Obama's Narrowly Targeted Stimulus Plan

By now, most Americans know that the reason we are in the economic mess that we are in is because of loose credit in the housing markets. Now, the pendulum has swung completely to the side of extremely tight credit for homes, cars, credit cards, student loans, small businesses, etc. Credit got us into this mess and only credit will get us out. By having broad based credit availability, people will, once again, be able to buy that house; or, that car; or, rack up credit card charges. That in turn will put millions of contractors and laborers to work building homes and office buildings. It will keep the United Auto Workers in their jobs. Small business loans will help start-up businesses and the expansion of existing businesses for new direct jobs and in related jobs. Also, lowered personal credit rates, as in credit cards, could stimulate consumer spending.

But, Mr. Obama's plan doesn't address that. His "put people to work" effort is narrowly targeted in heavy construction for infrastructure, green jobs, and tax rebates (See Full Text Of His Speech). In the area of infrastructure, anyone who has had dealings in this area knows quite well that materials and equipment are the highest cost components in any project of this type. You actually get less labor bang-for-the-buck than in, say, home building. Also, the concept of building green jobs is similarly limited in its scope. Once again, those industries are less labor intensive relative to the cost of materials. The cost of creating a solar array is primarily buried in the expensive cost of those cells and not in the labor to build or install them. A lot of money will be spent without getting a lot of people back to work. Every program in Obama's plan goes on like that. Big dollars - limited labor.

Even his tax credits are non-starters. Giving someone a $500 check as an Earned Income Tax Credit (if they don't pay taxes) or a true tax credit if they are a tax payers is only going to have a minimal effect on the economy. Given the high credit card debt being carried by most Americans, that check will probably only go to pay off some of that debt and nothing more. Generally speaking, the people receiving those checks won't go out and buy more cafe lattes to keep Starbucks in business or electronics to keep Circuit City from going under. The last two attempts to give money back to consumers in order to kick-start the economy didn't work. Now, Mr. Obama wants wants to go to that well one more time.

I think that the key to recovery is credit. I have long believed that if we could get banks to lend money again, we will quickly recover. But, if you want to buy a home under this current economic fog, the banks are asking for steep 10 or 20 percent down payments. That puts home buying out of the reach of most potential buyers. If you want a car, you can only buy one on credit if you have an excellent credit rating and the payments are well within the scope of your income. Increasingly, any newly issued credit cards now come with high initial rates; and, that too is a deterrent to consumer spending.

A way to get us out of this credit morass is "not" to spend government money (our money) on fruitless infrastructure projects. Those kinds of projects didn't work in the great depression (See My Previous Blog Entry of October 19) and they didn't work in Japan as it languished in more than a decade long recession that has been called the lost decade in Japan(See Full Story).

I personally believe that we could get out of this mess by not spending trillions of dollars to do so. Our Federal government could act as a loan guarantor on all kinds of loans. For example, on home loans, it could apply a small Federal insurance surcharge to all new loans. Similar charges could be set up for auto loans and credit card accounts. People with good credit would pay a minimum surcharge of, say, $10 a month for a home loan. People with less money down on a home and at a higher risk could get their loans with up to a $20 monthly surcharge. As an incentive for the Banks and lenders to give that loan, the government would insure that loan at up to 50 percent of the loan's value. This assumes that Bank's downside risk is near completely eliminated because the house or the car would, hopefully, have not lost more than 50% of its value if the borrower defaulted on their loan. A risk matrix could be established to determine the fees that each loan will carry.

This kind of program, because it is an insurance program, would actually have incoming revenues to the Federal government in terms of those "insurance surcharges" and not big payouts. Only in the case of a default would the government actually payout anything. Most importantly, it will get credit moving again and break the back of this recession. People could buy cars and homes again. Consumer credit will be freed up. People will be put back to work without our government spending billions in wasted expenses on what is sure to be another government boondoggle program or programs.

As always, only my opinion.