We Need More Stimulus, Not More Bailout
With only $110 billion remaining in the TARP bailout fund, all signs are that Tim Geithner is preparing to return to Congress seeking more bailout money. He’ll bring along the results of his bank “stress tests,” which will probably show many that big banks are still technically insolvent, along with bankruptcy scenarios for General Motors and Chrysler, and a couple of CEO scalps – he’s already got GM’s. Congress won’t be happy but in the end it will cough up another 300 to 500 billion.
Geithner believes the only way to rescue the economy is to get the big banks to lend money again. But he’s dead wrong. Most consumers cannot and do not want to borrow lots more money. They’re still carrying too much debt as it is. Even if they refinance their homes – courtesy of the Fed flooding the market with so much money mortgage rates are dropping – consumers are still not going to borrow more. And until there’s enough demand in the system, businesses aren’t going to borrow much more to invest in new plant or machinery, either.
That’s the big issue – the continued lack of enough demand in the economy. The current stimulus package is proving way too small relative to the shortfall between what consumers and businesses are buying and what the economy could produce at full capacity. (According to today's report from the Commerce Department, retail sales fell in March, as did prices paid to U.S. producers.)
Worse yet, the states are pulling in the opposite direction. States cannot run deficits, which means that as their revenues drop in this downturn they’re cutting vital services and raising taxes to the tune of $350 billion over this year and next. This fiscal drag is wiping out about half of the current federal stimulus.
If Geithner gets Congress to give him more bailout money, Congress won’t be in any mood to do what it really needs to do – which is to enlarge the stimulus package. Voters are already worried about too much government spending. At most, the administration is going to get only one more bite at the congressional apple. Make that more stimulus rather than more bailout.
Is there another side to this, Robert? Is it maybe that things cost too much and that whatever deflation we're feeling now is a good thing?
Example: I really, really would like a flat screen TV. I hunted Circuit City's liquidation for one but couldn't find a set that I would pay even their liquidation price for. So to heck with them, I'll wait it out.
Where are profit margins at the moment? I think the retailers and producers are being greedy. You want to get me shopping? Offer me better deals.
April 14, 2009 12:51 PM | Reply | Permalink
I'd like to buy a house, so it's in my personal interest to that extent for housing prices to continue to fall. I'm not interested in speculating, I want quality housing stability (known future costs and not having to move) on a small income. I fear increased taxes to support government spending and inflation to wipe out other people's debts incl. government debts.
But housing in my area, of the quality I would accept, remains too high still.
April 14, 2009 3:12 PM | Reply | Permalink
Guess what: when you go to a liquidation sale, you typically see higher prices than usual, because the liquidators rely on people getting excited and not having the time to check prices against other outlets.
But the problem isn't so much that prices are too high (oh, wait, maybe all the workers in the supply chain should get paid even fewer cents a day) as that people don't have the money. Some of the didn't have it before, but now they're actually acting in line with reality. And that the focus of the economy needs to shift: there just aren't enough consumer electronics toys in the universe to sustain the level of economic activity we want/need.
April 14, 2009 10:08 PM | Reply | Permalink
I know you are being diplomatic Prof. Reich, but unless we start specifically pointing out that Geithner and Summers are the representatives, not of the people, but of the financial nobility we cannot solve this problem. Geithner and Summers wish to serve and enable the assertion of the priveleges of the nobility instead of the rights of the people. It is unimportant what happens to the peasants. All that matters is that the Lords of Wall Street keep their castles and get to continue the charade that they are competent and that unregulated or lightly regulated capitalism works. They aren't and it doesn't. I pray the Congress refuses even so much as another penny for the banks and Wall Street.
April 14, 2009 1:32 PM | Reply | Permalink
Careful.
As you write, the Obama cult is circling.
April 14, 2009 4:26 PM | Reply | Permalink
Economic stimulus is a can of worms trying to pretend they are little electric eels. But I want to discuss 'bailouts' first.
Let's keep in mind that there are various aspects to "bailout". There's a vast difference between a "Get out of jail free" card, and nationalization. For instance.
The stock injection plan seemed like a better, or less worse, idea than Paulson's Pig. What I did not realize at the time was that the preferred stock was not as senior as it should have been. but some banks are returning funds and some large banks are making noises as if they will do so. So that money won't have gone down the drain, it will have been an investment which paid off (nevermind how well it performed).
The loan guarantees to Citi and BAC strike me as bad policy. And PPIP also stinks. There are paper losses which should be realized by banks and investors. Investors foolishly and/or greedily loaned out money to borrowers who did not pay them off.
As for stimulus, who is helped most by stimulus? As Reich suggests, intentionally or not, it is ... [drum roll] ... government itself. States depend on taxes based on economic performance, and many have leveraged well into the future with burdens not unlike GM's.
So government has a clear conflict of interest here. I don't see populism coming to the rescue in time or in the right ways. The future looks bleak.
April 14, 2009 2:21 PM | Reply | Permalink
At last someone is admitting that supply side only, trickle down, economics is a dead horse.
There is another side to the economic equation and that is the demand side.
There were two major areas where supply has drastically exceeded demand. They are auto production and credit. Note that both of these areas are where bailouts have occurred.
There are more automobiles available than there are people to buy them. Bailing out the auto manufacturers so they can continue to build more cars, trucks, and SUV's can only make the underlying problem worse than it already is.
People cannot afford more debt than they already have. Bailing out the banks and financial institutions without addressing the underlying problem of overextended credit will not solve that problem either. Actually the banks and financial institutions have the best of everything. They have the bailout money plus they still have all those outstanding mortgages and credit card debts that people owe them.
A much better solution would have been to bail out the people. Since the current bailout is estimated to be in the neighborhood of $3 Trillion (counting the federal bailouts and the money infused into the stsyem by the Federal Reserve Bank) this would have provided a $10,000 bailout for every American who would have used it to either reduce their debts, would have spent it in the American economy, or would have saved it providing money for the banks and financial institutions to loan out.
The way the bailouts were handled only served to infuse US taxpayer money into the bank accounts of already rich foreign investors.
It has been the biggest ripoff in the history of the human race.
.
April 15, 2009 1:14 AM | Reply | Permalink
I'm very disappointed by Obama on this (he's good on other stuff). My recent blog touches on some of your points - not a good time to expand production, for instance.
"a $10,000 bailout for every American"
That would be almost pure inflation, as far as I understand it. At least the original TARP funds to banks can get paid back by each bank which doesn't go under, and maybe almost all of the Fed liquidity injections will get returned too (if the corporate paper collateral was good). The Citi and BAC loan guarantees ... well I'm a hair away from calling them criminal but for now I'm just unhappy with them as they've been reported.
April 15, 2009 3:11 AM | Reply | Permalink
Again, there are LOTS of folk, including a brief mention in a NY TIMES editorial a while back, that seek a second stimulus package, in particular one that addresses the remaining massive budget crisis of state governments. But, as I've said before, until these folk (Reich, Krugman, and many many others) get together to form some kind of UNIFIED program, and not just follow that with some full-page ad in the papers, but go to the major progressive groups across the country to build a coalition, all these good ideas remain idle chatter.
Robert Reich -- you are in a position to contact these people to get together to do what is politically essential for progressives to overcome Geithneromics. Someone in my position isn't. Is there really any alternative to this kind of collective progressive approach, to politically achieve these necessary changes to national economic policy? If so, what are they?
April 15, 2009 9:58 AM | Reply | Permalink
I don't know where the myth of banks not lending is coming from.
Home Equity lines of credit are available to people with good credit at near record low interest rates. I get offers in the mail daily, and recently took advantage of one "just in case". The lenders aren't as reckless as they were during the recent mortgage boom, but they aren't as restrictive as they used to be in, say, the early 1990s either.
Small business loans are also available, also at low interest rates.
Seems to me like the problem is demand. Trying to solve that by throwing money at banks is like pushing on a string.
April 15, 2009 12:38 PM | Reply | Permalink
The Federal Reserve is covering the need to borrow for larger borrowers in corporate paper etc. They are very secretive about it. That stinks. But that's probably the "not lending" meme/myth is coming from. If the Fed stopped lending, short term corporate paper would flood the market and drive yields up.
The problem is the moral hazard the Fed creates when it does this for more than a short moment. The Fed has to stop doing this in order for market pressures to move the borrowing to private parties where it belongs.
April 15, 2009 1:48 PM | Reply | Permalink
Here's the problem with deflation; in order for it to happen people have to either lose their jobs, or see their wages fall. Stimulating a price-wage deflationary spiral is just as dangerous as stimulating a wage-price inflationary spiral. There is no guarantee you will get that TV if you are worried about losing, or have already lost, your job. In the macro-economic sense, inflation (a wage-price spiral) is better for heavily indebted workers than deflation, mainly because of the debt issue. As everything inflates, the absolute debt decreases as a percentage of income. Likewise, if you already have a lot of money and you own a lot of debt, deflation is more your friend because the buying power of your money increases. Don't get me wrong, both rapid inflation and deflation are undesirable, and their effects are uneven, so don't think I want to see inflation. Still, between the two, inflation will tend to favor wage earners.
April 15, 2009 4:20 PM | Reply | Permalink
First of all getting insults thrown at me from the Clinton era reject from the Adams Family is rich. You are an elitist putz. I guess a bunch of woman running around in Pink protesting at a hospital comtaining injured war hreo's is normal and they are sane. But working people voicing there opinions that do not agree with President Zero are crazy. I do take the insults personally I know how hard my wife and I have worked over the years and to be insulted by a midget who has not done an honest days work in his life does make me very angry. So keep pushing it all you leftist morons all you are doing is uniting us even more. By the way I know you cowards are used to insulting people from afar. How about having some courage and walk up to one of us at a rally and say it to our faces. I doubt if this will ever happen from one of you limp wristed wimps.
April 16, 2009 4:17 PM | Reply | Permalink