Bloomberg reports that the price tag for the proposed Obama administration economic stimulus package is now at $1 trillion:
The one thing that isn’t shrinking in the U.S. economy these days is the size of the stimulus package that financial experts say is needed to turn it around.Recall my earlier post from September, "Paulson Plan Could Lay Foundations for Recovery"? Whatever optimism analysts had at that time has given way to a grudging confirmation that this economic crisis is virtually unprecedented, with perhaps the exception of the 1930s. The housing market in particular just continues to drag things down, and as long as home prices decline or stagnate, the rest of the financial sector - nearly universally "securitized" by mortgage-backed instruments - will continue to implode.
With automobile sales dropping, payrolls plunging and manufacturing contracting, economists from across the political spectrum are raising the ante on how much the government should lay out. Some are now calling for at least a $1 trillion boost.
Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton’s White House, are among those who say President- elect Barack Obama should push for a package of that size.
“They need a stimulus of $500-to-$600 billion a year for at least two years to counter what is going to be a collapse in consumption,” said Rogoff, a former chief economist at the International Monetary Fund.
That number may grow. This week brought news that the economy has been in recession for a year. Tomorrow the government will release November employment data, which economists say will show another 330,000 jobs lost, the most in seven years.
“Every day it looks like the stimulus package needs to be bigger,” said Bill Samuel, the lead lobbyist for the AFL-CIO, the largest U.S. labor federation. “You’re talking $500, $600, $700 billion or even more” for a year.
‘Things Are Evolving’
Obama, who has said that enacting a stimulus plan will be his top priority once he takes office on Jan. 20, has himself been steadily increasing the amount he thinks is needed.
Earlier in the presidential campaign, he proposed a package worth $50 billion, then raised that to $175 billion as the election approached. Advisers have since said the program may total as much as $700 billion, although that number, too, may rise.
“Congress should think in terms of $900 billion in 2009, with possibly more in 2010,” said James Galbraith, a self-styled liberal economics professor at the University of Texas in Austin who has talked with the Obama transition team about the issue. “I may be higher than they are at this point,” he said, “but things are evolving.”
Whatever its size, the package is likely to include tax cuts, aid to the states, higher unemployment benefits and increased spending on infrastructure such as roads and bridges.
In this sense, it's always hard to argue against "big government," with what's essentially the collapse of the contemporary mixed economy (we have had a "free market" for decades), but the size of the stimulus being discussed is mind-boggling.
What are the limits of U.S. capacity to borrow? At what point does the credibility of the economy and the U.S. dollar evaporate?
“A stimulus of this magnitude helps push government debt as a percentage of GDP closer to dangerous levels, when inflation and interest rates start to rise,” said Thomas Atteberry, who manages $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles.
7 comments:
I'll check it later, Philippe.
Starting in the mid 1990's Americans started to use the rising values of real property to pay off debts or consume goods and services. We all know this and it has ended.
Therefore the economy lacks the stimulus of the money that was borrowed and spent. A stimulus package of $500 billion yearly for two years will cushion the slow down of the economy but we will be back at square one when the stimulus money is spent.
What would be best is to get the millions of mortgagors who have stopped paying their monthly mortgage to start repaying again. Get the money flowing back through the banking system.
Therefore, we should allow anyone is currently behind in their mortgage payments to immediately restructure their loan so the monthly payment is affordable. For example, make a 30 year mortgage into a 60 year mortgage to lower the payments. On average most people sell 10 years into owning a property so it really makes no difference. When the property is sold the original amount borrowed will be paid off.
Or if the value of the property is below the amount of the mortgage owed the government will then guarantee the deficit to the bank.
When 99.9 percent of homeowners are paying their mortgage again, then this economic problem will be on the real road to recovery.
@Norm:
The essence of any security is that it is a legal claim to some stream of future cash flows, how ever defined. One of the primary reasons that the US market is so attractive for investment, both foreign and domestic, is that our legal system is well established, predictable, and transparent. Ex post modifications of the contract underlying securities by government fiat undermines our legal/financial institutions.
It could well be that in this case the resulting increase in the cost of capital from establishing this new legal precedent will be less than the cost of some direct fiscal intervention, but that's not at all clear. It is clear that your solution is not without cost. It will effectively levy an unknown risk-of-subsequent-modification-of-terms penalty on all future borrowing.
Furthermore, recent estimates suggest that the number of homeowners who are upside-down on their mortgages is near one-in-six and increasing daily as housing prices continue to seek their new equilibrium level. Moves designed to keep people in these mortgages will freeze a large fraction of the housing market. These owners will not be able to afford to sell. This will also reduce labor mobility. The outcome could be something like the long drawn out stagnation that Japan experienced following their real estate bubble when the policy was designed to prevent failure, as the US current policy seems to be. The beauty of the stock market is it adjusts relatively quickly and in an unambiguous fashion. This is true even in the face of idiotic but populist policies such as the short sale ban list.
The illiquid and fractured nature of the housing market contributes to, or interacts with, behavioral factors to prevent the market from adjusting efficiently. In residential real estate, virtually everyone in the market is a noise trader. While it would be painful, my guess is that we'd be better off sooner by taking steps to accelerate establishment of the new equilibrium price level rather than taking more steps to slow the adjustment as has been done so far.
Ultimately the price must adjust to demand and in the long run that demand must be supported by income. As household income has been mostly flat to lower in real terms for the last decade prior to the start of this recession. A good guess as to the equilibrium price level in most of the country would be the market price circa 1997 (before the Greenspan put) adjusted for inflation. Using the CPI, that would be about a 30% nominal increase over 1997 price levels. Under the circumstances, that estimate is probably optimistic.
@Grace:
Be cautious w.r.t. financial gurus. When the best and brightest don't know, you can be fairly confident that the practitioners don't know either.
Something to read to your children, after putting the last piece of "government-issued" wood on the fire.
http://www.groundbreaking.com/Good_Sam/Rhyme008.htm
@original David
Thanks for your response. But my suggestion does no harm to our legal
system. Loan restructuring and contract modification are common events.
If one in six mortgagors are in trouble, then why would you want to keep them in trouble ? You fear that restructuring their loans will "freeze a large fraction of the housing market".
What would rather have..one in six
mortgagors walk away from their mortgages and homes handing their deeds back to a lender which no longer holds their mortgage ?
Borrowers who are in foreclosure cause illiquid real estate markets because the costs of foreclosure, added on by the legal sharks, make selling that much harder. Restructuring the loans will make the real estate market more liquid and prevent further drops in prices. Furthermore, statistics tell us that within 50 years the number of Americans will increase from 305 million to 500 million. Real estate prices will not drop for very long and what we see today are the bargains of this century. Buy now and you will make a lot of money.
Norm,
restructuring and modification is common but there are predictable rules and the lender is party to the proceedings. The rules and procedures are established ex ante.
I'm not claiming that your suggestion would not work. It might even be less expensive than some alternatives. We just can't say because the resulting risk premium is difficult to predict.
I'm a believer in free markets when possible. I do think that we would recover quicker if these underwater mortgages were for the most part given back to the lenders and cleared from the market at free market prices. Even today, the price levels in many areas are artificially high.
Likewise, if there is to be federal help for the automakers, it should be support for an orderly disposal of their assets. They are where they are because they are badly structured and poorly managed firms. A big wad of public money is not going to change that.
We need to let the market allocate capital to its most efficient use, whether that be housing stocks or industrial assets.
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