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Stimulated yet?


 

So the Bush presidency draws to a close, with a four-month barrage of economic recovery plans issuing forth from various parts of the US government, most of them improvised in great haste with little thought for their long-term consequences. Politico adds up the bill:

It’s a package of about $8.7 trillion dollars’ worth of potential taxpayer commitments for loans, guarantees and other bailout goodies for businesses and distressed homeowners.

Amid the tissue paper:

• More than $1.5 trillion in Federal Deposit Insurance Corp. loan guarantees, including a $139 billion assist to the lending arm of General Electric Corp.

• $1.8 trillion in cash, tax breaks and loan guarantees doled out from the Treasury Department to taxpayers, financial institutions and credit companies.

• $300 billion for homeowners from the Federal Housing Authority.

• $25 billion in assistance for auto companies from a program overseen by the Energy Department, which is separate from the bailout proposal that tanked last week in the Senate.

• And $5 trillion worth of new money, loan guarantees and loosened lending requirements from the Federal Reserve Bank.

According to Bianco Research President James Bianco, who crunched these numbers, that amounts to more government aid and assistance than nine other historic bailouts and big government outlays combined.

The New Deal, for instance, cost an estimated $32 billion in its day, which would be about $500 billion in today’s dollars. The Marshall Plan cost about $12.7 billion, which is the equivalent of a paltry $115.3 billion. The Louisiana Purchase? The French got $15 million, which would be worth about $217 billion today. 

If you take those three items, add in the adjusted costs of the Race to the Moon, the savings and loan crisis, the Korean War, the Iraq war, the Vietnam War and assistance for NASA, you still get to just $3.92 trillion — not even half of the taxpayers’ exposure today, according to Bianco. 

If that weren’t enough to make you want to upgrade your holiday gift list, it’s useful to remember that Congress isn’t done and President-elect Barack Obama’s team hasn’t even started.


 
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Stimulated yet?

  1. Wow. Assuming a US population of 300M, that works out to $29,000 for every man woman and child in America.

    Can I just get my portion in cash?

  2. Well, the important thing is that there’s detailed plans and quantifiable benefits associated with each of these items. Right?

    Right?

  3. TJ Cook – actually not. Some Serious Economists (e.g. Bernanke) think that what matters is getting the cash out there. Hence the nickname “Helicopter Ben”

  4. Steve Wart – fair enough, that’s a good point.

    I think I’m boggled by the sheer dollar amount, and the unpredictable outcome of that much money sloshing into the economy.

    I’m trying to come up with a metaphor in which the seized financial system is a clogged toilet, and this remedy a firehose into the bowl – it might unclog the toilet but could make an awful mess in the process.

    Sadly it’s been a long day, I’m not proud of that metaphor :)

  5. TJ Cook, I like your metaphor but replace fire hose with Niagra Falls.

  6. In order to try to prevent some short term hardship and resulting political problems, they really are going to cause ourselves and our children a MASSIVE (shouting intentional) financial crisis (although that word falls short) for us all… aren’t they?

    Those of you supporting these bailouts: You suck.

  7. I agree that the scale of the bailout is mind-bogglingly huge but it’s worth pointing out that the $8.7 is comprised mainly of *potential* taxpayer commitments. Most of the loans will probably be repaid; most of the loan guarantees will never be called. Still, US taxpayers are on the hook for a tremendous amount of money. Thing look a lot different than they did in 2000, when Al Gore’s platform included the goal of paying off the US Federal debt by 2009.

  8. Important to distinguish between government spending on goods and services and simple balance sheet operations. When the Fed swaps some tbills for some MBSs, the cost of this isn’t the face value of the MBSs, but the difference in value between the tbills and whatever the MBSs are sold for in the future. Could be negative; could be positive.

    So, simply adding together the face value of balance sheet operations with money that is going to purchases of goods and services is fatuous.

  9. Oh and wait for the inevitable shower room size comparison between the “Obama package” and the “harper Package” with Layton sitting on the sidelines saying “it isnt even 10%”

    Only quibble I have is that a guarantee on deposits isnt really cash out…it is a confidence measure….and if you get called on it you have bigger problems than you think anyway.

    So stimulus is more cash in the hands of firms and households ither through direct subsidy/grant/benefit and/or tax reduction. The amount will be less but will still be a staggeringly large amount of money that has been borrowed from…..ulm…….the Chinese I think.

  10. I feel sick.

  11. Wouldn’t it be cheaper to start a “War on Frauds and Incompetents” and seize their assets? Someone must have the money!

  12. To expand:

    A decade and a half’s worth of prudent behaviour and sacrifice from people in the United States and Canada with the promise of a healthier and more prosperous economic situation is about to be squandered by panicky politicians and their enablers.

    I still feel sick.

  13. I’m trying to come up with a metaphor in which the seized financial system is a clogged toilet, and this remedy a firehose into the bowl – it might unclog the toilet but could make an awful mess in the process.

    Where were you when the sh*t hit the fan?

  14. To be fair, according to a Globe and Mail article titled “Industries seek aid on taxes and credit, no bailout,” many industries are not asking for a bailout. They are instead asking for tax breaks, gov’t backed credit, etc.

    These measures no doubt have price tags attached. But they seem more reasonable and realistic than a blatant “money gun” (as PW puts it) solution, and (I presume) would also result in a reduced financial burden on the government.

  15. So, if I get this straight, George W. Bush has bought the equivalent of something like half of U.S. GDP.

    Why do we even talk about capitalism anymore ?

  16. Dear children: we love you to pieces. We don’t have a clue about how to be responsible, so we hope you can sort it all out after we’ve finished making a mess of the joint. Of course, you’ll have to clean up our mess before you can even start figuring out what to do next. Good luck. Mom sends her love.

  17. Where does this money come from?

    Currently every investor in the world is madly trying to put as much wealth as possible into US Government Bonds (T-Bills) at interest rates so close to zero they can’t possibly be making any decent return.

    In a way, it’s hard to blame the US for doing this. If someone offered you unlimited interest-free credit to be repaid over 30 years, how could you say no?

    Right now the savers of the world are the Chinese and the wealthy Arab nations. These are not stupid people, therefore (perhaps my logic is weak), there must be strings attached.

    What sorts of strings? Well China and Arabia want the US to keep consuming. It’s really that simple.

    In the meantime, the Canadian dollar is most emphatically NOT THE WORLD’S RESERVE CURRENCY. We follow in the footsteps of the US at our peril.

    Keynes advocated different policies for the US and the UK, and none at all for Canada. Anyone who thinks we should be doing the same thing needs to think again.

  18. Three concerns:

    1. Distrust of institutions

    2. Fear of investing and spending

    3. Treasuries in distress

    Batten down the hatches — there’s trouble in the wind.

  19. Gee, guys. No one anywhere knows where we are in this thing. ” Thing ” in the non-Soprano sense of downturn, recession, depression, credit crunch, lack of trust among the master class, whatever we want to call it.

    We’re in it. But are we 1%, !0%, 70% through it ? How do we know ? There are a number of prognostications out there. Pick one.

    But save some of the frenzy just in case we need it later.

  20. Yes but Andrew, it shows “Empathy” b/c everyone knows if you just throw money at a problem it will get fixed, and the media will say you care….(eye roll)

  21. JK,

    Apparently appropriate emoting is what matters and action to back it up is what matters as well.

    This is not a problem of Canadian source, it is an external shock that a small open economy has to weather. Just thnak your lucky stars we arent Iceland, which Canada could buy pretty cheapy right now and give us some more claims up north. The Russians were about to do some “lending” but then found they didnt have any money either after oil fell through the floor.

    They said at the beginning of this it wouldnt start to end till US housing prices start to stabilize. Apparently US mortgage paper started moving this afternoon…..that would start the process of new loans, so we might be near the end of the begining. Libor and the Tedspread have fallen consistently over the 3 weeks and week respectively, this is also a good sign.

    However there are many many US pick and pay loans coming up for renewal in 2009…..these are loans where people were allowed to skip payments and have it added on to their principal. So US real estate remains shakey till for at least another 2 quarters.

    If banking stabilizes then lending stabilizes, first for business then for consumers then things start the repair process. If banking was solid then you could tell the auto companies and unions to pound sand.

    Next time.

  22. Most amusing of all, these are the same geniuses who are “handling” the environment, the ones who tell you Global Warming is a myth (“Hey, it’s snowing outside! How could the planet be getting warmer?”) and don’t worry, be happy, get a bigger SUV and burn all the gas you want because we’ll be able to make all we want AND save the planet with the new wonder drug, ethanol. And/or “Drill, baby, Drill” and/or mine evermore bituminous shale – well, once the price comes back. Cleave the tops of the Kentucky hills for coal, and burn that coal because, darn it, the Chinese are anyway.

    Dion was still right, Carbon Tax is the simplest, easiest, cleanest, least bureaucratic means of directing our efforts toward reducing pollution and building a sustainable economy. But as well, our idea of unlimited growth in economics is the sand upon which this edifice is built: overlooks the simple fact that the planet is a closed system. No one’s mentioned that because they never do until the proverbial hits the fan. Then we can all sit around and blame one another. Fun times.

  23. I agree that a carbon tax is the best policy for reducing carbon emissions. But the timing of the green shift was stupid (can I use that word?). It wasn’t so much Dion, but some Liberal MPs were mouthing off about how they were going to finally pay back Alberta for its years of success that it was guaranteed to generate an NEP-style backlash.

    I also looked at the numbers and came to the conclusion that it was timid and insignificant (not a reflection on Dion, but I am really confused about some of the things he did in the past few months).

    According to my calculations it worked out to about $0.04 per litre on diesel fuel. This on top of the existing $0.04 Federal Excise Tax and $0.12 per litre Provincial fuel surcharge in BC. And then he caved in on which industries would be affected.

    Maybe I miscalculated, but it seemed like a joke to me. Coming from someone who said some pretty impressive things about Quebec separatists, it struck a dissonant chord.

  24. Scissorpaws, I didn’t realize this was a thread on global warming. Oh wait, it isn’t.

    Why then do you choose to bring it up? You are typical of those who believe that by combating global warming (or whatever fashionable cause you hold dear) we will somehow magically save the economy too. Comforting perhaps, but hardly realistic.

  25. Bernanke is now openly talking about monetizing the US Treasury’s debt. ‘Monetizing’ is what it’s called when the central bank purchases T-bills directly from the federal government because no one else wants them anymore. So the government doesn’t even have to find a buyer for its debt anymore, the Fed prints ’em and the Fed buys ’em. It’s like free money. Pretty neat eh? That won’t be inflationary at all.

  26. Raging Ranger – look at this this way. The big risk is deflation. Inflation is the opposite of deflation. Therefore inflation will cure deflation.

    Or if we want to use a medical analogy. The patient has overdosed on barbiturates. Amphetamines are the opposite of barbiturates. Therefore a massive dose of amphetamines will cure the patient.

  27. I feel like it’s the dark ages and the likes of Bernanke and Krugman are standing over us with filthy hands and rusty blades.

  28. Stimulated yet’
    i’m worried. I think AC may be headed for a nervous breakdown. still i don’t suppose he’ll be the only one.

  29. If you free market mavens are in a froth now, wait until The Great Global Regulators start stirring the pot.

    Bubble, bubble, toil and trouble.

  30. We must distinguish between the bailouts to industry and the bailouts to the financial sector. The former are just bandaids. The latter are meant to prevent Total Credit Meltdown. Whether they’ll do that or not is an interesting question, quite unresolved as yet I think; and whether the helicopter approach is the smartest way to do it is, ah, open to debate. But a Total Credit Meltdown would be, um, well, ah . . .

    Don’t blame Krugman and Bernanke, blame the complete idiots who were chanting that the US could simply borrow its way out of the 2001 recession. Man, it was total madness at the time and yet the various self-anointed bishops of the Capitalist Faith — everybody who felt pretty good about themselves financially, really — kept looking at US GDP and personal wealth and all that and saying, “Only a moron would doubt the integrity of the system.” Meanwhile TV ads in California were openly selling ordinary people on the idea of mortgaging their homes to pay off credit card debt, on the theory that the bubble was generating free and limitless money. I remember looking at those ads and thinking, “This economy is completely f*cked.” But the same sort of person who is now decrying the bailout of Greenspan’s mess would have told me I was a Leninist or at least a pessimist. You don’t like multi-trillion-dollar bailouts? Don’t trust investment bankers on economics ever again. And don’t let the Fed act as the White House’s white knight. Basically burn all your copies of Ayn Rand.

  31. Why is the Macleans website commenting or writing articles on internal US financial system? Canada couldn’t fathom this kind of money or power the US has. We as Canadians should be focus on our internal problems.

  32. I feel a knot in my stomach, but my private sector is not getting stimulated at all by this.

  33. jack M
    burn all your copies of ayn rand. We may be burning a lot more than that before this is over. Does create a bit of a dilema, it’s cold outside, but i’m also running low on toilet paper.

  34. “look at this this way. The big risk is deflation. Inflation is the opposite of deflation. Therefore inflation will cure deflation.”

    A message arrived today for Ben Bernanke and all his pals in central banks around the world. It’s from North Korea. It says, “Communist central planning doesn’t work for food, clothing, transportation, health care, manufacturing, retirement savings, insurance, banking, monetary policy or anything else. See you in hell.”

    The big risk is increasingly desperate government interference in the market, leading to the collapse of major business activity, followed by the flight and sidelining of capital and skills as everyone either flees or sits on their hands waiting for their government takeover or bailout, followed by trade wars, then by famine and civil unrest, finally ending in a genocidal world war. Laugh all you want at the monetary cranks and nanny-loving governmentopians, but they are completely serious and they looooove their jobs. Give them too much power over you and you’re dead.

  35. Jack Mitchell, aren’t Krugman and Bernanke now recommending exactly that? That the US attempt to borrow its way out of recession? Particularly if Bernanke starts purchasing government T-bills directly.

    Steve Wart, I find the fear of deflation to be absurd. If prices drop a few percentage per year over the next several years it will be good for us. As for it turning into a deflationary spiral, that won’t happen. Every developed country now has a government that spends in excess of 30% of GDP each year. That’s more than enough to maintain a base level of consumption and prevent a deflationary spiral, without any added “stimulus”.

    Back when Keynes was alive, government’s comprised about 10% of GDP, and he had a very good reason to encourage an increase from that level. He is unfairly pilloried by right wing economists nowadays, but he was right in his time. However, I doubt very much he’d be calling for massive doses of “stimulus” today with governments already running large deficits and already supporting large welfare states. The fiscal stabilization policy that Keynes dreamed of is built right into the system.

    Today’s economists believe that if some Keynes is good, then more Keynes must be better. By that logic, I should take a whole bottle of vitamin pills every day. One is good, so one hundred must be fantastic. I’ll probably clean up at the 2010 Olympics.

  36. Al Heck Brakes: “The big risk is increasingly desperate government interference in the market, leading to the collapse of major business activity”

    Um, Al, as I understand it the financial bailout is happening because the alternative is the collapse of major business activity. Home-grown! You may have seen it in the papers.

  37. Have faith, everyone. Soon enough there will be so much cash around you can use it to start your fires to stay warm. Or to wipe your private sectors, kc, if you’re out of TP.

  38. Raging Ranter: “aren’t Krugman and Bernanke now recommending exactly that? That the US attempt to borrow its way out of recession? Particularly if Bernanke starts purchasing government T-bills directly.”

    It’s different, though, because in 2001 the borrowing was done by consumers and home-buyers, whereas this time it’s the government doing it. I’m not an economist, but it seems to me that the US is now effectively borrowing collectively what it spent excessively on an individual basis in 2001-2007. It’s worse when it’s the consumers and home-buyers doing the borrowing because such loans are not guaranteed, to say the least, whereas the USG can’t default. What Bernanke is doing now is not trying to borrow his way out of a recession, he’s trying to borrow his way out of a major financial meltdown, which would be much worse than a recession. He’s trying to keep it at recession levels, in other words, while the credit markets recover from their 3rd degree burns.

  39. Raging Ranter – I can’t say whether fear of deflation is absurd. Honestly, the entire economy is absurd. Nobody knows what’s going to happen.

    I worked in the fixed income derivatives department of a major investment bank when the credit markets blew up. When you’re in IT you get to talk to people at a lot of different levels in the company (IT people don’t officially know anything, we just “serve the business”). I talked to a lot of people about the “toxic waste” in the CDO market and the laughably bad quality of data going into the risk models. Everyone knew it was a disaster waiting to happen, but the bank was making lots of money, so nobody rocked the boat.

    So while I’m happy to wear my technician’s hat and look to others for wisdom, I occasionally find things like this that ring true, even if it somewhat contradicts what I read in Reuters and the Times:

    Since August of 2007 we have been seeing a steady constriction of credit markets, starting with subprime mortgage back securities, spreading to commercial paper and then to interbank credit and then to bond markets and then to securities generally. While the problem is usually expressed as one of confidence, a more honest conclusion is that credit extended in the past has been employed unproductively and so will not be repaid according to the original terms. In other words, capital has been betrayed into unproductive works.

    The credit crunch today is not destroying capital but recognising that capital was destroyed by misallocation in the years of irrational exuberance. If that is so, then we are entering a spiral of debt deflation that will play out slowly for years to come.

    /londonbanker.blogspot.com/2008/07/fishers-debt-deflation-theory-of-great.html

    You might be right. I can’t say categorically that government spending will prevent deflation. A lot of people have been waffling back and forth on deflation versus inflation, which makes me wonder how they can actually be opposites if nobody’s really sure which train is making that light at the end of the tunnel.

  40. the most intelligent column and list of comments I have seen here in ages. can’t see a hateful rant in the bunch . just intelligence. well done contributors

  41. >look at this this way. The big risk is deflation. Inflation is the opposite of deflation. Therefore inflation will cure deflation.

    Is there any reason to believe the people in charge won’t oversteer more and more with each successive attempt to correct the skid?

  42. I think the chicken little scenarios, e.g. “print/borrow jillions of dollars or the economy gets it” are completely false. It’s the printing/borrowing of jillions of dollars which has caused the weakness in the first place. The cure for problems caused by inflation – malinvestment in unproductive sectors – is not more inflation. The alternative to stimulus is to let the unproductive investments die and wither away so that the valuable factors of production – capital, land, machinery, workers, etc. – can find their way back into productive use.

    Only the free market is capable of determining which activities are unproductive and should be shut down or scaled back, and which activities are productive and deserve to be allocated more resources. If politicians and bureaucrats are allowed to decide what happens in the economy then they will act in the exact opposite of the public interest, because it is not in their interest to fix the economy and build up a strong free market economy. To do so would cause there to be very little need for welfare, stimulus, subsidies, protection, etc. (all the usual rackets) which would mean a loss of power, income and perks for the politicians and bureaucrats. Placing their faith in politicians and bureaucrats is therefore an economically suicidal policy for the vast majority of the citizens.

    Only the Austrian School economists and the financial planners who understand the Austrian business cycle theory predicted these problems. They realize that at any level of organization above a barter economy, money is the only possible way of measuring wealth. If central bankers like “Helicopter Ben” are allowed to play with the value of money by counterfeiting it at will and literally hosing it into the market as if it were confetti, then the yardstick is destroyed and nobody will be able to determine the value of anything any more.

    If nobody can measure the value of their paycheques, their savings, their investments, their real estate, their jobs, etc. because the value of money as a yardstick has been destroyed, then highly organized and productive business activities (the ones which depend on money for transactions made along the various stages of production) will cease and people will naturally revert to a relatively unproductive form of barter economy in which they earn very little, but at least they understand the value of what they earn. By this I mean, that farmers trade eggs for haircuts, taxi drivers are paid with bottles of liquor, labourers work for food, and so on. That is what a depression means. It means that governments have destroyed the value of and confidence in money, they exercise their monopoly on force to prevent any competing forms of money from being used and to prevent the foreclosure of non-performing assets, and until something cataclysmic happens (like a great war) they will do everything possible to hinder the rational restructuring of the economy which would happen if sound money existed. They do so because they benefit from poverty and chaos.

    That’s all you need to know about central banking, bailouts and stimulus.

  43. Mr Coyne
    I would like you to tell me why the Bank of Canda keeps lending financial institutions our tax dollars at a low rate. Is it so they can rip us off charging us 9-18% on plastic and other loans.
    Maybey its time the Bank of Canada lends directly to the taxpayer ( bypassing the banks).
    If the government does not take action on this gouging by the banks, I will remove as much of my money from the economy and encourage my family and friends to do the same thing. Mabey if a lot of us do not spend ( except for necessities) the economy will really tank and the government might take some positive steps for ordinary Canadians.
    Call me fed up.
    Thank you.

    • Bert, are you crazy? Nationalize the banks? Just because they’re doing it in the US, and the UK, and Japan, and Iceland, … oh never mind

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