Savings Experiment: Snow Removal
Bonds Are a 'Safe' Investment: A Big Lie Gets Even Bigger
President-elect Obama has discussed a $775 billion stimulus plan that involves $300 billion in complex tax cuts and targeted government spending on roads and bridges, broadband in schools, healthcare information technology, and alternative energy. Will it succeed? I'd say it depends on how you define success.
My definition would be that the plan creates three million new jobs and gets GDP to grow again in the next few years – but also jump-starts economic activity so we don't need to keep borrowing and spending to keep the economy going.
By that standard my guess is that the plan has a 50% chance of succeeding. It will get economic activity going in the short-term but I am not sure if it's enough to revive economic activity in the longer-term. In my view, the plan has the following pros and cons:
-
Positives. In general the idea of fixing roads and bridges is good and there are about $323 billion in plans prepared by the states that need funding. I think having broadband in schools is also a good investment in the future education of American students, and that spending on health care information technology could boost its efficiency. Finally, alternative energy is crucial if we hope to free ourselves from dependence on oil and gas from people who don't like us very much.
-
Improvement opportunities. However, the problems of this plan are significant. First, getting involved with significant tax cuts to satisfy the Republicans in Congress will slow down the process of getting the legislation passed and it will ultimately bring the U.S. to annual budget deficits that could top $2 trillion.
At some point, global investors could decide that they don't want to take the risk of buying our debt to finance all this. Then we'd be faced with a harsh choice – stop borrowing to finance all this deficit spending or raise interest rates to a very high level in order to attract those reluctant investors.
If we can't borrow more money then we will need to cut back on all the spending. If we need to raise interest rates, there will be a lot less money available to spend on stimulus because so much of it will go to paying interest.
Stimulus bills have been put in place during five of the past seven recessions -- in 1964, 1971, 1975, 1981 and 2001. Efforts made in the 1960s and 1970s were relatively ineffective. By 1981, lawmakers had learned to act faster to reverse recessions. The $1.3 trillion in tax cuts of 2001 were swiftest of all. But they also helped lay the groundwork for the current financial catastrophe.
Why are some stimulus packages more effective than others? Sometimes policymakers took too long to recognize the problem or too long to act. Sometimes their actions weren't properly targeted, and most of the money didn't get spent. Sometimes the policies were permanent, and the long-term damage in terms of increased deficits and debt outweighed the short-term benefit
The Congressional Budget Office rates food stamps and unemployment benefits best because they are quick, cost-effective and carry little risk.
Unfortunately, last year's $160 billion stimulus plan was a flop. It was too small to make a difference and did not create an investment – it just added to the deficit.
In my view, the success of the proposed $775 billion stimulus plan depends on whether it is an investment or a cost. If it's an investment, it will create assets that can generate future revenues and profits which can be reinvested to sustain economic activity. However, if it's a cost, then the money will be spent and nothing will be left at the end that can generate revenues.
To analyze the plan on this basis requires more details. And those will not emerge for a while. When they do I will try to make sense of them. But for now I am concerned that the tax cuts will not be an investment nor will it be easy to quantify the benefits of putting broadband in the schools.
Despite my reservations, I hope this plan works. Since interest rates are near 0% we've run out of ammunition there, and it's hard to see how we get out of this mess any other way.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. Portfolio published his eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing on December 26, 2008.
Goldman Earnings Sink After Buffett Dividend
Johnson & Johnson's Income Falls 23%
Burberry Shares Leap on Sales Update
Reader Comments (Page 1 of 1)
1-08-2009 @ 4:03PM
Basilovecchio said...
Please have anyone you wish review and edit if you wish.
But for the sake of all PLEASE POST
How about earning $300 billion for health care and Social Security as well as multi-tasking:
1.Firming housing prices,
2.Create affordable housing ,and
3 SOLVING the mortgage crisis.
YEAH BUT HOW COULD THIS REALLY BE POSSIBLE???
NO ONE CAN DISPROVE IT-COULD IT POSSIBLY BE RIGHT????
Feds to announce New Plan:Take Action Now for Troubled Asset Relief ?
Legality and funding of GSE is already in place.
ACTION:Solve $6.1 Trillion crisis without issuing new money and make a profit
for the taxpayers.
RESOLVED:ALL "underwater" loans and foreclosed homes to be purchased at 110% of FAIR MARKET VALUE.
Loan to be marked "paid-in-full"
Purchase will be made with the use of 10 Year US Treasury Bonds at 2.5%.Not with money,but with bonds that become cash in 10 years.
Legislation is already in place for GSE agency to do this and also funding is already approved.
NEW LOAN is a special "EVERYBODY WINS PLAN" loan
A loan that has 10 year fixed payments (120) with a payment of the balance of the loan by a new 30 year fixed mortgage,thereby retiring the 10 Year Bond.
Because of the low cost of the funding(12/31/08 @ 2.08%)now @ 2.5% with the special long term payback "EVERYBODY WINS".
Even the taxpayer!
TERMS FOR THE NEW LOAN:
120 fixed monthly payments that consists of (A) payment of total interest,
(B)15% of principle
; ; (C) 5% taxpayer profit
Payment number 121 is made by a third party lender that will gladly give a new 30 year mortgage
at a fixed rate for the 85% balance,marking the 10 year bond paid-in-full"
Example:$110,000 "EVERYBODY WINS LOAN" to cover home valued at $100,000
A...Total 10 years interest.......... $27,500
B...15% for principle reduction.... .$16,500
C...5%..TAXPAYER PROFIT.....$ 5,500
TOTAL.......................................$49,500
paid by 120 fixed equal payments of $412.50 each. (wow how affordable is a $110,000 mortgage at $412.50/month?)
Then the 10 year treasury bond is paid-in-full since a new 30 year f ixed mortgage is acquired for the $93,500 balance.
To calculate payment for 10 year portion use a factor of 3.75 per $1,000.
Example if loan amount is $274,000;payments of $1027.50.($274 X 3.75 = $1027.50
"EVERYBODY WINS"
LENDERS: cut their losses substantially and go about the business of making money
from what may have been mandatory reserves.
BORROWERS:perhaps,a wrong ,made right?AFFORDABLE HOUSING.And
as a side benefit for the other 90% of homeowners,now prices are not only stabilized at 10% above the "vulture's prices",but also can start to increase in value.
TAXPAYERS :when did you ever get a RETURN ON INVESTMENT?
City and state revenue base,firmed and increased.
THOUSANDS OF BENEFITS CAN BE DETAI LED.
ONE DOWN SIDE- there is no vengence.We can however take the time to discover how this happened ,fix blame,and take action.
------Take Action Now for Troubled Asset Relief of Homeowners!!!
THIS IS MY DREAM HEADLINE,PLEASE MAKE IT PART OF YOURS.LET'S GET A DATE ON THAT HEADLINE,"Feds Announce Plan..."
Best Solutions Fl
Real Estate
9804 S Military Trail E-10,Boynton Beach,Fl 33436
email: bestsolutionsfl@aol.com
Please edit / correct,send me a copy,thank you.
Wed, 24 Dec 2008 7:53 am
Subject: Short add on to Answer to your questions
The MOST difficult part to explain is that NO NEW MONEY is required.The mortgages are converted into bonds.The 10 year Treasury bond.We do not have to go out and sell $6.1 trillion-they are already " purchased" by the lenders.
No inflation,no increase in money supply,its just an already existing asset conversion,just "EVERYBODY WINS".A business plan that stabilizes housing=2 0pricesand makes the mortgage very affordable and creditworthy.
P.S. if rates go up .25 still no problem,change factor by adding $20.10.(120 payments to collect the $2,500 needed to pay increase 10 years interest).Rate on 12/ 30/08 @ 2.08%
Se nt: Tue, 23 Dec 2008 8:10am
Subject : Answer to your questions
Subject: RE: Thanks for your help. ?Feds to announce Plan?
1-08-2009 @ 4:22PM
paul teal said...
re: roads and bridges
All steel must be bought from U.S. companies. U.S. Steel should fire up the mills. PA reps should insist on it.
All trucks must be bought from U.S. companies. GM and Ford start building big trucks. Michigan reps should insist on it.
All heavy equipment must bought from U.S. companies. John Deere and Caterpiller start building.
Put americans to work in these plants. Chinese steel and Japanese heavy equipment is part of what put us in this mess. Insist on "Made in U.S.A." Call your congressman and senator
1-08-2009 @ 5:19PM
lou said...
To Basilovecchio: How does this help new home sales? If prices are still valued at 10% over actual value, homes are still unaffordable to most people unless a repeat of what has brought down this financial disaster occurs again. The way mortgages were set up ( interest only, etc.) has caused this mess. The fact is homes need to be made more affordable to start with. Inflated home prices don't seem like the answer.
1-08-2009 @ 10:19PM
william lindblad said...
50% chance?
If everyone in charge continues to think domestic, more like "0"
The proposed moves are positive, but what do we do about Iceland? What do we do about the other countries that heading in this direction? Although these sound like silly questions they are not. All should keep in mind that trade is now global and economic interaction between all of the countries that are trading partners matters. If we use a stimulus and start to pull out and they don't?
This is not rocket science - everyone has to get on the same train and it will take the G7+, all in agreement on policy to turn this mess around.
If not, you are going to get about the same result as the aftermath of 1893, which lasted until 1910. Ups and downs for at least as long.
No way to run an airline!
1-08-2009 @ 11:31PM
blogs11111 said...
I like the idea of fixing infrastructure and alternative energy. These are problems we have to fix anyway and they will create jobs. I agree with the first poster on how to fix housing. I would like to see all stimulus go only to domestic use. Use US labor and US made parts. The other countries will have to fix their own economies on their own. We are not their parents. A slow down in China might help us bring back our own manufacturing, that would be a plus in my opinion. I would like to see the US become more self sufficient in manufacturing and agriculture as well as energy. Since China likes to play currency games, I would like to see tarriffs on anything we import from them so our US companies have a competitive chance to sell in the US. I would like to see incentives for buying US products and discouragement of imports. Also, how about they add campaign finance reform, and outlaw lobbyists. They can go ahead and fund these things with a gas tax so it'll curb the use of foreign oil.
1-09-2009 @ 1:45PM
Lchapp said...
Economic stimulus plan is good as long as it take care of the working class first who is hurt the most. Divide stimulus package into 2 parts 1. Home foreclosures, 2. Jobs. Allow all home owners who are in distress and can show it, a 3 percent 40 year loan refinance, Just a NO BULL Loan. Give employers the incentive to hire new employees, Give them a tax relief and give incentives to buy equipment. Take care of the working class from the bottom up first and everything else will take care of it self.
3-18-2009 @ 9:47PM
Bryce said...
Lchapp, the problem is companies don't create jobs; demand for products and services creates jobs. It doesn't matter how much of an incentive a company is given to hire more employees if the company doesn't have the demand from its customers to warrant additional employees. With unemployment on the rise, credit tightening, interest rates increasing (on credit cards especially), and everyday expenses increasing, people just don't have as much discretionary income as they used to. If people are also uncertain about their job security they may also be bolstering their emergency fund.
Until these problems are reversed or remedied through increased wages, demand will continue to fall (or plateau for a long time during this recession, hopefully avoiding full on depression).