The stock market is not exactly cheering about the announcement of a $140 billion stimulus plan which would give people $800 tax rebate checks. In a $14 trillion economy, that 1% of GDP rebate won't do much.
I think the money would go much further if it was used to recapitalize the banks that are writing down their collateralized debt obligations (CDOs). To maintain their capital ratios -- for instance, Citigroup (NYSE: C)'s Tier 1 capital ratio target of 7.5% -- banks that write down their assets need to either raise more capital or shed more assets or both.
But the great thing about recapitalizing banks is that they could lend out that capital to people who would put down some of their own capital and borrow the rest to make a purchase. $1 of capital invested in a bank could add almost $17 to GDP. Here's a rough example: if a bank trying to maintain a 7.5% capital ratio gets $1 of capital, then it can theoretically make roughly $13.33 worth of loans. If a person wants to buy a house with a 20% down payment, then that $13.33 can be used to buy $16.66 worth of real estate.
My proposal could add $2.4 trillion to GDP -- 17% of the U.S. economy; whereas the tax rebate plan would add $140 billion. Of course, some would complain that the government was using taxpayer money to bail out the banks. I'd offset some of that risk by letting the government get an option to buy the shares at the current market price. So if the plan worked and the economy revived, the government could sell its shares at a profit and put the money back in the U.S. Treasury.Washington's plan won't do much beyond providing cover for politicians in an election year. My proposal might actually stimulate the economy.
Update: I have received a few comments that this proposal creates a "moral hazard." -- meaning that it rewards banks for bad decisions and that they need to be punished. To partially address this issue I would suggest that the government replace the people in the firm who were responsible for the bad loans/assets before investing the capital.
I know this would be difficult to implement but companies and boards have done this already in the cases of Citi and Merrill Lynch & Co. (NYSE: MER) so it can't be that hard. By doing that, the people who created the problem would be punished to some extent and the greater good would be served since banks play such a central role in the economy.
In other words, if we punish the banking system for the mistakes of a small number of bankers then we are canceling out the offsetting good that banks can do.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in Merrill Lynch securities.
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Reader Comments (Page 1 of 1)
1-18-2008 @ 5:22PM
bush said...
$800/person is a p---hole in the snow -- for a family of 4 (heavens help those with more than that) buys them a few (and I really mean a few) weeks of groceries
#1 - increase the amount one can write off for capital losses !!!!!
#2 - ration gasoline as was done in WWII - it will be a sacrafice for some - but not the big SUV'ers - nor those taking unnecessary pleasure trips.
#3 - increase the tax rate for those making over "x" million dollars/year to 105% which was done in Great Britain by the great Margaret Thaeser -- NO ONE AND I MEAN NO ONE needs more than $1 million $s/year to survive !!!!
#4 - AND PROBABLY THE MOST IMPORTANT - BRING THE WONDERFUL ARMED FORCES HOME AND SPEND THOSE TRILLIONS OF WASTED $S CREATING JOBS - IF ONLY AS THE GREAT PRES. ROOSEVELT DID !!!! then we are too far gone and I will pick out the best corner where I can sell my apples.
1-18-2008 @ 10:48PM
Shaun Hazen said...
Taxing the rich more is a bad idea. If someone makes a billion dollars are you wanting them to be taxed so they only make under a million dollars ... because "you can survive on a million dollars a year"? Where is the incentive to hire new workers, pay higher wages, and give retirement plans when the government takes over 50 percent of your paycheck. Most of the people making that much are making it for a reason and they are probably stimulating the economy with there money more than taxes would. The government does not know how to spend our money - we should be decreasing taxes for everyone, not just the middle/lower class. The government waste our money, so company executives having to give more to the government is bad.
1-19-2008 @ 12:43PM
Patrick said...
The author's analysis fails to cover the multiplier effect of money (CONVENIENTLY). Money used for Bush's plan is hardly going to "disappear" as you presented it - it will be utilized for other purchases.
I work in commercial banking without having them change their executive compensation program would only line the pockets of the idiots who got us into this mess. This problem has been in existence for years .. nobody wanted to address it. It is all about the year end bonus and options. Funny thing - Goldman didn't get caught in this mess
To "Bush" - my advice read some. FDR did not get us out of the depression - the war did. His efforts were fer below the Keynesian requirements to have altered our economic decline. His spending onnly slowed the decline and prolonged the process. Though, it did make Ameicans feel better that we were doing "something". Though, the remedy worsened the illness.
1-18-2008 @ 6:53PM
jim said...
if it were only so cut and dry to say just let the banks suffer since they created this mess. the banks' tentacles reach far and wide into the all corners of the economy and if all of them have massive problems it becomes massive problems for the rest of us regular joes just trying to get by. if you, i or our whole street block go bankrupt the economy wouldn't even hiccup but citigroup going bankrupt would send huge ripples throughout the rest of the economy. i like this idea, has moral hazard issues but sometimes we have no choice. i wish that in the aftermath there would be more regulation, they hate it but too bad for them. they seem to be always getting us all in trouble with their neverending greed.
1-19-2008 @ 12:24AM
VIC said...
BUSH WANTS TO PUT $150 BILLION DOLLARS INTO THE ECONOMY SO PEOPLE WILL SPEND MORE??? HIS "SPEND MORE" POLICY WHILE WE WERE POURING BILLIONS DOWN THE IRAC HOLE IS WHAT GOT US INTO THIS MESS. SOME ONE SHOULD TELL BUSH THAT INFLATION IS OUT OF CONTROL, AND MORE SPENDING WILL ONLY SUSTAIN THE SPIRAL. BUSH SHOULD MAKE SURE THAT THE FINANCIAL COMMUNITY DOES NOT COLLAPSE, BECAUSE IF IT DOES, EVERYONE WITH AN IRA, A 401K, STOCKS, CD, BANK DEPOSITS, COMPANY RETIREMENT PLANS, AND JUST ABOUT ANY OTHER TYPE OF INVESTMENT WILL BE DAMAGED VERY BADLY. AS I SAID BEFORE, BUSH IS PLANNING TO PAINT THE HOUSE AFTER IT HAS BURNED DOWN. HE HAS TOTALY DESTROYED THE REPUBLICAN PARTY, AND MAYBE THE COUNTRY WITH IT.
1-19-2008 @ 7:14PM
Cathy said...
I agree with bringing ALL our Armed Forces home so that they can and will protect the United States. We know that we are very vulnerable to Terrorists and attacks from countries that we think we are protecting. That is what America needs now is to protect the US.
1-20-2008 @ 7:43AM
ken said...
bring home all our troops that are overseas,japan
iraq, germany,everywhere the money spent in these other countries would do a hell of a lot of
good here in "america"support our country.
the billions spent on the iraq fiasco by the toad bush is a crime he should be impeached along with 97% of the politicians.
1-20-2008 @ 5:08PM
Craig Moore said...
What President Bush is doing is really detrimental in the long term. The value of the US dollar is falling. Bush is borrowing money from China to pay for his endless spending. He is also ignoring much needed investment in our own infrastructure. We can put people to work rebuilding American roads, the power grid, the water and sewage systems. Our energy policy needs to change to employ Americans and to reduce our reliance on foreign oil. Interest rates are already too low to allow investment growth. Our manufacturing base has been stripped away and so we have only agriculture to add value to our economy.
I you and I quit work, borrow money, and give money away, we will see our personal finances crumble as our savings turn into a huge debt. This is the long term hope for America under Bush's plan. He is the tax cut and spend President. The Democrats have often been accused of taxing and investing in America's future. But, who wants that?
1-20-2008 @ 7:10PM
Craig Moore said...
Like most Americans, I would spend my share of the tax cut on Chinese made goods to help boost China's economy and to further reduce the value of the US dollar.
1-20-2008 @ 10:48PM
Boards0000000 said...
I think over the last few years the banks took more money than they should of (subprime loans). Don't reward them. We know they profitted from those years of excessive loans, they'll have to take those old profits and stretch them. If they can't stretch those old profits to survive then they'll go under. Too bad for them. Guess they'll just have to deal with a foreclosure sign in front of their office buildings. LOL Sweet justice!
1-21-2008 @ 9:10AM
jason said...
there's really no way to address moral hazard, it just is what it is and we have to stomach it. you say replace the guys who created this mess, does that punish them? not even in the least. all you have to do is look at one of the leading architects of this problem, countrywide ceo angelo mazilo. he's being "replaced" essentially, big deal he's also walking away with 100 some odd million dollars. i'm sure he's suffering or all the execs at countrywide getting paid retention bonuses for screwing up. only on wall street can people foul up so royally and still walk away not only scot free but in the positive with their hefty parachutes, bonuses, etc.. it would be nice if we all could live in that kinda world.
i do have a couple questions for you or anyone else willing to answer. i've thought about this depression scenario recently and think it's possible, but not likely. if you were to put a percentage (0-100) on the chances of a depression happening what would you give it? or how bout a citigroup going bankrupt? do you think the gov't could stop it in time or bail out the banks like you suggest before the ball got rolling to far down the hilll that it's unstoppable.
1-21-2008 @ 2:54PM
ROBIN said...
PETER , THE BANK'S ARE THE ONE'S WHO GOT US INTO THIS MESS WHY SHOULD TAXPAYER'S BAIL THEM OUT I SAY LET THEM FALL AND MOVE ON. YOU REAP WHAT YOU SEW.
1-22-2008 @ 10:29AM
GRAY said...
I've enjoyed reading all the comments regarding Bush's recommendation's for a quick fix. Would readers' help me understand why we can bail out Chrysler ( keeping in mind they also line executives pockets) and we can't bail out the banking institutions? Did Chrysler get in trouble for making good descision's? I think not....but we bailed them out to help them from their demise..... I flunked ecomonics 101...help me understand????? In my opinion this would help our economy rather than a band-aid fix of $800.00........where next month everyone will need another $800.00.