Posted At : April 9, 2009 12:22 PM
“I will gladly pay you Tuesday for a Hamburger today!” This is obviously the approach the government is taking to the economy. Spend spend spend, but don’t worry I’ll pay you Tuesday. The good news is that we seem to have averted a complete meltdown, and make no mistake about it; we were closer than you think. I’ll never forget that Sunday when Merrill Lynch was about to go under. My whole body was literally shaking, both from the fright of the possibility and the excitement of being right on the economy and markets which I forecasted in my Economic Tsunami special report. All of this spending is trading a faster long term recovery for a smoother road for the short term. Proof can be seen this morning with Wells Fargo’s announcement that they will earn record profits this quarter. Its one thing for the tax-payer to pay for their solvency, but quite another to pay for their glory. It reminds me of a quote from Joe Kennedy (John’s dad): “Don’t buy a single vote more than necessary. I’ll be damned if I’m going to pay for a landslide”. The bad news of this massive spending is that by lessening the pain now, the recovery to real growth will be delayed.
Last week saw a continuation of the questionable policy response to this financial crisis, which seeks to address the downturn by encouraging more of what got us into this mess in the first place. Applying more leverage to the problem that got us into this…“leverage”, seems absurd to me. Doesn’t anybody agree with me? The U.S. Treasury’s toxic assets plan, for instance, looks to “leverage” public funds (with the FDIC providing the “6-to-1 leverage”) in order to defend the bondholders of mismanaged financials who took excessive leverage. At the same time, the Treasury plans to limit the “competitive bidding” to a few hand-picked “managers” who will be encouraged to overpay thanks to put options granted at public expense. This certainly seems like a recipe for the insolvency of the FDIC and an attempt to bail out bank bondholders using funds that have not even been allocated by Congress. The whole plan is a bureaucratic abuse of the FDIC’s balance sheet, which exists to protect ordinary depositors, not bank bondholders.
The stock market cheered a move by the Financial Accounting Standards Board (FASB) to relax FAS-157 (the “mark-to-market” accounting rule), allowing nearly insolvent financial companies to use more discretion in the models they use to assess fair value. Of course, the irresponsibly rosy assumptions built into these models have been a large contributor to this near-insolvency, because they virtually ignored foreclosure risks. Now, the Fed is sticking it to the tax payer yet again by eliminating the mark-to-market provision just in time for the banks to sell their toxic assets to us, the tax payers. That means the tax payer gets to pay a higher price for these assets. Plus, the few specially chosen companies get most of the profit but we take most of the risk. Has Ralph Nader been kidnapped?
According to Bloomberg, the Treasury has injected over $955 billion in direct stimulus, $700 billion in the “Tarp,” and just over a trillion dollars in various other support or guarantee programs to banks and major corporations. Meanwhile, the Federal Reserve has commitments up to an astonishing $7.7 trillion in various lending, guarantee, and open market operations programs in an attempt to keep the credit markets functioning and interest rates down. The FDIC has separately added in $2 trillion in guarantees, bank bailouts, and “public-private partnerships,” and even HUD has chipped in a good $300 billion. This brings the total amount potentially spent, lent, or guaranteed by the Federal Reserve and U.S. Government to $12.8 trillion—not far from the total value of U.S. GDP at$14.2 trillion! And much more is expected in the years ahead. We are now looking at a $1.7 trillion deficit for 2009—assuming a better economy than we expect.
The greatest absurdity is that the government is projecting that we return to 4% GDP growth in 2010 and beyond; Hard to believe that’s even remotely possible given tighter lending standards and natural slowing in Baby Boom spending. If we are right about a worse downturn into 2010 and 2011, then we could easily see $3-trillion-plus deficits into as late as 2013. At some point in the next year it is going to look as if the U.S. government is racking up incredible debt with little results. That could cause a run on the U.S. dollar and a rise in long-term Treasury bond rates, despite efforts to keep rates down. A rise in long-term rates is the worst thing that could happen to housing now that short-term ARM loans and rates have been so disfavored. Thus far, lower rates continue to stimulate strong refinancing but only weak rises in home buying and new mortgages (outside of California)