back up the decline in the value of their assets.
The question that still remains to be discussed is the solvency issue. Financial crises generally follow the pattern that first there is the liquidity crisis. Then there develops the asset crisis. Finally, there is the solvency crisis.
We finished with the liquidity crisis in December 2007. The asset crisis hit in March 2008 and grew into and through the fall of that year. We are, I believe, in the period of the solvency crisis…the life and death struggle of a large number of financial institutions.
Hopefully, TARP has provided a little relief toward the solvency of banks. The big question is whether the funds that have gone to bank capital have reached any where near the total that will be needed. If banks do not know the value of their assets now, there are still big holes to be filled in balance sheets…existing bank capital may be no where near that needed to keep the banking system going. In addition, if there are still shocks that the banks must face in terms of future bad loans…even more pressure is going to be added to the capital needs of the banking system.
There are two issues here. First, how is the government going to keep those banks that are relatively healthy going? Second, how is the government going to close those banks that are not healthy and how is the government going to dispose of the assets of these banks? In the first case…and I never ever thought I would ever be in a situation where I would be saying this…the government may have to nationalize a fair portion of the banking industry…more than it already has.
In the second case, the government is going to need something like the Resolution Trust Corporation (RTC) to manage the assets it takes over from the banks that have to be closed. Furthermore, it would seem as if the government would have to come up with a relatively large amount of funds to cover the losses on assets that would have to be shelled out in the closing of these banks. Many analysts have argued that this is not such a bad solution since the original RTC, formed in 1989 actually made money in its asset sales. However, this organization sold into a rising housing market. A rising market does not seem likely in the near future.
Now back to the original question. Can an economic expansion take place without a banking sector to support it? My feeling is that it would be very hard for an expansion to take place under such circumstances. If the banking system is not functioning…even a large economic stimulus package will not be very effective in getting the economic system going again.
Wednesday, January 14, 2009
The Collapse of Citi
Banking is a commodity business. Banking deals with information…I am holding $100.00of yours in something called a transaction account…I am holding your IOU for $1,000,000.00. Whereas, historically, these sums had to do with a physical quantity…something like gold…now all banking is basically conducted in 0’s and 1’s.
Banking is just information and the movement of information. Banking is a commodity business.
Yes, there are some other products and services connected with the banking business. There is safe keeping…you can get coin and currency back from you transaction account. We will clear payments for you though the banking system so that you can pay people from your account without the use of coin and currency and you can receive payments from other which will be put into your account. That is, we clear transactions through the banking system. We will do your accounting for you and send you a monthly statement. We will make loans to you and provide many different kinds of services for you connected with your loan. And there are many other products and services that banks provide their customers…individuals, businesses, and governments.
Banks used to get paid for these services primarily in interest payments or in deposit balances that were kept at the bank. In the 1980s, however, we got another idea. We can isolate these products and services, account for them, and then charge the customer fees for these particular products and services they use and then we, the banks, won’t have to build in payment for them in the interest rates charged on the loans or by means of the deposit balances that the customer had been required to keep at the bank.
Fees are good because they don’t depend upon loan or deposit balances, but depend upon other products or services rendered.
In the 1980s depository institutions found another way to generate fee income. In the 1970s the government had invented a new financial instrument called a mortgage-backed security that could help financial institutions make more money available to people who wanted to own homes and the depository institution could make these mortgage loans, securitize them so they could sell them and not hold them on their balance sheets, and collect fees for originating and, possibly servicing them. Furthermore, the banks would not have to worry about the interest rate risk that came from holding assets with long term maturities like mortgages and support them with deposits that were available on demand or had short-term maturities.
Banks liked fees and started to build businesses based on fee income. They looked farther and farther in an effort to find more sources of fee income. They built or acquired subsidiaries that generated fee income. And banking companies grew and became diversified…even conglomerate in nature.
But, the banks saw that more than just mortgages could be securitized and they saw that these securitized loans could be traded and in so doing more and more fees could be generated, but they also found that they could make trading profits from dealing in these securitized loans. And so banks began trading in securitized loans…otherwise called derivatives…and developing arbitrage strategies to take advantage of market discrepancies. But, to take advantage of market discrepancies they had to increase the amount of leverage they used so as to earn competitive returns.
Yet, the nature of banking did not change. Banking is a commodity business.
Not only is the business of borrowing money in the form of deposits and lending that money out to businesses and consumers in different kinds of loans a commodity business, the banks found that competition made all the products and services they offered into commodities as well. And, trading…well no one makes money over the longer haul on trading…because it, too, is composed of transactions in commodities.
Banks can earn a return on capital that is equal to what the capital can earn elsewhere given the normal risk a bank assumes. But, banks cannot mold themselves into institutions that can produce and sustain competitive advantages over other firms and industries. The business model they tried did not work. Yet, like other firms and other industries that come to believe in a business model that doesn’t work, their continued efforts to make the business model work only exacerbated the problem. Generally, this extra effort meant taking more and more risks and then even using extra-legal means to produce the results wanted.
I am not saying that banks committed fraud, but I have very serious concerns about the off-balance sheet practices along with other accounting efforts that the banks used in an attempt to generate the higher returns they felt they had to earn. However, the competitive pressure to perform does push people and organizations to walk the edge of ethical practices.
Citi…whatever…had a business model that did not work. And, this model was tested over about a decade…and it never worked. The investment community realized this and was only luke-warm about the company’s stock. Yet, management stuck with the model and tried all the tricks to make its business model work. They were true believers.
No one stood up, however, and mentioned that the emperor didn’t have on any clothes.
Banking is a commodity business. Citi…whatever…is said to be cutting back its organization by a third…and this is from the reduction in size that had already been achieved. They are supposedly getting back to fundamentals…into areas in which they have a core competency. Supposedly, its management has a better appreciation of the markets it will be working in. Let’s hope so.
And so the debt deflation goes on. The example of the banks…and of Citi-whatever…shows why it is so difficult to achieve a turnaround in the financial system and the economy during a time such as this. In the previous forty years or so, many companies, like Citi-whatever, took advantage of the almost continuous expansion of the economy and the government support of that expansion. Now the re-construction of these companies must take place.
The big question on the table right now concerns the stimulus plan being put together by President-elect Obama and his team. With companies…like Citi-whatever…drawing back and restructuring, how much effect can the stimulus plan have on the economy? The stimulus plan must not only attempt to reverse the economic down-term but must overcome the impact of the companies that are deleveraging their financial structure or are withdrawing from markets. The administration is shooting at a target that is moving away from it.
Banking is just information and the movement of information. Banking is a commodity business.
Yes, there are some other products and services connected with the banking business. There is safe keeping…you can get coin and currency back from you transaction account. We will clear payments for you though the banking system so that you can pay people from your account without the use of coin and currency and you can receive payments from other which will be put into your account. That is, we clear transactions through the banking system. We will do your accounting for you and send you a monthly statement. We will make loans to you and provide many different kinds of services for you connected with your loan. And there are many other products and services that banks provide their customers…individuals, businesses, and governments.
Banks used to get paid for these services primarily in interest payments or in deposit balances that were kept at the bank. In the 1980s, however, we got another idea. We can isolate these products and services, account for them, and then charge the customer fees for these particular products and services they use and then we, the banks, won’t have to build in payment for them in the interest rates charged on the loans or by means of the deposit balances that the customer had been required to keep at the bank.
Fees are good because they don’t depend upon loan or deposit balances, but depend upon other products or services rendered.
In the 1980s depository institutions found another way to generate fee income. In the 1970s the government had invented a new financial instrument called a mortgage-backed security that could help financial institutions make more money available to people who wanted to own homes and the depository institution could make these mortgage loans, securitize them so they could sell them and not hold them on their balance sheets, and collect fees for originating and, possibly servicing them. Furthermore, the banks would not have to worry about the interest rate risk that came from holding assets with long term maturities like mortgages and support them with deposits that were available on demand or had short-term maturities.
Banks liked fees and started to build businesses based on fee income. They looked farther and farther in an effort to find more sources of fee income. They built or acquired subsidiaries that generated fee income. And banking companies grew and became diversified…even conglomerate in nature.
But, the banks saw that more than just mortgages could be securitized and they saw that these securitized loans could be traded and in so doing more and more fees could be generated, but they also found that they could make trading profits from dealing in these securitized loans. And so banks began trading in securitized loans…otherwise called derivatives…and developing arbitrage strategies to take advantage of market discrepancies. But, to take advantage of market discrepancies they had to increase the amount of leverage they used so as to earn competitive returns.
Yet, the nature of banking did not change. Banking is a commodity business.
Not only is the business of borrowing money in the form of deposits and lending that money out to businesses and consumers in different kinds of loans a commodity business, the banks found that competition made all the products and services they offered into commodities as well. And, trading…well no one makes money over the longer haul on trading…because it, too, is composed of transactions in commodities.
Banks can earn a return on capital that is equal to what the capital can earn elsewhere given the normal risk a bank assumes. But, banks cannot mold themselves into institutions that can produce and sustain competitive advantages over other firms and industries. The business model they tried did not work. Yet, like other firms and other industries that come to believe in a business model that doesn’t work, their continued efforts to make the business model work only exacerbated the problem. Generally, this extra effort meant taking more and more risks and then even using extra-legal means to produce the results wanted.
I am not saying that banks committed fraud, but I have very serious concerns about the off-balance sheet practices along with other accounting efforts that the banks used in an attempt to generate the higher returns they felt they had to earn. However, the competitive pressure to perform does push people and organizations to walk the edge of ethical practices.
Citi…whatever…had a business model that did not work. And, this model was tested over about a decade…and it never worked. The investment community realized this and was only luke-warm about the company’s stock. Yet, management stuck with the model and tried all the tricks to make its business model work. They were true believers.
No one stood up, however, and mentioned that the emperor didn’t have on any clothes.
Banking is a commodity business. Citi…whatever…is said to be cutting back its organization by a third…and this is from the reduction in size that had already been achieved. They are supposedly getting back to fundamentals…into areas in which they have a core competency. Supposedly, its management has a better appreciation of the markets it will be working in. Let’s hope so.
And so the debt deflation goes on. The example of the banks…and of Citi-whatever…shows why it is so difficult to achieve a turnaround in the financial system and the economy during a time such as this. In the previous forty years or so, many companies, like Citi-whatever, took advantage of the almost continuous expansion of the economy and the government support of that expansion. Now the re-construction of these companies must take place.
The big question on the table right now concerns the stimulus plan being put together by President-elect Obama and his team. With companies…like Citi-whatever…drawing back and restructuring, how much effect can the stimulus plan have on the economy? The stimulus plan must not only attempt to reverse the economic down-term but must overcome the impact of the companies that are deleveraging their financial structure or are withdrawing from markets. The administration is shooting at a target that is moving away from it.
Sunday, November 23, 2008
The Coming Stimulus Package
Yes, we do have a President (elect)! (See “A Whiff of Leadership?” posted November 22, 2008 at http://maseportfolio.blogspot.com/ . An economic stimulus package is in the works. The underlying philosophy…the risks of not doing something big are bigger than the risks associated with inflation and an economic cleanup when the economy shifts into first gear rather than reverse.
We have seen this attitude taken by the Federal Reserve. The Fed, as we have been writing about in this blog, has not wanted to be short in supplying liquidity to the financial markets. Federal Reserve assets have more than doubled in the past ten weeks. Chairman Ben Bernanke has been given the name Helicopter Ben during this barrage of funds. But, the argument goes, the risk is too great to not put money into the financial system until the financial markets begin to function again.
Liquidity is apparently not going to get the economy humming again…spending of the private sector is going into the tank. Lending in the financial markets is not going to kick-start consumer spending or investment spending…state and local government expenditure is also in decline…so the belief is that the federal government must step into the gap and stimulate incomes and employment.
The talk seems to indicate that the Obama economic stimulus package is going to be somewhere in the neighborhood of $700 billion…of similar size to the bailout package of a couple of months ago. The idea…like that of the bailout package…is that the stimulus package must be a large number.
One thing that is crucial in all of this is that the Obama administration must give off the impression that it is operating under control…that it is disciplined. This is a hard thing to do when the philosophy of the stimulus package is the one described above. However, the administration must appear to be very intentional, on top of the situation, and ready to do what is necessary in response to new information. That is, the Obama administration must rebuild confidence in the federal government. Establishing confidence at the top is necessary because it will help to rebuild the confidence of the whole system as I discuss in “Discipline or the Lack Thereof” posted November 20, 2009, at http://maseportfolio.blogspot.com/.
President-elect Obama seems to be aware of this need to set the tone for the future. I think people, and markets, will respond very well to this because they are so hungry for leadership at this time…and are very, very anxious. So, we see two things going on right now…first, the appointment of top quality people to important positions…and, second, the intentional effort to create programs and get the discussion in Congress and the economy going so that action can be taken as soon as possible. The important emphasis right now is that the effort is intentional, not passive or just reactive.
Just a final note about the apparent appointment of Larry Summers to head the National Economic Council: this may be an inspired choice. No one questions the intelligence and ability of Summers. Being in the White House, acting as the coordinator of the economic policies of the President, monitoring the President’s economic agenda, and serving as close advisor to the President may not only fit his personality best but may be the real place his talents can fill the needs of the nation. It also superbly complements the other appointments that the President-elect has made to build his economic team.
We have seen this attitude taken by the Federal Reserve. The Fed, as we have been writing about in this blog, has not wanted to be short in supplying liquidity to the financial markets. Federal Reserve assets have more than doubled in the past ten weeks. Chairman Ben Bernanke has been given the name Helicopter Ben during this barrage of funds. But, the argument goes, the risk is too great to not put money into the financial system until the financial markets begin to function again.
Liquidity is apparently not going to get the economy humming again…spending of the private sector is going into the tank. Lending in the financial markets is not going to kick-start consumer spending or investment spending…state and local government expenditure is also in decline…so the belief is that the federal government must step into the gap and stimulate incomes and employment.
The talk seems to indicate that the Obama economic stimulus package is going to be somewhere in the neighborhood of $700 billion…of similar size to the bailout package of a couple of months ago. The idea…like that of the bailout package…is that the stimulus package must be a large number.
One thing that is crucial in all of this is that the Obama administration must give off the impression that it is operating under control…that it is disciplined. This is a hard thing to do when the philosophy of the stimulus package is the one described above. However, the administration must appear to be very intentional, on top of the situation, and ready to do what is necessary in response to new information. That is, the Obama administration must rebuild confidence in the federal government. Establishing confidence at the top is necessary because it will help to rebuild the confidence of the whole system as I discuss in “Discipline or the Lack Thereof” posted November 20, 2009, at http://maseportfolio.blogspot.com/.
President-elect Obama seems to be aware of this need to set the tone for the future. I think people, and markets, will respond very well to this because they are so hungry for leadership at this time…and are very, very anxious. So, we see two things going on right now…first, the appointment of top quality people to important positions…and, second, the intentional effort to create programs and get the discussion in Congress and the economy going so that action can be taken as soon as possible. The important emphasis right now is that the effort is intentional, not passive or just reactive.
Just a final note about the apparent appointment of Larry Summers to head the National Economic Council: this may be an inspired choice. No one questions the intelligence and ability of Summers. Being in the White House, acting as the coordinator of the economic policies of the President, monitoring the President’s economic agenda, and serving as close advisor to the President may not only fit his personality best but may be the real place his talents can fill the needs of the nation. It also superbly complements the other appointments that the President-elect has made to build his economic team.
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