The Stimulus Package: Weak Soup
First of all, I want to say that I have no proof to support the rumors that economic policy is designed by mindless zombies who habitually repeat what they heard “experts” say. However, the shape of the final stimulus package may provide evidence for this proposition.
The basic story is that we get a bit more than $100 billion in tax breaks for individuals and about $40 billion for businesses. There is nothing by way of infrastructure and certainly nothing green. (Anyone in this town hear of “global warming?)
Perhaps half of the individual tax breaks will be spent by the end of the year, and maybe a fifth of the business tax breaks. That gives us about $60 billion in spending to counteract the collapse of an $8 trillion housing bubble.
The economists who missed the housing bubble (EWMHB) have given us a weak unimaginative stimulus package.
We perhaps should be thankful that these folks at least recognize that we are facing a recession (they didn’t four weeks ago), but this package is going to prove woefully inadequate to counteract the collapse of the housing bubble. House prices are now declining at a 16 percent annual rate nationwide. That translates into a $3.2 trillion loss of housing wealth over the course of a year. With record vacancy rates and backlogs of unsold homes, coupled with a sudden tightening of mortgage credit, it is hard to see how this pace of price decline slows.
Homeowners are already cutting back their spending sharply and will continue to tighten further as they lose more equity in their homes. Millions of homeowners already have mortgages that exceed the value of their homes. This number will soar as prices continue to drop.
The outcome will be that the rate of foreclosures will hasten and move up-market. This will bring about a quick end to the subprime mortgage crisis, as everyone will be talking about simply the “mortgage crisis.” The write-offs at the big banks will soar well into the hundreds of billions, reaching a multiple that will be at least three or four times the bad debt incurred thus far from the subprime market. The stimulus package, by raising the loan limits on mortgages bought by Fannie Mae and Freddie Mac, has hastened the date when these behemoths will be running to Congress for bailouts.
Not only is the stimulus not adequate to the task, Congress lost a great chance to direct the stimulus towards accomplishing longer term goals, the most importantly the reduction of greenhouse gas emissions. The most obvious item on this list is tax credits for energy conserving home improvements, such as increased insulation or installing energy efficient windows. There have been massive layoffs in the construction industry. If Congress passed a tax credit, contractors would be chasing down business the next day. Apparently, this one was never seriously considered (strong support for the zombie theory).
Congress could have also offered money to transit agencies that cut fares for passengers. This would be a tax break for everyone who takes public transit – say $1 per ride. The EWMHB say that such green stimulus items would not lead to quick spending. This claim seems questionable, but the logical implication is that they then could have been included at zero cost. If a time limited tax break doesn’t lead to new construction, then it costs zero. If mass transit agencies can’t get in gear to give discount fares, then it costs nothing. So, Congress would not even consider costless measures to reduce global warming. This is not encouraging.
In sum, we should be glad that Congress did reach agreement on the stimulus package. It’s better than nothing. But it is woefully lacking in size and imagination. The EWMHB will be back later this year acknowledging this fact -- guaranteed.
Totally with you that the stimulus package is bland, unimaginative and not up to the task. I also totally agree that tax credits for green home improvements and more federal support for public transportation are good ideas, but not so much for stimulus as for general operating procedure.
I think you overstate the short term stimulus provided by a green home improvement credit. If the consumer is being held back from dinners out, vacations or new flat screens because wages are stagnant, inflation on the rise and credit is unavailable then they are not going to spend their scarce money having solar panels installed just to get a small tax credit.
As you say a $60 billion increase in people's allowances is not going to counter an $8 trillion market collapse. But, Dean, we only spend trillions when we invade something. I think we need to send the Marines into Countrywide.
February 8, 2008 9:20 AM | Reply | Permalink
The weak soup of most legislation from the 2006 Congress is why 2008 matters for its congressional implications as much, if not more, than for its White House prospects. What worries me is the bare majority persisting.
There is sometimes reference to an American preference for splitting the ticket between Congress and White House, hedging one choice with the other. This view finds Hillary more likely to induce the hedge of voting for Republican reps and senators.
And I feel that Obama is more likely to generate the excitement that would carry more Democrats into Congress. Both candidates have enough experience to know how to work the House or Senate, but I feel Obama has more chance of finding a cooperative Congress, and has more persuasion power with the public in general, to motivate legislators through their constituents.
February 8, 2008 9:39 AM | Reply | Permalink
Either Clinton or Obama, as President would lead on a stimulus package in order to make it better and get the money to the people who need it.
That said, are Obama's supporters going to twist every single thread and discussion into a "why we need Obama to be the nominee" discussion? Because that's going to get old fast.
February 8, 2008 10:22 AM | Reply | Permalink
Touché.
February 8, 2008 10:39 AM | Reply | Permalink
That said, are Hillary's supporters going to whine about every single comment that praises Obama? Because that's already gotten older than Tankard, and that's waaaaaaaaay old.
February 8, 2008 8:48 PM | Reply | Permalink
The stimulus package is "bread" being thrown out to the people with the hopes that no-one will notice the underlying economic problems.
First, the statement "The economists who missed the housing bubble (EWMHB) have given us a weak unimaginative stimulus package." implies misplaced blame. I don't think blame can be placed on economists, it's like shooting the messenger. The blame belongs to the consumers who lied to get credit and the financial institutions who created the securitized debt.
Last night (2/7/2008) Larry Kudlow made comments on his CNBC program that demonstrates how the credit problems are being swept under the rug. Mr. Kudlow asserted that the problem was do to credit applicant's lying on their credit applications. While true, it neglects the other side of the story. Two of his guests attempted to raise the issue that the lenders where not adequately investigating the applicants and that the risk of these unproven financial instruments was never investigated. Mr. Kudlow cut these commenters off to re-focus on credit applicant fraud. I guess, he did not want a dissenting viewpoint.
Mr. Kudlow's viewpoint points to a fundamental flaw of how we make economic decisions in our country. The flaw is that businesses are responsible for performing due diligence and they have NOT done it. In fact, I will go a step further, in today's economic environment its actually OK for business to promote fraudulent business practices. Then if we have an economic "problem" it is always the fault of the consumer, never of business. This is a misplaced blame perpetuated by this country's pro-business agenda.
While both the consumer and the financial institutions are to blame, I would still take the position that if the financial institution had done their job of due diligence, this crisis would never have happened.
February 8, 2008 10:26 AM | Reply | Permalink
Kudlow's a liar.
If there was fraud, the lenders were complicit in it, and not by not doing proper due dilligence but by engineering it.
You've got a mortgage broker who only gets paid if you borrow money. They are not paid to reject your application. They are paid more if you borrow more. They then tell you that not only are they your mortgage broker but that they're your de facto credit counselor. They tell you what is acceptable to write down on those applications.
So we have a situation where the representative of the lender says "I'm not going to let you walk out without borrowing money and neither are my bosses and we'll accept this application with these numbers on it" then the consumer isn't guilty of any sort of fraud.
It's kind of like the phrase "You can't rape the willing."
February 8, 2008 10:33 AM | Reply | Permalink
The media helped to frame Democrats efforts to strengthen the stimulus package as a delay that could bring down our economy. Maybe if they spent a little more time talking about how much stimulus will actually be generated from this and whether a $600 check will really save j6pk's house or job the average American would understand the issue. Instead, the Democrats must cave in rather than risk the wrath of the uninformed public. If the difference between an economic collapse and continued growth is this stimulus package and another week of delay it might be a good idea for reporters to question republicans how we got to this point rather than just accept their talking points.
February 8, 2008 10:35 AM | Reply | Permalink
This is silly!
The Congressional Democratic Party is economically conservative. Think Social Security "lockbox"; overweening pride in the Clinton surpluses; regular Cassandra-like diatribes against the Bush deficits, etc.
What else ought we to have expected out of them?
P.S. And elected a few more of them this November isn't going to change anything.
February 8, 2008 12:00 PM | Reply | Permalink
"Congress lost a great chance to direct the stimulus towards accomplishing longer term goals, the most importantly the reduction of greenhouse gas emissions."
Patience. Just one more year to go. This couldn't have passed right now anyway.
"That gives us about $60 billion in spending to counteract the collapse of an $8 trillion housing bubble."
What's the government to do here? It's not like they have any money to spare either. I agree that they should be smarter about how they distribute the cash, but I don't think we should expect them to spend more.
I don't really understand the reasoning behind giving everyone a check. When Bush did it in 2001, Democrats thought it was a horrible idea, now they're for it. And why am I getting a handout? Sure I got screwed by the housing bubble and my mortgage is more than my home's value, but I am not hurting anywhere near as much as others. I won't turn away free money, but I question the reason for it.
February 8, 2008 1:32 PM | Reply | Permalink
Incentive public transit systems to offer discounted rides is not going to get more people out of their cars and on the buses/trains. In some urban/suburban areas, public transit is failing apart, or doesn't run frequently enough or to destinations people want to go to.
As for incenting home owners to invest in green technology - many states already give tax deductions for solar panels, etc. But I wonder if people are going to invest anything more than maintenance (to keep their house from falling down) when home values are declining.
February 8, 2008 2:08 PM | Reply | Permalink
Yeah, you'd have to convince people that when home values start climbing again, they'll be glad they made te improvements.
What about a tax credit now and a capital gains credit on the worth of such improvements if the home is sold later?
Still probably not enough. When people can't get credit and don't have enough money, I just don't see how you convince them to spend on expensive home improvement projects.
As for public transport, you're right. In most places you can only take a bus or train to a limited number of places. And once you get there, you wish you had your car.
February 8, 2008 2:26 PM | Reply | Permalink
The Democrats in Congress are 'fiscally conservative' because a decade of Republican control, and a generation of conservative ideology (think 'tax and spend', 'death tax', yadda, yadda, yadda) have made them afraid to act honestly out of fear of demonization and losing their newly gained majority.
Now, back to the rebates, never mind the amount, why do we have to wait until May for it? If the recession problem is NOW, the sooner the money gets pumped into the economy, the better. It's a little like spending money on maintenance, the earlier you fix a problem, the less it costs. Unless, of course, they want its effect to appear during the presidential campaign.
February 8, 2008 3:30 PM | Reply | Permalink
The Democrats in Congress are 'fiscally conservative' because a decade of Republican control, and a generation of conservative ideology (think 'tax and spend', 'death tax', yadda, yadda, yadda) have made them afraid to act honestly out of fear of demonization and losing their newly gained majority.
Now, back to the rebates, never mind the amount, why do we have to wait until May for it? If the recession problem is NOW, the sooner the money gets pumped into the economy, the better. It's a little like spending money on maintenance, the earlier you fix a problem, the less it costs. Unless, of course, they want its effect to appear during the presidential campaign.
February 8, 2008 3:36 PM | Reply | Permalink
"Now, back to the rebates, never mind the amount, why do we have to wait until May for it?"
The IRS is tied up handling 2007 tax returns.
http://www.nytimes.com/2008/01/25/washington/25irs.html
February 8, 2008 4:00 PM | Reply | Permalink
Most of the losses in the housing bubble are purely fictitious. If you bought a house for 200K a few years back, saw its (potential) selling price zoom up to 300K then fall back 250K you may say that you lost 50K, but in reality you haven't lost a penny, in fact you're still 50K ahead. The real losses involve situations where houses must be sold (either by owners or by foreclosers) for less than is owed on them. That will be regrettably common the next couple of years, but it will still invole only a tiny minority of all mortgages.
February 9, 2008 8:37 AM | Reply | Permalink
This would make a good blog post entitled, perhaps, "Theses Against Dean Baker."
But I do think that you'd have to address the question of the effects of the "mortgage crisis" on the banks' balance sheets and thus, upon their ability to lend in the amounts that a $13-14 trillion dollar economy requires.
Unlike the collapse of the dot.com bubble when banks had money but no one (telecommunications, media, technology) post-Y2K wanted to borrow, this time the banks don't have the money.
February 9, 2008 11:16 AM | Reply | Permalink
More on the situation at Fannie Mae and Freddie Mac: link. It's nauseating.
I was confused on one point. When does a loan get the backing/buy out of Fannie and Freddie? When it is originated? Or does Fannie and Freddie somehow wade into the market afterwards and pick up the loans?
If it's only when it's originated, wouldn't it be the case that any new loans backed/bought out by Fannie and Freddie (even jumbo ones) would have to meet better loan requirements (and reduced risk of default)?
February 10, 2008 11:20 PM | Reply | Permalink
A rather undistinguished rant by Attorney Sean Olender, whoever he may be.
The GSEs don't just buy up whatever mortgages are offered them. They buy what their qualifying rules tell them is a good loan. And if they're doing their jobs right, they'll be expecting to see a fully documented file supporting the loan.
If they aren't as cautious as I think they'll be, their shareholders should be worrying. Congress just may not be willing to bail them out of any post-2007 mistakes they make. Once bitten, twice shy.
February 11, 2008 1:02 AM | Reply | Permalink