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.

Is The Federal Bailout Stifling Credit?

Banks have a simple and basic business model. They take in cash from depositors and, then, use that cash to make loans. Those loans become the income basis to which they can pay interest to their depositors and cover their expenses. Hopefully, after paying expenses and interest on deposits, the remainder is profit.

So, if banks need loans to make money, why aren't they giving up loans to consumers for new houses, cars, tuition, remodeling, new businesses, etc. Partly, it's because they don't want to get burnt with bad loans. But, another part of that is the Federal Government. By the the U.S. Treasury giving them bailout money, the incentive that drives them to make loans, their profits on lending, is being negated. In many ways the Federal Government has become their guarantor that they can pay interest to their depositors and pay their operating expenses without having to give out loans. There is no profit motive and consumer loans won't flow again as long as Daddy U.S. government is around to give them money. In essence, we have created a welfare system for our banks and all the ills of any welfare system are showing up in making our banks lazy and not willing to work for their money.

How Long?

The housing bubble broke around the 4th quarter of 2006; just about 2 years ago. At that time, it was estimated that there was about 13 months of housing inventory in the country. In some hot areas, the inventory was about 16 months. Under normal circumstances, we should have recovered from that bubble in about a year's time as the inventory was depleted. But, we haven't. We are two years past the bubble-break and new home building is still seeing 18+% per-month drops (See Full Story). That's because we aren't in normal circumstances.

The thing that is complicating the whole home sales mess is primarily the foreclosure rate. This added tons of inventory, all those foreclosed homes, back into the real estate market. Many of these are really big, fixer-uppers that will need a lot of work before being resold. To complicate things further, consumer credit is tight. Probably as tight or tighter than during the great depression. Click to view a consolidated U.S. Consumer Credit chart as a popup window from Briefing.com's website. If you look at that chart, you easily picture a downward averaging slope from July of 2007 to September of 2008. That shows clearly shows the declining credit situation in this country.

I guess the issue will be how long available consumer credit will continue to be so restrictive and how much lower home prices will go before there is some daylight on this recession. When some bottom in these two areas is actually reached, we will be staged for a recovery. The Federal Reserve bank has lowered its interest rates for borrowing money to a target of 1/4 to zero percent; almost free money. But, only to the banks. Until the local mortgage lenders (those banks) take some risk by taking on more mortgages and other consumer loans without such steep conditions, like 20 percent down, we could remain in this situation for ever.

There is one fact that will always help the home market: birth. No matter the recession, people will continue to have babies. Those babies of two decades ago are going to need housing. That's pressure that the housing market can always count on. In times like this, you can also count on family members to help their sons and daughters with a down payment on a house. But, we really need those banks to lighten up to help recover this economy. The best money spent by our government would be to act like a "co-signer" on loans; or, in other words, a loan guarantor. This means they will have to, somehow, get down to the consumer level for loans and stop focusing on the banks. I believe Federal Housing Administration (FHA) has a role here but I haven't heard that agency mentioned even once since this housing bubble burst. As usual, just my opinion.

Barack Obama's Econ Adviser: Austan Goolsbee

I find it quite interesting that Barack Obama is blaming so many people in the Bush Administration for what is happening in the credit and housing markets. He's blaming McCain, too. But, his own economics adviser, Austan Goolsbee, wrote in 2005 (over three years ago): "If you want to make money off the housing bubble, you'll have to do it the old-fashioned way: Buy a place with a no-money-down mortgage and then flip it." Isn't that a responsible statement?! (See Full Story).

For years, like a lot of Democrats, Austan Goolsbee has been promoting low-income, no-money-down borrowing for home loans. A primary reason for the mess that we are now in. I think America should take a good, hard look at Obama and his economic ideas. Ideas and tax programs which are driven by a guy, Austan Goolsbee, who, apparently, thought it was fine to keep feeding the housing bubble until it burst. Now, we are all paying for that kind of philosophy. I just think Austan Goolsbee and Barack Obama aren't ready to lead this country. Unless, of course, total economic collapse is the goal!

One last point. It was obvious that Obama's economics adviser knew that a bubble was in progress in 2005. Did Barack Obama ever take the reigns of leadership to address this obviously explosive situation while being advised by Austan and while he was an active U.S. Senator? Not hardly! Maybe it was because Obama was too busy taking campaign money from the likes of housing giants like Freddie Mac and Fannie Mae! At least John McCain, the guy who according to Barack doesn't know anything about economics, had the sense to introduce a bill in the Senate to reign in both Freddie Mac and Fannie Mae. He did that in 2006 and, if passed in the Democratically-controlled Senate, it might have changed the course of history, today!