Is the Stimulus Package Just a Baby-Aspirin? posted 2/15/09

 Hey, I voted for Obama, so this is not a question designed to elicit partisan comment.  But the small immediate tax cuts in the legislation are puny.  And there is ample evidence that unless tax payers believe that the boost to after-tax income has some permanency they will tend to save or pay down debt with a hefty portion of it.

 

While the bill contains some worthwhile infrastructure objectives (along with a bunch of liberal democrat wish items), the economy will not feel the full impact of the spending for them for a couple of years.  There is, of course, the job saving allocation to the states so that during this tough period for tax revenues their layoffs may be more modest than otherwise. That’s job-saving, not job creation. That’s okay but not much of a start on the 3.5 million person objective.

 

Personally, I believe that what the Federal Reserve and the Treasury will be doing is of more immediate importance.  True, Geithner’s package was lacking in crucial details, but my bet is that between the Fed, Treasury and FDIC there will ultimately be an unprecedentedly immense effort to insulate toxic assets and to inject capital into the system. 

 

 

The banking system has two problems: liquidity and insolvencies. So far, not enough attention has been paid to the insolvencies that can only be cured by capital injection. Will that happen without letting some of the big players go bankrupt?  I don’t know, but as long as depositors are protected, bankruptcies may not be such a bad outcome.  Certainly, the whole, global banking system needs massive restructuring and the sooner the better.  For now, however, the blueprint is missing.

 

I think that the stock markets of the world will continue to be dangerous places until we can see some answers for the financial sector.  At the moment the haze is still too thick.

 

For an interesting discussion of the current economic slide and the financial system see John Mauldin’s Thoughts from the Frontline

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One Response to Is the Stimulus Package Just a Baby-Aspirin? posted 2/15/09

  1. Paul F. Miller, Jr. says:

    Since I wrote this, the Congressional Budget Office released a “scoring” of the stimulus bill: 24% in 2009, 50% in 2010, and the rest in 2011+. Infrastructure spending of $100 billion will see 8% spent in 2009, another 23% in 2010 and the remainder in 2011-2019.

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