Waxingandwayneing’s Weblog

April 29, 2008

Tax Stimulus Package as Viagra

Filed under: The Economy — waxingandwayneing @ 9:12 pm

Once the media started talking about the economy, the politicians figured they better do something about it. Instead of addressing the systemic problems of our financial affairs, our brilliant government decided to simply throw some cash at the problem. Our never ending thirst for “quick fixes” has yielded the economic stimulus package, where eligible Americans will get a check for $300 to $600.

According to the IRS,

“the vast majority of people who file a 2007 income tax return qualify, and many who don’t regularly file a tax return may qualify as well. You’re eligible if you have a valid Social Security Number (SSN), can’t be claimed as a dependent on a tax return and have either an income tax liability or “qualifying income” of at least $3,000. Qualifying income includes any combination of earned income and certain benefits from Social Security, Veterans Affairs or Railroad Retirement.”

Some 130 million households (75% of the country) will receive these payouts, costing us (not the federal government…they don’t pay taxes, we do!) $168 billion. The first checks will be mailed this week. And then what?

As reported by CBS, a CBS News/New York Times poll conducted over the weekend shows that,

“of those expecting a rebate, half say they plan to pay bills with the extra money, 27 percent say they will save or invest it and 18 percent plan to spend it.”

So, with 50% of those polled expecting to use this windfall to pay bills and another 27% saving or investing the rebate, how can we expect any stimulus from these checks?

One could argue that paying bills will help the economy, as it frees up credit to enable new purchases. Fair enough. Saving the money does grow deposits at banks providing them with funds to loan out, with a multiplier effect. Investing is not as clear, since buying a stock does not stimulate the economy, per se, except that it does enrich the seller of that stock who may then buy something that helps the economy.

What is unfortunate about this bailout scheme is that it was intended to be spent. Back in January when the stimulus package was being developed, Treasury Secretary Henry Paulson, said,

“There are no silver bullets. But…to give money to consumers, there’s plenty of evidence–you give money to people they’re gonna spend it.”

On the eve before the first checks enter the system, that doesn’t look like what will happen.

But let’s give the politicians the benefit of the doubt for a moment. Let’s assume (incorrectly) that these checks will all be spent in our economy. Best case scenario, every check is spent on new TV’s, refrigerators, bikes, lawnmowers, clothing, side of beef, DVD’s, or whatever. For precisely the length of time it takes the checks to work through the system (probably 6 months), retailers will enjoy spikes in sales.

So how does this help the economy? It clears out stale inventory; that’s a good thing. But does it cause new orders to be placed? Probably not. Retailers will very cautious in ordering new merchandise to support the new sales levels, because (and here is the big surprise) the sales peak is just a one-time shot. So the suppliers to the retailers will not feel any benefit from the rebates.

How will these checks create jobs? They won’t, at least not in the long-term. At best, employers will hire employees to handle the sales spike. That is great for those hired, but I would imagine the job growth will be marginal at best. And then, most of the temporary hires will get laid off. How lovely!

Doesn’t this economic stimulus package sound a lot like Viagra? If a man has erectile dysfunction, he has two basic choices. He can take Viagra (or a similar short-term pill) or cure the problem–either surgically or psychologically. I am not making any value judgment of those who have ED (although I am grateful I don’t have that problem!) Clearly, if a man chooses to take the magic blue pill, he will have put off worrying about his flaccidity for 4 hours or so. But when next he has an urge to “rise to the occasion”, he will have to pop another pill. Unfortunately for the man whose penis is in a recession, he will get no stimulation without medication.

Why is our economy any different? I may be a bit slow on the uptake, but I am not wrong about this. The rebate checks are a one-time benefit, no different than a rebate check you might get from a manufacturer. Once you spend it, it’s gone. Unless you can count on an endless supply of rebate checks, you are not going to make any long-term changes in your spending pattern.

The economic malady we are in now is deeply rooted, systemic. Quick fixes will provide, at best, a temporary respite from the realities of the problem. Pop that pill and delay the need for a long-term fix.

Unfortunately, the only thing our politicians know how to do is send us pills. And we simply swallow them.

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April 20, 2008

Put it Down….You’ve Had Enough

Filed under: The Meaning of Life — waxingandwayneing @ 11:36 pm

When I was kid, my mother used to tell me my eyes were bigger than my stomach.  I would regularly be unable to finish what was on my plate.  Wasting food was not good, she would tell me.  People are starving around the world.  Of course, she was right.

Today, we are faced with an economic crisis caused mainly by excessive consumption and greed.  For the past several years, Americans have been consuming well beyond what they really need, or, for that matter, beyond what they could really afford.

Propped up by artificial real estate prices and  baseless lending practices, consumers were presented with liquidity they did not deserve.  Shouldn’t we all have been a bit suspicious with advertisements for home loans at 100% of appraised value (leaving no cushion for error), or the 125% home equity loans promotions.  Why didn’t we demand  scrutiny when lenders were willing to do loans with no income verification or sign loan documents to borrowers that the lenderS knew did not understand what a rate reset would really mean.

This liquidity fuel artificially propped up the economy enabling most economists and legislators to believe we were in a healthy growth mode.  Once the pipeline of play money stopped last year, the engine started to sputter and the economy  faltered.  It seems to me that what is happening now is an economic slowdown that will caused a marked job loss and the need to evaluate what drivers really exist.  WE ARE IN A RECESSION.  Let’s just grow up and admit it.  This is not voodoo.  Saying the dreaded R word will not make us slipped further into this malaise; we are in it, so let’s now figure out what we have to do to get out of it.

One thing I feel we must do is tame our consumption.  We have been buying like a drunk sailor at a bar for so many years that we finally have to sober up and stop.  The time has come for someone to finally say, enough is enough.  Or, to steal a phrase from the Passover seder, Dayeinu!

As with any situation, the media loves to find a victim.  The poor borrower, lured into a loan he never should have signed.  Let’s bail him out.  Nonsense!  It’s wrong to bail people out of mistakes like this.  Certainly if any lenders violated lending laws, then that should be dealt with.  But for the government to bail out borrowers in loan foreclosures would set a bad precedence.  On top of that, we don’t have the money.  (We are pissing it away in Iraq!)

We also should not be providing any assistance to the lenders or equity holders of these loans.  Banks have never been able to assess risk properly.  Charging a couple of hundred basis points for a riskier borrower is the wrong way to compensate for higher risk.  Those extra percentage points hardly compensate the lender when the loan goes into default.  Yet, banks continue to price risk based on interest rates.  If we are going to throw any money at them, send them back to school to learn how to properly structure loans.

This recession should give all those affected a chance to evaluate what got us into this mess.  Years of greedy consumption paid for by resources we didn’t even own fueled our economy and allowed us to falsely believe everything was fine.  It’s now time to stop and evaluate what we truly have and what we can actually afford.  If you are making $50,000 a year, you cannot afford a $2,000 a month mortgage and the house that goes a long with it.  Do you really need that RV or to go on that 2 week vacation for $20,000 (financed by your home equity loan)?  NO!  Start to live within your true means and not in a “wanna be” world.

Like my mother used to say, “Put it down……you’ve had enough.”

April 12, 2008

Recession and Responsibility

Filed under: Ramblings — waxingandwayneing @ 1:11 am
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Just finished up my birthday.  Turning 50 is supposed to be dreadful, but, for me, it was exciting.  As long as I continue to act much younger, my actual age is not important.  But, enough about me; at least for now.

I want to use this blog to present my view on various topics that interest me.  I enjoy being controversial, so, if you wish, please get back in my face and challenge my thoughts.  I only ask that you do it with respect and good grammar.

Am I the only one that thinks most economists and politicians have no clue what financial mess we are have gotten ourselves into?  UCLA still believes we will not go into a recession.  And what is the phobia we have with the R-word?  Let’s just face the facts.  We lived for many years on resources we never really owned, propped up by unscrupulous lenders loaning money to people who never earned the right to own such nice homes.  While this was happening, we were selling boatloads of treasury securities to the Asian, mostly the Chinese, enabling interest rates to stay artificially low.  Unfortunately, all dreams come to an end.  But, in this case, the dream is replaced by a nightmare, th elikes of which we haven’t seen in our lifetimes.  Let’s just be frank:  We are in trouble.  We are going to experience a period of tough pain.  Artificial means to stimulate the economy, e.g., the brilliantly-conceived tax rebate plan, will do little to correct our financial problems long-term.  Sure, a $150 billion injection will create jobs, but for how long.  Until we deal with the core problems, the situation will remain.

I will revisit this topic later, but enough on this for tonight.

I continue to worry about the deteriorating state of our country’s morals.  I am hardly one in favor of the government legislating how we live, but living in a society that places no rules on behavior is just not working.  How did we get to a point where everyone has a right to pretty much do anything, for fear that we will offend people by saying “No.”  A combination of liberable judges, overly ambitious lawyers, and undeserving litigants has put fear in our society that dire consequences exist for anyone attempting to put boundaries aorund behavior.  The proverbial pendulum has swung too far, creating a society that no longer requires accountability and the need to “earn” rights. 

For too long we have simply handed benefits to people, creating a sense of entitlement that continues to expect more and more from its government.  As we head into this severe recession that will cripple governments’ ability to provide for us, I hope more of us will realize the importance of self-responsibility.  Let us help each other.  Make the road go both ways.

 

April 11, 2008

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Filed under: Uncategorized — waxingandwayneing @ 10:39 pm

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