Another in a series of posts with some thoughts on economics issues and their discussion in the political scene. And later, a debt to Paul Krugman.
- The first stimulus bill has passed. What do we do now? While an important political victory for the President and Congress it will help many people but not as many as need near term help to retain jobs and survive the economic storm. The problem is the bill is not big enough and it includes provisions that are not stimulative but raise the total price tag. So what will the reaction be when there are far fewer jobs created and less economic growth than promised? Even a relatively conservative Mark Zandi of Moody's(on Fix News today) said that the inclusion of the Alternative Minimum Tax fix lessens the impact of the bill.
The problem is that almost no one new expects to be hit by the AMT anyway so the thinking is that it really does not offer any stimulative effect. In essence, no one expects to pay so no one will notice that they don't have to pay. Therefore $75 Billion of the package is mythical. Typically the Congress handles this issueone year at a time anyway and would have passed this provision later in the year apart from the stimulus. So the money was counted and displaced funds for assistance to the states, school construction and health care. Will the budget be a chance to make up for some of these Collins-Snow-Specter enforced shortcomings?
- So what happens now? The Obama Administration is working on two other initiatives that will have a big effect on the economic recovery. One is the TARP II that Geithner outlined (sort of) last week. This proposal revolves around the use of the second $350 Billion from the original bank bailout passed in the fall of 2008. Nobel winning economist and NY Times columnist Paul Krugman has stated that he likes the idea of the "stress test" for banks but is unsure what Geithner's proposal will do for banks that are found to have bad assets that make them insolvent, at least on paper. Here is the rub, if you are not in favor of nationalization, how do you give money to the banks to give them a favorable net worth without the government getting equity in return (nationalization?
Well you can't. You can't lend money to the banks and solve the problem because that raises both the equity (cash) and liability (loan) aspects of the balance sheets. If you start with negative value, you end up that way. Only if you let them take that loan and buy undervalued assets so they immediately show a profit would the loan scenario work. I suppose you could lend banks some money, have them buy other banks at a discount and clean up their balance sheets that way, but it is just a backhanded way of the government forcing a transfer of wealth from taxpayers to shareholders of the banks. This is a great case of ideology (we don't want to be Social Democrats) get in the way of solving a problem. Nationalize them and move on.
The other effort is to provide short term relief for mortgage foreclosures. This is just as important as the other two legs of the recovery effort (Stimulus 1 and TARP I and II). The issue becomes in whose interest will the foreclosure crisis be resolved? There will be conflicts between the mortgagees and the banks. Giving bankruptcy judges the capability to work out mortgages to some government set rate would be a good start. Or providing an easy refinance to a government backed mortgage at a reasonable rate is a better idea too. The details will be forthcoming this week as the President goes to Arizona (take that John McCain).
- Many of these topics were discussed this week at a wonderful conference sponsered by The American Prospect, Institute for America's Future, Demos and the Economic Policy Institute. Called Thinking Big, Thinking Forward the gathering gave policy experts and advocated to talk to some leading progressive thinkers including Bob Kuttner, Jacob Hacker and others. Paul Krugman was the luncheon speaker and did a book signing after his speech. Now I am a huge Krugman fan and appreciate all he does to help turn the tide toward more progressive economic and political policies. A few years ago I attended another event where Dr. Krugman spoke and signed books. I got his signature on a brand new copy of "The Great Unraveling" and went home happy. That is until my wife lost the book on a subsequent business trip. (The class warfare version of the story has her claiming a guy in first class thefted the book when she left it on the ticket counter for a few minutes.) So here was my chance. Being Valentine's Week and all, I appealed to the romantic nature of the Nobel Prize Winner and asked him to inscribe the book to my wife and then say, "Please do not lose this one, Paul Krugman". And he did. I smiled for the rest of the day. I wrapped it up and the finest Valentine's Day paper I could find and reveled in her whoops of joy when she saw the book and read the message.
Update...a review of the conference and a vivid recollection of an important historic moment by the indispensable Harold Meyerson.