McCain/Palin’s Economic Stimulus Plan

This post is written in response to the October 21st statement issued by the McCain/Palin campaign:

“We are deeply concerned about our nation’s economic outlook and will support measures that improve the outlook for American families. This economic crisis has its roots in the housing market and the most effective stimulus will be to reverse the cycle of foreclosure, neighborhood blight, and falling housing values. The American Homeownership Resurgence Plan is the best kind of stimulus.

“The Democrat-controlled Congress will likely propose additional measures. We do not believe that a national crisis should be taken as a license for wasteful spending or earmarked projects. Each new proposal must pass on the grounds that it is timely, effective in supporting business sales and job creation, and consistent with long-term fiscal discipline.

“In the past, raising taxes and cutting off international trade have only served to make hard economic times worse. We oppose harmful attempts to just ‘spread the wealth.’ Our job-creating economic plan is the best path for the economy and includes the types of policies that the Congress should consider.”

Prior to addressing the prospects of another economic stimulus plan, let’s review some of the steps that the Fed and Treasury have taken over the course of the last month:

1. Passed the 700bln TARP (Targeted Asset Repurchase Plan) which quickly shifted focus to direct injection of equity into 9 of the largest banks (Citi, JP Morgan Chase, Bank of America, Goldman Sachs, Morgan Stanley, Wells Fargo, Bank of New York, State St….who did I miss? extra piece of Halloween candy for whomever can tell me). They took this direct injection of equity on the heels of the U.K and Europe taking that approach and in certain cases fully nationalizing some of their banks.

2. Backstopped Money Market Funds…

3. Backstopped the Commercial Paper market….

4. Backstopped senior bank debt….

5. Cut the fed Funds rate to 1.5% and likely to cut it again next week…..

Fed Chairman Bernanke publicly pronounced that he and the government “will not stand down” in the face of this crisis.

Well, that is a TREMENDOUS amount of ammo that has been unloaded onto our banking system and with foreign governments using similar ammo, this assault is nothing short of true “Shock and Awe”.

These steps do not come without a price, though, both in terms of future debts, moral hazards, and stunting future growth. That said, there was no alternative.

Believe me, without these steps there would have been runs on banks, a significant number of bank failures already, and panic in the markets/streets.

That said, what these steps have done is buy time so that the banking system can generate revenues over the next few years to both write down and realize losses that are currently on their books but which if were currently acknowledged would have rendered certain banks as already bankrupt. (To wit, Goldman Sachs came out today and said that they do not expect Citigroup to make a profit until the second half of 2009…Goldman is being kind. )

Throughout all of the above steps, we all heard Secretary Paulson and Fed Chair Paulson say that every step was done not for Wall St. but truly for Main St.. Well, in times like these we are all Americans but still there are many in our country who view the above measures as more of a Wall St. bailout than anything else.

Truth be told, we all know that the TARP was a very difficult bill to pass because many consumers and homeowners especially did not see how it would benefit them. Many Congressmen from both sides of the aisle knew that voting for that bill ran headlong in the face of what their constituents were telling them.

Fast forward to today a mere few weeks before the national election, and our legislative leaders are trying to pass a $150bln economic stimulus package for the good of our economy.

Sounds reasonable, right? I mean what’s another $150bln when you just spent $700bln. Plus why do the Fed and Treasury get to have all the fun? They’re not up for reelection. Congress is the one that needs the political cover and wants to bring home some presents in hopes of capturing a few more votes. I view this package as much more of a political move than an economic one AT THIS TIME.

Why do I think this is the wrong move at this time and is not properly focused?

1. We had a 100bln+ stimulus package last Spring to support the economy. What did it get us? A bump in retail sales for a month and not even a thank you. (remember, for so many in America, “when the going gets tough, the tough go shopping …”)

2. We just committed hundreds of billions into the economy. We are seeing growth in the money supply as evidenced by the Leading Economic Indicators just this morning. Let these steps work their way through the system.

3. The highlights in this package are focused on 1. extending unemployment benefits 2. infrastructure 3. debate over tax cuts vs spending increases. There are merits to all of these but let me tell you, at this point in time, things are going to get worse and perhaps a lot worse before they get better.

The unemployment rate is now at 6.1% and will likely move to at least 7%, and perhaps 8% if not higher. If we did not spend that $100+ billion last spring, we could have used it now and nobody would have noticed. At some point, we need some degree of fiscal discipline!!!

I strongly believe that they should save this ammo for later, while they should focus on the core issue and that is HOUSING!!

The two people in government who are truly focused on housing are the current chair of the FDIC, Sheila Bair and John McCain. Housing is and always has been the crux of our problems. While the delivering in our housing markets is painful it is necessary in order to have our economy bottom out before rebounding. While every “doctor” has his own prescription for addressing our pain, it is John McCain and now Sheila Bair who are focused on addressing the real issue.

Given the size and scope of our housing market, there is no one size fits all cure. That said, John McCain has displayed the courage to stand up and take the heat for pointing out that we need to fully focus on this. BO (Johnny come lately) chimed in after John that addressing housing and delaying withdrawal penalties on 401Ks (another McCain idea) should both be addressed.

I would put forth three proposals. Depending on the nature of the borrower, the lender, and the particular housing market, it can be determined which proposal is most appropriate.

1. McCain plan of buying up “delinquent but not yet foreclosed mortgages” and then renegotiating with the borrower to buy down the rate. This incurs taxpayer expense right now with capital having already been allocated through the TARP and forces lender to recognize some sort of loss. Reality is the loss is there, whether the lender wants to acknowledge it or not.

2. Provide tax incentives and attractive financing terms for private capital to enter the market and buy homes that have already been foreclosed. This brings real money into the system to support the market while costing the government future revenue.

3. Freedom Recovery Plan, explained in a NY Times story.

I think this idea is ingenious because it has the current homeowner who is either delinquent on their mortgage or has already defaulted give up the deed to their home to the lender in return for a market rate rent (most rents nationwide are typically 60-70% of the cost of a mortgage) while having the option to repurchase the home in 5 years from the lender. No government expense. Homes are kept off the market. Lenders do need to accept the fact that they will receive less in rent than mortgage thus they recognize a loss. Homeowners need to accept the fact that they cede the deed to the lender. All of these are realities now anyway.

Housing is the issue that needs to be addressed. John McCain and Sarah Palin know it.

The stimulus package is POLITICAL at this juncture. Save that ammo for later when we will need it. Bush has no political leverage. Bernanke is looking for cover, a partner in the process, and don’t discount that he is hedging himself in case BO is elected.

COUNTRY FIRST!!!