My Stupid Stimulus Bill - What's wrong with it?

[drkitten]

In particular, there's a part that starts at about 35 minutes into it about household debt. Here's the chart they're talking about:

Maybe the problem is that regular people are too deeply in debt, and so what they need to do is to start paying down the principle on their debt.

That's one of those irrelevant charts that keeps popping up despite the fact that it doesn't measure anything. (Compare the stock price vs. number of pirates chart beloved of the FSM devotees.)

There's nothing wrong with being in debt as long as you can pay it off. Most of the rise of household debt over the past ten years is, of course, the housing bubble --- but there's nothing wrong with having a huge housing debt if the value is sustainable and the payments are manageable. I was lucky; I bought my house for less than a year's salary. Most people are not that lucky and pay way more than a single year's salary for their house --- but at the same time, they can also take thirty years to repay, which means that unless they suffer a tremendous drop in income, they can comfortably repay the mortgage.

 

[Bjorn]

Americans have been spending more than they were making for quite a few years. It was paid for by credit(cards), and more often during the housing boom by taking out equity from homes to spend on something that would have no long-time value or would depriciate fast - cars, holidays, meals, clothes.

House prices have come down. Credit card companies are starting to demand some money back. Lines of credit are being cut.

If we think that we, in the long run, can't spend more than we make, I cannot see how giving people more money (that they don't make) to spend is going to save the economy.

Yes, if we give people more money they will shop more, but we are just postponing the moment when we have to .... spend a lot less. The more spending incentives we give to people who are already overspending, the worse the crisis will become.

If we have to spend 10% less than we have been, then the real economy will shrink by 10%.

That's just my 1.8 cent opinion.

 

[Puppycow]

That's one of those irrelevant charts that keeps popping up despite the fact that it doesn't measure anything. (Compare the stock price vs. number of pirates chart beloved of the FSM devotees.)

You would have us believe that recent spate of news reports of Somali pirates coinciding with the start of a bear market is just a coincidence?

There's nothing wrong with being in debt as long as you can pay it off. Most of the rise of household debt over the past ten years is, of course, the housing bubble --- but there's nothing wrong with having a huge housing debt if the value is sustainable and the payments are manageable.

Well, duh. The if clause is what I am concerned about. Can consumers continue to pay their debts in the current economic downturn? Or did too many of them bite off more than they can chew?

According to this, maybe it's not so bad.

I won't claim to know the answer, but the hypothesis makes more sense to me than the pirate one.

 

[Puppycow]

Americans have been spending more than they were making for quite a few years. It was paid for by credit(cards), and more often during the housing boom by taking out equity from homes to spend on something that would have no long-time value or would depriciate fast - cars, holidays, meals, clothes.

House prices have come down. Credit card companies are starting to demand some money back. Lines of credit are being cut.

If we think that we, in the long run, can't spend more than we make, I cannot see how giving people more money (that they don't make) to spend is going to save the economy.

Yes, if we give people more money they will shop more, but we are just postponing the moment when we have to .... spend a lot less. The more spending incentives we give to people who are already overspending, the worse the crisis will become.

If we have to spend 10% less than we have been, then the real economy will shrink by 10%.

That's just my 1.8 cent opinion.

It would be nice though if for a change our trading partners spent more money and saved less. Then Americans could save more but the export sector could still hire more workers at the same time. I happen to think that it would be a good thing in the long run if trade was more balanced and people in different countries had similar levels of savings. I'm very pro-trade, but I'm also for letting currencies rise and fall with the market so that trade will naturally balance out in the long run.

 

[kevinquinnyo]

Hmmm Lemme think.

If it made sense to take penicillin, shouldn't we be doing it all the time?

Answer -- no. It makes sense to take penicillin when we're sick, and specifically when we have some sort of bacterial infection that can be treated by penicillin. If we take penicillin routinely, like candy, that will actually make us worse off (and make all the nasty germs penicillin-resistant).

If it made sense to wear bikinis, shouldn't we be doing it all the time? Not in the dead of winter....

Inflationary measures make sense when the economy is at risk of deflation. Deflationary measures make sense when the economy is at risk of inflation. "To every thing, turn, turn, turn, there is a season, turn, turn, turn, and a time to every purpose under heaven."

All the pundits and politicians were saying this will probably turn a profit eventually....

That's what I was referring to.

Remember that Big Dig Boston Tunnel project? That was planned wayyyy in advance, and I think it was supposed to cost 2 billion dollars, and now the estimated final cost with interest is 22 billion dollars.

So how much are we going to lose on a 1000 billion dollars that had maybe a month or two of planning involved?

You know, just sayin is all

 

[Meadmaker]

Okay, several problems. In no particular order:

I actually agree with all your points, but I'm going to play devil's advocate for the moment.

* Money is fungible; just because I can't spend this $100 on anything but clothes doesn't mean that I will spend $100 more on clothes.

Let's consider three types of citizen. First, there are the good people of America who are out stimulating the economy at a breakneck pace every day. This plan won't affect them, except maybe some minor inconvenience. They're already spending their money.

Then there are the people who could be spending money, but aren't. These miscreants are making more than the minimum payments on their credit cards every single month. Some of them, astonishing as it may seem, have no debt at all, and they could be buying a Grande at Starbucks dressed in their brand new shoes, but are opening savings accounts! It is this class of non-consuming consumer that the Stupid Stimulus Plan is aimed at.

Finally, there are people who just can't pay their bills anyway. This plan will force them into bankruptcy, at which point those bills will be wiped away. In the meantime, they'll at least buy some stuff, and that creates jobs. And those jobs give paychecks to workers, who will buy stuff, and create more jobs.

So, your point is correct, but the Stupid Stimulus Plan will increase demand, just not on a dollar for dollar level.

* It would be quite expensive to carry out (cards and postage aren't free); while spending money is a goal of the stimulus plan, that doesn't mean it should be done stupidly.

True, but not much more expensive than the other stimulus plans.

in a way that creates long-term jobs and longer-term infrastructure. Spending $100,000 to create or repair a bridge means that you now have a bridge you didn't before,

Let me come back to this one in a minute.

The money behind the stimulus cards would still have to come from somewhere (i.e. long-term debt).

True, but it wouldn't increase national debt. The money would come from the paychecks. Basically, the Stupid Stimulus Plan is a way of requiring people to spend money on unnecessary goods which they might be otherwise inclined to save or use to pay down debt.



OK. Enough Devil's advocate for the moment. In truth, I think that the real problem with the Stupid Stimulus Plan starts with your first point, but your first point doesn't go far enough. Money is indeed fungible, which means moving it from one place to another doesn't matter. The Bush stimulus plan didn't work because it moved money from here to there. (Treasury to taxpayers) However, since the Treasury was spending more than we were taking in, that fungible money was pulled from somewhere else. No real gain.

The Obama plan is only slightly better, and only maybe slightly better. It still moves a bunch of money from here to there, pulling it out of the economy in one place and injecting it into someplace else. The one advantage it has is due to that point I said I would get back to. At least with the Obama plan, we get a bridge. Assuming we need a bridge, that's a good thing. It takes idle people and gets them working. To the extent that they are doing something of value, it stimulates the economy, by making things we actually want.

Building a Bridge to Nowhere would employ just as many people, and move just as much money from here to there, as building a useful bridge, but at the end of the project, one of them creates a bridge.

The real problem with the Stupid Stimulus Plan is its premise. Its premise is that if only people would start spending, and borrowing, money, everything would be ok. The premise is that the problem is lack of demand. I don;t think that's it. I think there's plenty of demand. The real problem is that we are in debt up to our ears. Our national debt is staggering, and our personal debts are staggering. Finally, those bills are coming due, and we can't afford to buy more stuff.

The Stupid Stimulus Plan has the same problem that the Bush plan had. It pretended that the economy would take off if only we moved money from here to there. It pretended that the problem with the economy was that people just weren't spending enough money. That wasn't it, and it failed. The Obama plan has some virtue in that it is spending money on things that are worthwhile, but its benefits, I think, are overrated. That's because money is fungible, and that money has to come from somewhere, and whereever it came from, it could have been spent on stuff other than bridges. So, if any of it is spent on stuff that no one wants, that portion is a total waste.

That's enough for the moment.

 

[Meadmaker]

I actually don't think there's a big problem when people use their stimulus checks to pay bills or credit card debt, or even put it in a savings account. Sure, it doesn't stimulate the economy in the short term, but if it helps keep more people from going bankrupt it helps in the long term.

....

Maybe the problem is that regular people are too deeply in debt, and so what they need to do is to start paying down the principle on their debt. Economic pain may be unavoidable and trying to defer that pain by propping up the consumer will only make it worse in the long run.

Exactly. However, in fact, it even stimulates the economy in the short term. That money in savings accounts is what is lent out. I saw it in "It's a Wonderful Life" so it must be true. My money is in John's house and Fred's house, and Bob's wide screen TV...etc. If I hadn't saved that money, they couldn't have borrowed the money for their stuff.

The money doesn't vanish just because I save it. Also, if I use it to pay down debt, that's a good thing. Banks have to keep a certain amount of reserves. Once they've lent out all the money they can, they can't lend more until someone pays some of it back. Me paying back my debt allows the bank to lend it to someone else.

If anyone really thinks that the problem is finding a way to get people to spend money, then by all means enact the Stupid Stimulus Plan. If not, could you show me how your stimulus plan is better than the Stupid plan?

 

[Meadmaker]

You would have us believe that recent spate of news reports of Somali pirates coinciding with the start of a bear market is just a coincidence?

 

[drkitten]

The real problem with the Stupid Stimulus Plan is its premise. Its premise is that if only people would start spending, and borrowing, money, everything would be ok. The premise is that the problem is lack of demand. I don;t think that's it. I think there's plenty of demand. The real problem is that we are in debt up to our ears.

Actually,.... no.

The problem really is a lack of demand, or more accurately, a lack of demand for "risky" investments.

You can see that in the yields of things like T-bills, which for a while a few months ago were actually negative. People were so scared of losing more money in the stock market or the corporate bond market, they were willing to buy T-bills at a loss, and thereby guarantee themselves of losing a little bit of money, to avoid the risk of losing any more money through more conventional profit-making instruments.

The Obama plan has some virtue in that it is spending money on things that are worthwhile, but its benefits, I think, are overrated. That's because money is fungible, and that money has to come from somewhere, and whereever it came from, it could have been spent on stuff other than bridges. So, if any of it is spent on stuff that no one wants, that portion is a total waste.

Well, the question, of course, is whether what people "want" (as measured by the market) is really what is good for the country/economy. (The free market theologians, of course, don't understand the distinction, but they also don't understand the idea of a "bubble," which is a classic example of irrational wants.)

The government can shift externalities -- or simply spend money outright -- to make sure that the "needs" are funded as well as the "wants." What people seem to "want" right now are T-bills. What the economy needs right now is commercial credit. It makes sense, then, for the government to pour money (which is got from selling T-bills) into the commercial credit market and make sure that businesses have loans available.

 

[drkitten]

Exactly. However, in fact, it even stimulates the economy in the short term. That money in savings accounts is what is lent out.

You've just identified part of the problem.

The money in savings accounts isn't being lent out, because the banks are so risk-averse right now they're not willing to lend to anyone who actually has a use for the money.

This is stupid, yes. But there are enough bankruptcies and foreclosures and what-not that the banks consider the risk of not being paid back, even for "good" clients, to be unacceptably high, and as a result, people are seeing credit line dry up.

The money doesn't vanish just because I save it.

It doesn't vanish. But it stops circulating, because it's not being lent out --- and money that isn't in motion might as well vanish.

 

[Meadmaker]

You've just identified part of the problem.

The money in savings accounts isn't being lent out, because the banks are so risk-averse right now they're not willing to lend to anyone who actually has a use for the money.

I've heard that part of the story, and I can't be certain that it is wrong, but I don't believe it. I think it's a misinterpretation. I don't think banks are any more risk averse than they were last year. I think that what is happening is that they have now correctly identified the risks, whereas last year they failed to do so. They were always risk averse, but last year they felt that anything backed by a house was a low risk investment. This stretched from home equity lines to CDOs. Not only that, but if a bank held a share of that CDO, anything that used the CDO as collateral was low risk.

Sadly, they got the risk estimate totally and completely wrong. Now, they have it correct, and they aren't lending any money to anyone who can't demonstrate an ability to pay it back. That's good behavior on their part. Unfortunately, everyone has a bunch of old debts they have to pay off, such as upside down mortgages that they can't really afford. That makes all lending risky. It's risky to lend money to people who already owe more than they can afford.

Even bank to bank lending is risky, because bank assets were largely in the form of IOUs. That's really what a bond is, right? A mortgage backed security is a share in a whole bunch of IOUs, but they were calling it money a while back. (i.e. if I hold a bond in my brokerage account, and I do, my statement says I have money. Not really. I have a promise from a company that they will give me money later. As long as the risk estimate is correct, that's accounted for in the value of my brokerage statement, but last year, the risk estimate was wrong.)

It doesn't vanish. But it stops circulating, because it's not being lent out --- and money that isn't in motion might as well vanish.

And this is the part I'm not seeing. I'm not seeing the money that is not in motion. Where is this money?

Back when Keynes made up his ideas, there were people keeping currency in mattresses, or so I'm told. Banks, fearing a run, may also have been keeping more than necessary in reserve, which kept that money from circulating. Today, where is the noncirculating money? Unless I miss my guess, the closest thing to non-circulating money that exists now is a T-Bill. Obama's plan creates a whole lot of those T-Bills. I really wonder if we are creating a virtual mattress.

 

[drkitten]

I've heard that part of the story, and I can't be certain that it is wrong, but I don't believe it. I think it's a misinterpretation. I don't think banks are any more risk averse than they were last year. I think that what is happening is that they have now correctly identified the risks, whereas last year they failed to do so.

No, because if this were the case, they wouldn't be pulling existing lines of credit.

For example, the amount of money available to auto dealerships has dropped dramatically, much more than the amount that sales themselves have dropped. Auto dealerships, of course, are among the most loan-intensive businesses there are; not only do the customers themselves need loans to buy the product, but most of the cars on the lot are actually paid for by short-term loans that the dealers take out and repay when the cars are sold. (Very few dealers "own" any substantial fraction of the cars on their lot).

But this is true all over all industries; even relatively profitable companies are finding that the lines of credit that they've held, in many cases for decades, are being scaled down and withdrawn by the banks from which they've held them -- and new ones are not being made available.

Sadly, they got the risk estimate totally and completely wrong. Now, they have it correct,

That's where you and most economists disagree; they believe that the banks have swung too far and are assessing the risks too greatly. This is supported, as I said, by the negative return on T-bills, at the same time that high-grade corporate loans are unavailable. Heck, there is an article on the New York Times today about how other government bonds are in free-fall because investors are flocking to the safety of T-bills.

And this is the part I'm not seeing. I'm not seeing the money that is not in motion. Where is this money?

Cash reserves and Treasury obligations. Money that the bank has but is not making available.

Unless I miss my guess, the closest thing to non-circulating money that exists now is a T-Bill.

Yup.

 

[Meadmaker]

No, because if this were the case, they wouldn't be pulling existing lines of credit.

For example, the amount of money available to auto dealerships has dropped dramatically, ....

I'm not so sure, but it seems to me that lending less to an auto dealership seems rather prudent this year. Sales won't drop to zero, but there are plenty of dealerships that are expected to go bankrupt this year.

But this is true all over all industries; even relatively profitable companies are finding that the lines of credit that they've held, in many cases for decades, are being scaled down and withdrawn by the banks from which they've held them -- and new ones are not being made available.

You may be right. Certainly I have no information to contradict this view, but I don't have any to confirm it, either, and it strikes me as very odd behavior. Banks don't make money if they don't make loans, and then they stop being banks and bankers have to get real jobs. They certainly don't want that, so it seems to me there must be some reason why they think there is more risk with the loan this year than last.

That's where you and most economists disagree; they believe that the banks have swung too far and are assessing the risks too greatly.

Well, I suppose I would be more inclined to agree with "most economists" than with some guy on the internet. (On the other hand, if most economists disagree, I'm inclined to think that the ones who do agree with me are the ones who are right.)

Cash reserves and Treasury obligations. Money that the bank has but is not making available.

Is there any measure of the level of cash reserves available today, compared with historical averages?

 

[The_Animus]

But this is true all over all industries; even relatively profitable companies are finding that the lines of credit that they've held, in many cases for decades, are being scaled down and withdrawn by the banks from which they've held them -- and new ones are not being made available.

You are saying banks are scaling down or withdrawing credit to people who have been in good standing and paying back debts reliably for decades. This makes negative sense to me. If this is the case why are we bailing out the banks? Are they even banks anymore if this is happening? I mean part of what makes a bank a bank is lending money out to people/businesses in order to make money on interest. If they don't lend to people who have a good history of making payments what the hell do we need them for at all?

I did hear about this one place called Jim's Bank. Apparently what makes it different from other banks is that other banks are banks.

 

[drkitten]

You are saying banks are scaling down or withdrawing credit to people who have been in good standing and paying back debts reliably for decades. This makes negative sense to me.

They're trying to build up (short-term) cash reserves against the possibility that they're overextended on their existing loans.

Suppose that I have iron-clad credit and collateral for a million dollar loan, and I'll pay back two million over the next ten years. Under "normal" circumstances, this would be a great investment. But if you make it, and then it turns you that you need the million dollars next week, then you won't be in business long enough to collect my two million.

Lending money makes you wealthy in the long run. Banks, right now, are overestimating their short-term risks, to the point where they are turning down long-term profit.

If this is the case why are we bailing out the banks?

Because if they had "normal"-sized cash reserves, they would (in theory) be able to absorb the losses. And so the bailout is supposed to allow them to return to normalcy.

 

[The_Animus]

Because if they had "normal"-sized cash reserves, they would (in theory) be able to absorb the losses. And so the bailout is supposed to allow them to return to normalcy.

They already know they are getting bailout money for this very reason. Which brings us back to why they won't loan out money on good investments knowing that they are getting bailout money to cover losses.

 

[Meadmaker]

Because if they had "normal"-sized cash reserves, they would (in theory) be able to absorb the losses. And so the bailout is supposed to allow them to return to normalcy.

But...they have lower than normal cash reserves? If that's the case, then their money isn't sitting idle. It has already been loaned.

 

[drkitten]

But...they have lower than normal cash reserves? If that's the case, then their money isn't sitting idle. It has already been loaned.

Right. IT HAS ALREADY BEEN LOANED, which is why they are no longer making new loans. (And actually, they are typically sitting on larger-than-normal cash reserves, because they have larger-than-normal expectations of loan failure.) So they're reducing the available credit, by refusing to renew existing lines-of-credit and refusing to issue new loans as the old ones are paid off.

 

[Meadmaker]

Right. IT HAS ALREADY BEEN LOANED, which is why they are no longer making new loans. (And actually, they are typically sitting on larger-than-normal cash reserves, because they have larger-than-normal expectations of loan failure.) So they're reducing the available credit, by refusing to renew existing lines-of-credit and refusing to issue new loans as the old ones are paid off.

So, it's not that they are risk averse. The problem is that either

a) the people they would normally loan to can't pay them back or
b) the people they have already loaned to didn't pay them back, so they don't have any money.


The premise of the Stupid Stimulus Plan is that people need some sort of incentive to spend money. That's wrong. People are willing to spend all the money they have, and more. That's what makes the Stupid Plan stupid.

Unfortunately, it's the same premise in the Bush Stimulus Plan. The Bush plan may as well have been the Stupid Stimulus Plan. It's the same premise in any tax cut based plan, which is why they are stupid. Then there's the Obama plan. That's not quite as stupid, because at least it builds bridges, but there's a premise in it that there's a bunch of money sitting around doing nothing, and we really need to get it moving again. There's the false premise. There is no money sitting around doing nothing. It's true that banks aren't lending, but that isn't because they suddenly became afraid of being banks. They stopped lending because people stopped paying them back.

Meanwhile, Obama's plan is to create a gigantic virtual mattress where people can safely horde their money, but where the government, and only the government, can pull it out and use it to fund projects. That's not Stupid with a capital S, but it also doesn't provide a free lunch. If there were no government supplied mattress, people and institutions would be forced to either literally put currency in their mattresses, or make it available to the next safest alternative to the government, which would mean making it available to some form of business activity.

 

[drkitten]

So, it's not that they are risk averse. The problem is that either

a) the people they would normally loan to can't pay them back or
b) the people they have already loaned to didn't pay them back, so they don't have any money.

No. The problem is

c) the people they would normally loan to, who (demonstrably) can pay them back, are not being loaned to because the banks are unwilling to take the risk that they will not be paid back.

I don't see why you're so quick to agree that the banks have systematically underestimated the risk, but you insist that now they are accurately estimating the risk instead of systematically overestimating it.

The premise of the Stupid Stimulus Plan is that people need some sort of incentive to spend money.

More accurately, that people need some sort of incentive to spend money productively, instead of burying it in mattresses and T-bills.

Which is demonstrably correct. The demand for T-bills has skyrocketed, out of all historical proportions, while the demand for other sensible (and productive) investments has dropped like a paralyzed falcon.

Meanwhile, Obama's plan is to create a gigantic virtual mattress where people can safely horde their money, but where the government, and only the government, can pull it out and use it to fund projects.

No, what he's doing is he's taking the money that people want to put into the gigantic virtual mattress and putting it to use on the infrastructure.

If there were no government supplied mattress, people and institutions would be forced to either literally put currency in their mattresses, or make it available to the next safest alternative to the government, which would mean making it available to some form of business activity.

Yes. And all the evidence we have suggests that people are so risk-averse at the moment that they would literally be putting it into mattresses.

I also think you overestimate our ability to eliminate the "government supplied mattress," as you put it. Treasury securities have been around, literally, for centuries, and we can't just call them in. (First, we don't have the money, and second, that would be a stupid thing.) If Obama weren't enlarging the mattress, then we'd simply see the demand outstrip the supply and create another bubble as people irrationally demanded Treasury securities at any price --- and then a whole new group of people would be left holding the bag. (You'll note that the yield is no longer negative, in part because there are now more securities available, so the price has gone down and the yield up.)