Fiscal (Non)Stimulus - Part Two

I posted the other day some (more) views on why fiscal stimulus is not going to work. I even attached a statistical analysis from a guy at Stanford (the West Coast's version of smart people) showing this to be the case. Well, let's consider it from a more back-of-the-envelope down-to-earth perspective.

Let's assume you are a somewhat average American making a somewhat average salary. Your life may be better or worse, but I need to start from some base-line. So you make an average amount and you have several thousand in credit card debt. You are worried about your job, your spouse is working part-time, your son needs dentures, you are worried about college, retirement, the house payment and the like. You have been cutting back where you can but are running out of places to cut. You are at least somewhat worried about your financial future and your children's financial future.

So now the government gives you a one time $1000 check. There may be another one or two some time in the future, but no guarantees. So you get this check. What do you do? Well, let's make this multiple choice:

1. You splurge on a new high-def TV;
2. You take the family (at least some of it) to Disney;
3. You have a big neighborhood party to celebrate the check;
4. You by some new furniture, clothes for the kids, a new car, whatever; or
5. You use it to pay some of those bills you were not sure how you were going to pay.

Okay, I made this a bit extreme, but not too much from what I can tell. Americans are wising up and spending their money in a more prudent fashion. If only the politicians were to learn how to do this, I could sleep better at night.

Fiscal (Non)Stimulus

While I do not have time at the moment to do a proper summary of the following by John Taylor at Stanford, it is a good read and not that long. Bottom line, he updates a statistical analysis of the impact of fiscal stimulus spending, like we did last year and are about to repeat, and concludes there is no evidence to support its assumed impact on consumption, i.e. it has no statistically significant impact on increasing consumption. In other words, giving people a rebate is not helping the problem.

I for one take a slightly different view. I do not want people to spend more. I think they are now, for a change, spending within their means and it needs to remain there. Consumer debt is actually going down right now, minimally at least, and that is a good thing. The problem is not a lack of consumer spending, it is that we have built up too many retail and other establishments to be supported by what we make. That, my friends, is why we are correcting. And that is why a lot of businesses NEED to go out of business.

The only thing that rebates might achieve is to shift a bit of debt from the consumer's pocket to the government's pocket, benefiting the pay down in consumer debt or the increase in savings. I do not, however, view this as an efficient use of government money. Rather, we need to be using the money to (1) deal with the fallout of a recession in terms of helping the unemployed, homeless, etc. and (2) work on building sustainable businesses and jobs. The latter is difficult, but spending on alternative energy, better education and the like makes some sense to me. Meanwhile the economy will correct itself and we should let it take its course. We should certainly not be building a massive deficit in trying to stop the inevitable.

http://www.aeaweb.org/annual_mtg_papers/2009/retrieve.php?pdfid=387

Quote of the Day

"When the best minds of the country are all going to Wall Street, there is a distortion in the allocation of human capital to some activities that become excessive and eventually inefficient." Nouriel Roubini

Dollar Up or Down

There is a race to the bottom on currency values. The lower your currency goes in relation to other currencies the better off you are exporting as your goods are cheaper. Yet, here is a reason why the U.S. may not be in a position to devalue and may, instead, have an incentive to go the opposite direction slowly but surely. This seems the wrong thing to do, right? Well, if we want anyone to buy Treasuries, probably not. Eventually fear will not cause a flight to Treasuries. Indeed, fear may at some point drive a flight in the opposite direction.

So you need something to keep people buying Treasuries. Well, the rates certainly are not going to do it at the moment. Recently some people were essentially paying the U.S. government to hold their money for them and that is not going to last for long. When people start deciding there are better places for their money - which they are already in the process of doing - then they will need an incentive for buying Treasuries. Foreigners, especially, are not going to buy Treasuries at very low rates when the dollar is devaluing, as that is a losing proposition. But if the dollar is rising gradually in value against their currency, they a Treasury investment, even at low interest rates, is providing growth through currency exchange rates. And since the U.S. desperately needs to sell Treasuries for years to come, this might be the tool of the day for them to do it, and perhaps the only way.

http://suddendebt.blogspot.com/2009/01/linked-bonds-and-fx.html

Knock, Knock, Knocking On Paulson's Door

Well the $300 billion given to financial institutions to get them lending did little to achieve that desired effect. The banks held on to the money for dear life, literally, and for good measure. It seems ratings downgrades in the last quarter of $1.84 trillion were enough to eat up all the TARP dollars on the bank's books. Meredith Whitney at Oppenheimer & Co notes that the massive downgrades will lead to "meaningfully lower" capital ratios. In other words, the institutions are no better off now than just before they received their TARP dollars and can be expected to be knock, knock, knocking on Paulson's door.

I have said it before and undoubtedly will again; some of these financial institutions need an orderly wind-down. At a minimum, if we are spending all this money on them, Uncle Sam should outright own them. Shareholders and bondholders lose out, as does management, which should be replaced.

http://www.housingwire.com/2009/01/07/downgrades-outpacing-tarp-funding-analyst/

But rather than getting bang for our buck, Paulson is getting us next to nothing. He claims he is not trying to duplicate private deals, like the one Buffet got with Goldman Sachs. Why in the H E double tootpicks not?!! There is no way for this money giving spree to avoid moral hazard without making these financial companies bear the pain, and a lot of it. So wake up Henry!!

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAvhtiFdLyaQ&

Disclosures: None.

Here's A Worthy Cause . . .

Seems the adult entertainment industry is hurting in this downturn too. People are just too darned depressed to think about sex, according to Larry Flynt, so he and others in the adult entertainment industry are looking for a government bailout. Now this seems a bit counter-intuitive to me. It may be that people are just turning to free porn, of which there is plenty on the internet (I am told), instead of spending money on Hustler magazine. The good news is that we may have found one industry where Paulson and the Fed will draw the line.

http://dealbook.blogs.nytimes.com/2009/01/07/bailouts-gone-wild-porn-chiefs-seek-5-billion/

Disclosures: None (really honey I don't look at porn)

Back To Selling Shoes

Kenneth Lewis at Bank of America seems to have perhaps bitten off a bit more than Bank of America can chew. Seems some of the "crown jewels" at Merrill Lynch are ending up in someone else's crown, just when Bank of America is struggling with reduced earnings and a greatly reduced stock price. I guess $40 billion doesn't buy what it used to. Personally I thought Bank of America was toast when it bought Countrywide Financial, even if it can take advantage of some tax rulings at the IRS. When they added Merrill to the mix, they just became extra-crispy toast. They are probably in the too-big-to-fail category, so good old Paulson will prop them up if need be. The problem might become one of too-big-to-save if things get really nasty. The immediate problem for Lewis, however, is stemming the tide of defections. If he can't, he can always go back to his old job of selling shoes. I believe there are a few mall vacancies right now, so setting up shop in a prime retail location should not be a problem.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aMzHGkCEv2P0&refer=home

Disclosures: None

Gettin' Hedgie With It

Hedge funds charge a flat annual fee for their services and then, on top of that, take up to 20% of your earnings if they make you money. So what happens when they took 20% of what turned out to be nothing? They get sued, that's what. And that is precisely what is happening to those highly skilled professionals who after tons of due diligence gave their client's money to Madoff. Negligence aside, the clients are asserting that the billions in fees they skimmed-off based on false profits should be returned as it was never really earned. Now I have not seen the precise wording of their client contracts, but I think the clients have a good point. It will be interesting to see what the hedge funds have to say in response. It might sound something like "Chapter 7."

http://www.bloomberg.com/apps/news?pid=20601087&sid=amj8XcwuSr0s&refer=home

Disclosures: None