*sigh* I've been asked to write a 700 word article about the stimulus
This isn't it. I'm just thinking.
So Congress just passed a $787 billion stimulus package, with 24% spending (infrastructure), 38% tax cuts, 38% aid (medicaid, schools, unemployment, student aid). This is all being added to the national debt, which we're going to have to pay back with interest, probably to China, 10-30 years down the road.
It's not big enough.
*rests head on desk for a few minutes*
So it's probably going to take another trillion or two to unclog the financial sector, and probably another three quarters trillion to unlock the economy. That's a cool, interest-adjusted $30,000 per American family in additional debt.
*puts head back on desk again*
The problem, in a nutshell, is that when the tech bubble burst, all that money had to go somewhere. Really low interest rates and preferential tax treatment made housing particularly attractive, and as the money poured in, values inflated. People then began treating houses as an investment, rather than an expense, and bought more than they could afford assuming they would keep rising. Banks offered terms that were ridiculously loose for lending, increasing their risk. On the other hand, they didn't directly face the risk because they could package mortgages into things called tranches and sell them as securities to be bought and sold on the open market. Credit agencies then rated these tranches as "super safe" even though they were risky, and so holders of these tranches could borrow a lot of money against them at good interest rates even though they might not be worth that. Also, insurers could insure that the tranches had value even though they didn't have to actually put up any collateral in case the loans couldn't be paid back.
So the housing bubble burst. Suddenly, the tranches aren't worth as much. This means all the money borrowed against the tranches is unlikely to be paid back. Banks don't know if their loans are coming back, so they quit making new ones. Businesses lay people off. Incomes fall. People buy less houses. Home prices fall more. We have our downward spiral.
Setting aside all the tenuous strands people try and connect in order to blame one political party or another, the perpetrators are a combination of stupid borrowers, stupid lenders, and a regulatory system that completely failed to conduct proper oversight. Fair enough. Most people would agree, of course, that these are the people who should pay for their errors.
The problem is that the stupid borrowers are broke, so we can't get it from them. The stupid lenders have leveraged the assets of responsible people against the debt, so they're going to take us down with them. We pretty much sent the only signal we can regarding the stupid government, which is to kick the bums out. We'll see how the new bums do.
Anyway, the fact the stupid lenders are going to take us with them is why our hands are sort of tied when it comes to just letting the free-market correct itself. The free market will correct itself, but it's going to take a depression to do so. Maybe not a Great depression, but I can easily see 13-15% unemployment (we went over 25% in the depression, but our worst recessions have only seen 10%) persisting for a long period of time if we don't do something, and looming in the background is the fact that oil prices are going to come back up, because the price rise is supply driven and our demand decrease is just a reprieve, and the fact we really do need to invest in some environmental mitigation strategies.
This leaves us, really, with only one really horrible, obnoxious option, in two parts.
1) A bail-out, where we're going to have to come up with some strategy that nets out to handing out all the money people lost on their houses, because unbelievable amounts of personal and commercial debt are leveraged against them. We can do this by buying mortgages and selling the house back at the current value and eating the losses, or continuing to shower banks with money. All these are incredibly infuriating.
2) Good old fashioned Keynesian intervention.
Total Output = Consumption + Investment + Government Spending + Exports - Imports. Interest rates are basically zero, so we've juiced investment as much as we can. We can cut taxes to raise consumption, and increase government spending to raise that component. *eyes first paragraph* And there's our stimulus.
Unfortunately, it appears we're looking at an amazing shortfall that's probably going to take an even bigger stimulus to get the economy going. Even better, every million jobs we save NOW is going to cost us a couple hundred thousand jobs in the long run because we're crowding out future investment with debt we have to pay back.
So we have two options:
A) Burn baby burn for the entire economy.
B) Transfer a few trillion dollars to morons and reset the system.
Happy Valentine's Day.
P.S. For Americans, I advise the use of a Roth IRA, where you pay taxes now on retirement contributions and pull them out tax free later. Why? Because tax rates in the future are going to be amazing in order to pay for all this shit.
So Congress just passed a $787 billion stimulus package, with 24% spending (infrastructure), 38% tax cuts, 38% aid (medicaid, schools, unemployment, student aid). This is all being added to the national debt, which we're going to have to pay back with interest, probably to China, 10-30 years down the road.
It's not big enough.
*rests head on desk for a few minutes*
So it's probably going to take another trillion or two to unclog the financial sector, and probably another three quarters trillion to unlock the economy. That's a cool, interest-adjusted $30,000 per American family in additional debt.
*puts head back on desk again*
The problem, in a nutshell, is that when the tech bubble burst, all that money had to go somewhere. Really low interest rates and preferential tax treatment made housing particularly attractive, and as the money poured in, values inflated. People then began treating houses as an investment, rather than an expense, and bought more than they could afford assuming they would keep rising. Banks offered terms that were ridiculously loose for lending, increasing their risk. On the other hand, they didn't directly face the risk because they could package mortgages into things called tranches and sell them as securities to be bought and sold on the open market. Credit agencies then rated these tranches as "super safe" even though they were risky, and so holders of these tranches could borrow a lot of money against them at good interest rates even though they might not be worth that. Also, insurers could insure that the tranches had value even though they didn't have to actually put up any collateral in case the loans couldn't be paid back.
So the housing bubble burst. Suddenly, the tranches aren't worth as much. This means all the money borrowed against the tranches is unlikely to be paid back. Banks don't know if their loans are coming back, so they quit making new ones. Businesses lay people off. Incomes fall. People buy less houses. Home prices fall more. We have our downward spiral.
Setting aside all the tenuous strands people try and connect in order to blame one political party or another, the perpetrators are a combination of stupid borrowers, stupid lenders, and a regulatory system that completely failed to conduct proper oversight. Fair enough. Most people would agree, of course, that these are the people who should pay for their errors.
The problem is that the stupid borrowers are broke, so we can't get it from them. The stupid lenders have leveraged the assets of responsible people against the debt, so they're going to take us down with them. We pretty much sent the only signal we can regarding the stupid government, which is to kick the bums out. We'll see how the new bums do.
Anyway, the fact the stupid lenders are going to take us with them is why our hands are sort of tied when it comes to just letting the free-market correct itself. The free market will correct itself, but it's going to take a depression to do so. Maybe not a Great depression, but I can easily see 13-15% unemployment (we went over 25% in the depression, but our worst recessions have only seen 10%) persisting for a long period of time if we don't do something, and looming in the background is the fact that oil prices are going to come back up, because the price rise is supply driven and our demand decrease is just a reprieve, and the fact we really do need to invest in some environmental mitigation strategies.
This leaves us, really, with only one really horrible, obnoxious option, in two parts.
1) A bail-out, where we're going to have to come up with some strategy that nets out to handing out all the money people lost on their houses, because unbelievable amounts of personal and commercial debt are leveraged against them. We can do this by buying mortgages and selling the house back at the current value and eating the losses, or continuing to shower banks with money. All these are incredibly infuriating.
2) Good old fashioned Keynesian intervention.
Total Output = Consumption + Investment + Government Spending + Exports - Imports. Interest rates are basically zero, so we've juiced investment as much as we can. We can cut taxes to raise consumption, and increase government spending to raise that component. *eyes first paragraph* And there's our stimulus.
Unfortunately, it appears we're looking at an amazing shortfall that's probably going to take an even bigger stimulus to get the economy going. Even better, every million jobs we save NOW is going to cost us a couple hundred thousand jobs in the long run because we're crowding out future investment with debt we have to pay back.
So we have two options:
A) Burn baby burn for the entire economy.
B) Transfer a few trillion dollars to morons and reset the system.
Happy Valentine's Day.
P.S. For Americans, I advise the use of a Roth IRA, where you pay taxes now on retirement contributions and pull them out tax free later. Why? Because tax rates in the future are going to be amazing in order to pay for all this shit.