The Stimulus Package: A Mixed Bag with Limited Potential Impact

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 |  Includes: FMCC, FMN
by: Markham Lee

Congress has reached an agreement on the “economic stimulus package,” and the results were released to the public on Friday, since my high level thoughts on the measure haven’t changed, I'll look at the specifics of the plan and comment on those instead.

  • Including more lower income tax payers in the plan and phasing out higher income tax payers is a positive, but if you want to stimulate the economy you need to focus on people who are barely making ends meet not those operating at a surplus.
  • I roundly disagree with raising the mortgage GSE purchase limits on mortgages, for no other reason that despite being publicly traded companies, Fannie Mae (NYSE:FMN) and Freddie Mac (FRE), have the implied backing of the federal government. The government shouldn’t be providing implied subsidies to the top 2-5% of the population in order to enable them to purchase homes. Having to purchase a $400k home instead of a $600k one is NOT a hardship. If the government is interested in helping the mortgage market, they should just make it easier for loans taken on by average people to get FHA backing and/or sold to the GSEs, not a small portion of the market.
  • I’m not sure what impact the measures to allow small businesses to write off more expenses and encourage equipment purchases will have, business health (profits, cash flow, etc) drive purchasing decisions more so than tax treatment in many cases. In my opinion, if businesses feel as if they’re struggling, lower taxes aren't going to encourage much spending. The same is true for businesses in general, I don’t foresee companies running out and buying new PCs due to preferential tax treatment if profits are slipping.
  • Considering the fact that the unemployment rate is rising and probably has been under-estimated, it would’ve been a good idea to allocate some of the stimulus package towards individuals in need of unemployment and/or food stamps. I’m not a big fan of handouts, but you can’t ignore the fact that our society carries a lot of hidden costs due to the unemployed and those that are poor (or close to it). It would probably be wise to mitigate those costs in some fashion.
  • At the end of the day, the stimulus package is a short-term solution to a long-term problem that doesn’t even begin to address the biggest issues facing our economy at the consumer level: housing. There are some positive aspects to the stimulus package, but at the end of the day it’s the equivalent of placing band-aid on an individual with a broken leg and a small cut, and claiming you’ve fixed the major problem.

    But, the aspect of the stimulus package that bothers me the most is that it seems designed to encourage a nation of debtors to spend money, when the government should be encouraging the opposite behavior for the good of our economy over the medium to long-term. Considering that our government is ill-prepared to deal with the coming crush of social security and Medicare obligations, you’d think they’d make it a priority to encourage people to save money as a hedge against the future. Another way to view the stimulus package is as an attempted subsidy for the retail sector, which has already enjoyed several years of inflated earnings from the abuse of consumer credit.

    Hopefully, the consumer will thwart the misguided intentions of our government, and either use the money to pay down debt, or place it in savings.