Obama is Bush part 3

Stimulus Watch: Senate Pare-Down?

Mr Lounsbury: If you didnt see it already, please take a look at the Washington Post's (as opposed to Washington Times) analysis of the spending package ... hat tip to the SA author (calafia beach pundit) for reminding me and mentioning it first on SA.
seekingalpha.com/artic...

As you can see from the WP's excellent analysis -- this thing is a gigantic spending package, not a stimulus package. There are provisions for all sections of the government -- many are things that are clearly not stimulus, they are spending "wish list" items that have appeared regularly for decades.

This is nothing but a shameful grab for increased spending by unscrupulous politicians -- preying on a scared populace and taking advantage of a bad situation

Stimulus Watch: Senate Pare-Down?

Mr Lounsbury:

I read your reply in which you the debate has two facets... In #2 you said GDP growth would be (with the stimulus) 3-7%. I assumed this was your guestimate?

I did not mean any sort of personal attack -- but I do think the discussion of this "stimulus package" is very dishonest:
(1) The history of these stimulus packages is very questionable. There hasn't been one that was a resounding success (ever). Even in cases where economist "think" the stimulus helped, we have no control to compare to. We don't know how things would have progressed with no stimulus. Thus, any claim that "we must do something" is unsupported by any actual data
(2) Whether you take offense or not: if you want to measure the effects of this stimulus through 2019, please tell everyone how you plan to pay off this $850 billion of extra debt. Everyone has ideas about the programs they don't like -- tell us how you are going to pay this debt off in real life... how are you going to get Congress to go along with whatever cuts you propose? I have yet to hear a single stimulus advocate give ANY answer to this.

If you don't have an answer of how to pay back the debt, then the cost of perpetual debt is infinite, and the stimulus is prima facie a bad idea. Real investments pay for themselves -- frivolous spending does not.

As for what the government should do: sure, in a perfect world I think the government could make some good long term investments. But the incentives for our politicians are to favor the present at the expense of the future. While a few politicians may have investment or business experience, the vast majority have expertise elsewhere. Our election process rewards those who can survive on no sleep and still make witty sound bites -- not those who can make good long term choices

I do not share your view that government is omnipotent, and I think history is on my side. If the government cannot achieve a result better than doing nothing -- then it should do nothing. First, do no harm...

Whatever stimulus package you want to advocate should pay for itself (and the financing costs) in a finite amount of time. I think anyone who is business has done a cost/benefit analysis and asked how long it would take for an investment to pay for itself... This same common sense must be applied here as well.

How long will it take these "stimulus programs" to pay for themselves? How long will it take to get our $850 billion, plus interest, back? The answer seems to be: "it doesn't matter, we plan to stick our kids with the bill"

If you have a plan to pay back the $850 billion plus interest, please lets hear it. If the stimulus plan actually achieves 7% GDP growth, that works out to 0.07 x $12Trillion, or $840 billion. I don't know if I accept that 7% estimate (history suggests the results will fall short), but lets go with the esitmate

Even if the tax rate was 100%, the program doesn't pay for itself, much less the interest. It obviously doesn't provide any positive return above the costs.... Ergo, it is not an investment at all

Stimulus Watch: Senate Pare-Down?

Mr Lounsbury:

I think you are seriously misrepresenting the situation. A very standard political ploy is to estimate the costs of a program over a seemingly arbitrary time-frame -- arbitrary except that it is chosen to make the proposal look less bad than it is.

I would challenge you to provide a shred of evidence that the $850 billion in debt is going to be paid by 2019 ... Are you at all familiar with the US government?

This Keynesian nonsense sounds great in theory -- run deficit "stimulus" spending during recessions, and then pay it back during economic booms. But in the real world, it doesn't work that way -- and its high time ALL commentators stop lying. We have had both political parties controlling Congress, the White House, both or neither -- they are all the same. Spending ALWAYS goes up, in bad times AND in good times.

Mr Lounsbury: if you were honest, you would have to weigh the short term benefits of this mis-named stimulus package against an infinite future of lower growth. It won't stop in 2019-- you have no credible evidence that it will ever stop. The debt taken on today will be rolled in perpetuity, interest accruing all the way.

In short, the CBO estimate greatly underestimates the cost. An extra 3-7% growth in GDP (assuming that happens) does not compare to the negative infinity cost of perpetual debt.

Even your guestimate of 3-7% increased growth is dishonest. Have you checked your math? GDP is about USD $12 trillion. Lets go with your higher number of 7%. 7% of $12 trillion is $840 billion -- or $10 billion LESS than the proposed cost. That is assuming your UPPER estimate (which is doubtful, to be diplomatic) and it doesn't consider the interest expense.

I can't believe anyone would be absurd enough to suggest that 100% of the spending will go to stimulus, and there won't we any fraud, waste or pork spending. You are not asking us to suspend disbelief -- you have to be insane to even think it.

How does it make sense to spend $850 billion (ahem!) to get back $840 billion? Can you name any large scale government program that did not go massively over budget?

Programs like the Big Dig, the interstate thruway system, or the Hoover Dam were planned for months or years -- and they all went way over budget. Those are the stimulus "success" stories. This latest fiasco has almost no planning (maybe three months planning if you want to suggest Obama skipped Christmas). How can you argue with a straight face that this proposed spending is anything other than unplanned?

There is no way the government can prop up asset prices (securities or houses) to bubble levels -- other than running punitive levels of inflation. The $850 boondoggle isn't going to fix this and it is fraud to suggest otherwise.

Warren Buffet has been trying to figure out how to spend $47 billion in cash now for 4-5 years. I simply refuse to believe that the clowns in government can spend 20 times as much in three weeks. This is not an investment, this is corrupt politicians trying to create the illusion of growth.

Could the government spend money to increase long term GDP growth? Theoretically yes. But the key words are "long term". Politicians, like their constituents, want instant gratification. Real education reform might make for smarter graduates (ie more productive workers) in 20 years -- but who will remember the politician who made it happen 20 years earlier?

Congress isn't going to invest for long term growth -- its not in their personalities, and it is not in the "corporate culture" of Washington.

Decades of real life experience, as opposed to theory, have shown us clearly how this works. Politicians borrow from the future to artificially and temporarily perk up the present. The benefits are short term, the debt is not.

Mr Lounsbury, our government has not run balanced **spending**, never mind a surplus, since long before George W Bush or Barack Obama were born. Unless and until spending discipline is actually established -- not theorized -- it is a lie to suggest this debt is anything other than permanent.

Washington has no leadership. We are a country full of debt addicts, and our so called leaders are nothing but pandering enablers. The reason addicts have to go away to rehab is because their family has enabled their addiction (intentionally or unintentionally) ... The only difference here is that our enablers (the politicians) are also addicts

Anyone who has bothered to look has seen the effect of unlimited spending and debt has had on other countries. We are acting like the banana republics that we used to make fun of. We are acting like former world powers did when they were well into their decline.

This is NOT a stimulus package, this is a spending package -- pure and simple.

A real stimulus package would require a completely different culture in Washington, a population that lives within its means, a government purchasing system that wasn't rampant with fraud and waste, and a group of **LEADERS** (not pandering enablers) to sort out the good investments from the bad.

Maybe Obama or someone else can create those necessary prerequisites -- in time. But the economy will likely fix itself long before Washington's culture is changed.

I don't want to be part of a dishonest discussion Mr Lounsbury. There are two things that will fix our economy: increased savings / reduced debt levels ... and time.

The desire for instant gratification got us into this mess -- I don't believe it will get us out, not even if you mislabel it as stimulus

Stimulus Watch: Senate Pare-Down?

The CBO (which is currently dominated by economists appointed by democrats) has researched the stimulus package and concluded what everyone should already have known intuitively: it will hurt the country long term
www.washingtontimes.co.../

The U.S. has lived beyond its means for decades. We have far more capacity to produce "stuff" than we have economic need for it. By keeping interest rates artificially too low, the Fed created artificial demand -- at the expense of future tax hikes.

Now we have reached the future. The artificial demand could only be maintained for a short period-- but rather than admit this, the government (both parties) wants to throw more than twice as much money to create less than half as much artificial demand.

The effects of compounding guarantee this "stimulus" package will be far less effective than earlier ones -- which were harmful in the long run. After every "stimulus", we have lots more debt (which stays with us long term) but the artificial demand goes away.

Lets stop kidding ourselves: this is ****NOT**** stimulus. This is borrow from the future to artificially inflate the present. It has been tried many times before, and it doesnt work.

Lets also stop the silly "we must act now!" rhetoric. We have all heard the sky is falling, and its nonsense. The artificial demand was always artificial. Any business that cannot survive without artificial demand (aka a government subsidy) is by definition not economically viable.

This is not a stimulus package. This is yet another shameful effort to avoid living within our means -- and stick our kids with the bill.

This is not "free money" -- this is $850 billion +/- in future taxes and/or inflation.

By Any Means Necessary: Stimulus Package Needed Soon

During the last 40-50 years, each political party has (at various times) controlled Congress, the White House or both. We've had economic booms and recessions.

As the first commenter (pasttense) points out, they ALL run deficits. Bigger and bigger and bigger deficits.

Clinton supposedly ran a *budget* surplus, but this was basically an accounting quirk and not reality. The government has taken to claiming all sorts of costly items "don't count" -- of course you can run a balanced budget if you don't count your biggest expenses! Looking at things more accurately, Clinton -- like everyone else-- ran a huge *spending* deficit

So recently, The Bush administration wasted $750 billion in TARP money accomplishing nothing other than racking up more debt for our kids to pay. The Democrats step in last month and show small minded people that they "care more" by spending a slightly bigger amount ($850 billion) of our kids money. Only small minded people believe that a politicians "caring" should be measured by how much money they throw at us.

The government has no credible means to spend $850 billion intelligently. There aren't that many shovel ready projects-- so Congress is allocating the money to state governments... how many times have we heard this song before? The states have demonstrated, decade after decade, an ability to spend vast amounts of money on waste and fraud. The "big dig" in Boston was supposed to cost $3.5 billion and had been planned for many years -- it went years over schedule and eventually cost $14 billion. This "stimulus" nonsense was planned for less than two months -- how can anyone suggest with a straight face that this money will be spent better?

And as if anyone really needed further proof that nothing much has changed in Washington, the administration is warning about the end of the world if we don't pass their spending program immediately and without thought-- very George Bush like, except this time it is Barack Obama.

More proof? The Congressional Budget Office (CBO) is controlled by Congress (ie democrats), meaning a majority of the "unbiased economists" were hired by Democrats... The CBO has said that Obama's stimulus package will HURT the economy over the long haul
www.washingtontimes.co.../

New faces in Washington, but they are up to the same old tired and discredited "spend, spend, spend" policies as the last 50 years.

Bank Nationalization - The Max Holmes Proposal

While this plan has a few second order detail changes, it still doesn't address the big problem with all good bank / bad bank ideas:

What price do we put on the "bad" assets?

We know they are not worth par. Its pretty reasonable to say they aren't worth what the lying CEOs claim they are worth. But if there was true price discovery -- if we knew what the proper prices were-- we wouldn't be having this discussion.

The prices assigned are going to be one of two scenarios:

(1) the bad bank (aka the taxpayers) pay too much. The inept bank CEOs get a massive windfall, while the taxpayers take a massive loss

(2) the bad bank pays a fair, or too small, price. In this case, the insolvent bank is still insolvent. The CEOs know this, and have zero reason to participate in the plan. It could potentially have legal issues as well, as bond holders would sue claiming that their interests were not protected in the restructuring (shareholder equity is clearly negative, so there is nothing to protect -- but they might sue also).

Overblown CEO egos is a big reason bank insolvency hasn't been fixed yet. Everyone knows the major banks are insolvent -- but accepting that would mean the CEO would have to admit he is a professional failure.

At some point, the regulators are going to have to admit what everyone already knows but won't say out loud. The big banks are insolvent. They need to be shut down. The only real question is whether to shut each bank down overnight (a la Lehman) or to nationalize it and wind it down over a year or two (as was done years ago with Continental Illinois).

Equally clear: the big banks are really too big to save and too big to manage. If JPM or Citi failed, their assets are far bigger than FNMA or FHLMC. The government could not take on a big bank without jeopardizing its own AAA rating (investors were already doubting the AAA rating even with the GSEs). It is also far from obvious how one management team can be experts in everything -- which is the argument behind universal banks. Most of human history is about increased specialization -- Tiger Woods is a great athlete, but that doesnt mean he should play in the NFL. A bank that is really good at commercial lending probably won't be any good at trading securities. Even if we get better bank CEOs, they cannot be experts in everything finance.

This means the bigger banks need to be split up.

The Obama Stimulus Plan: Why I'm Concerned

morph366-

Apologies if I was not clear -- I thought I said "do nothing **NOW**. take a few deep breaths. think the problem through"

Implied (but I guess not stated) was the idea that there are long term investments that would make all kinds of sense.

I have serious doubts about the entire concept of a quick fix. I think a lot of our current problems were caused by yesterday's quick fixes

There is also a very real danger that corrupt politicians will use a false sense of urgency to ram through changes that restrict our freedoms and our future economic happiness.

The false urgency used to pass the TARP legislation should give us all pause. Not even Henry Paulson knows where he spent **OUR** $350 billion.

Taking a little time to think through the best **LONG TERM** solution will produce a far superior outcome than a bunch of self serving politicians hastily passing more foolish ideas to create the illusion that they are doing something positive

Rahm’s Doctrine and Breaking Up the Banks

Rahm’s Doctrine. “You never want a serious crisis to go to waste,” Emanuel said. “What I mean by that is that it’s an opportunity to do things you could not do before.”

What an embarrassment this man is to our country. People are suffering the ill effects of a disastrous Federal Reserve policy -- and this slimey politician wants to use the crisis to expand his political power.

The Obama Stimulus Plan: Why I'm Concerned

Morph366--

It is always the "worst possible time" to live within our means. Americans need to stop the short term thinking that has dominated our lives for decades.

What Congress is proposing is $900 billion in future taxes. This is a bill that will have to be paid. This is not free money falling from the sky. Calling it a "stimulus package" is just slick marketing ploy on a slow witted public.

If we are going to saddle ourselves -- we should be more honest: future generations -- with $900 billion in taxes, we should be thinking about creating jobs and a tax base with which to pay those taxes.

We can spend $900 billion now and get back $1800 billion later -- or -- we could spend $900 billion now and get some trolley museums and bridges that no one uses. If we allow our corrupt public servants to spend hundreds of billions based on maybe one week's consideration, we are pretty much guaranteed to get the latter. We will have to pay the $900 billion in extra taxes either way.

It took many years of planning to coordinate the "big dig" in Boston, and that was "only" about $15 billion (out of an original cost estimate of $2.6 billion). If it took many years of planning to spend $15 billion poorly -- what can we expect from the rocket scientists in Congress spending $900 billion based on less than 3 months planning? (and one of those months was the Christmas season, so it arguably doesnt count)

We spent $700 billion only four months ago on TARP -- that was done under the same foolish pretense that something had to be done NOW and there was no time to think it through at all. Absolutely no one has any idea where the first $350 billion went, and banks are still teetering on the brink of collapse.

Everyone is in such a hurry do "something" ... anything.

Sometimes, you have to have patient. Sometimes, the best thing to do is nothing. Take a few deep breaths. Think the problem through. Is there really a monster under our bed? Do we really need to build a $900 billion monster containment unit?

If we thought about it carefully, could we build some high speed trains to reduce car usage and reduce our dependence on foreign oil? Could we fund some research into alternative energy sources? Could we research new technologies to reduce our impact on the environment? Could we encourage the creation of new industries with advanced technologies that will provide future jobs (and future tax base) when the auto industry meets what is now an inevitable fate? Might some (not all) of these things prove economically viable (ie they create more wealth than they use?). Yes, yes, yes and yes – but it will require more than a few weeks thought and planning.

America needs to stop reacting to crisis – and start planning a few moves ahead

The Obama Stimulus Plan: Why I'm Concerned

Every year, the politicians come up with yet another reason why they should spend ever increasing amounts of money. Every time there is a recession, the world is coming to an end and we need economic stimulus right now. When the economy recovers, there is prosperity as far as the eye can see, so there is no need to ever cut back spending...

The U.S. has spent far more money than it has earned for years -- living beyond our means is the root cause behind the current crisis. Many individuals are realizing this and cutting back on conspicuous consumption that was all the rage in recent years. If we are honest with ourselves, most of us have too much "stuff" already.

Globally, the world has more manufacturing capability than we have legitimate economic demand. For a few years, central economic planners could create artificial demand by keeping interest rates too low (at a penalty to savers).

After a few years, everyone who could afford "stuff" had at least two of everything. So the central economic planners started pushing banks to lend at sub-market interest rates to people who could not afford to repay -- creating a little more artificial demand.

There is no interest rate at which any more artificial demand can be created, so the next step in this lunacy is for the government to steal money from our children (via debt) and use that money to buy more consumption.

Three months ago, Bernanke and Paulson assured us that TARP would fix everything and we did not know who the next President would be. No one was talking about a $900 billion spending plan.

So what are the odds that someone-- anyone-- carefully considered various infrastructure spending options and determined the best use of $900 billion that no one expected they would get? Infrastructure has been underfunded for decades, why would anyone expect a sudden windfall would be a few months away? Why would anyone bother to create a shovel ready project idea for money they would probably never get?

But now, to plump up the egos of politicians and prey on economic fears, we are going to fool ourselves into thinking we have hundreds of billions of shovel ready projects.... please

Any true "investment" would require months of careful thought -- and would not be ready for Congressional consideration until fall of 2009 at the earliest. Anything that is done faster than that is clearly being done in haste, and not well thought out.

We will have hundreds of bridges to nowhere. Hundreds of trolley museums. Hundreds of economic boondoggles that will not generate enough revenue to even service (much less pay off) the billions in new debt. That means future economic growth will have to be diverted to pay for today's waste.

America needs to stop lying to itself. We cannot spend our way to prosperity. We need more savings (not less). We need to pass our children a prosperous economy -- not a mountain of debt.

If the government isn't going to carefully think through how to spend our children's money -- than it would be better they not spend it at all

Water: The New Oil

While potable water supplies are shrinking the world over, and water might be a good investment (in the medium / long term) -- the two ETFs you proposed are made up of companies kinda sorta but not really in the water business. Investing in water meters is not the same as investing in water -- if the water dries up, there is nothing to meter. Same thing with the filter companies (who by the way mostly filter air and liquids other than water). In short, even if your investment hypothesis (limited supply of water) turns out to be 100% correct, it will not necessarily benefit the companies you recommend (it probably won't).

The municipal water utilities are politically controlled and are guaranteed a certain return on assets by law (the utility is, not necessarily the utility investor). Existing capital will get no less than the legislated return, but also no more. If the utility needs to expand, it underwrites more capital.

Lastly, as many private land owners in the west are discovering, water rights extend only straight down. If someone buys land that shares an underground aquifer with you, you have zero legal control over how much water he can draw. About a year ago, ranchers in Nevada sued the municipality of Las Vegas. LV went and secured land (and water rights) that were downhill (geologically speaking) from the rancher's land and began drawing as much water as they could. The ranchers had been ranching on their land for generations -- long before the city of Las Vegas was even imagined. None the less, the grass their herds eat is brown and dry, and the wells their cattle drink from depleted.

The ranchers may not have had the best legal counsel, but the problem is more politicial. If thousands of city voters want water, and thousands of jobs (and state revenue) depend on that water -- legal water rights become rather fluid (pun intended). Water ownership rights don't have the legal protection that oil / natural gas fields do

Furthering the Discussion on Bank Nationalization

..." My question is: What happens to the taxpayer investment so far, estimated to be as much as $8.5T in equity investment, loans, loan guarantees and bailouts? A list of these exposures..."

This is more than disturbing. Bailout advocates are now arguing we have to double down on a terrible investment in order to bail out the previous bailout?

I am very happy that bank nationalization is now being debated, rather than rammed down our throats by an unelected Treasury Secretary... but one argument that has ZERO validity is the claim that we have to make more foolish moves because we already made foolish decisions.

The unfortunate reality that nationalization advocates won't admit to is that the banks (in aggregate) are too big to save. The trillions it would take to prop up poorly run businesses would devastate the US government's financial position.

Further, a nation filled with zombie banks would not possess the tax base needed to keep Uncle Sam in business going forward.

Too many people cite the (isolated incident) of the Chrysler bailout as evidence of bailout "success". One success, if it really is a success, does not prove a idea is sound.

Was Chrysler a success? The company is back for more handouts, so at best Chrylser can be called a delay of death, not a save. While government accountants have stated that the US government "got all its money back" -- this is an incomplete accounting. If Chrysler had been allowed to fail, what other businesses would have been created in its place? How much taxes would those other businesses have paid while Chrysler was paying none?

Further, if Chrysler had been allowed to fail, would that have been the kick in the pants needed to get GM and Ford to implement reforms? How much extra taxes would have been paid by a more healthy car industry? And fast forward to today, how many more billions will the "successful" Chrysler bailout cost taxpayers to bail out Chrysler (again) as well as GM?

With success like that, who needs failure?

Banks are poorly run businesses -- they have proven that beyond any doubt. Plenty of writers have talked about financial disintermediation -- banks are no longer really needed to perform many of the functions they used to. Indeed, it was bank's efforts to branch out into businesses they didnt know and didn't understand that got them in trouble.

New financial institutions, based on a different business model, are needed. Bailing out poorly run banks is unaffordable (even if it was a good idea) and delays the needed reforms in the industry

Consumers Confident Wells Fargo Will Survive

Wells Fargo's assets are concentrated in California -- but supposedly Wells Fargo was infinitely more conservative than any of its competitors. At the same time, Wells supposedly made similar returns to its more risky competitors. I for one do not believe there is such a thing as a free lunch

Now Wells has merged with Wachovia, paying whatever positive nominal sum for a bank with a negative net worth. Wachovia comes with the disaster that finished it off -- Great Western Savings ... whose underwater assets are based in California.

Even if Well's asset mix was markedly better than the market average before (which is hard to swallow) -- they now must add in all the garbage they got from Great Western via Wachovia. There is no way asset quality could possibly be anything but worse following the merger

And as Bank America has learned, if you pay a positive amount for an asset worth less than zero -- you will have future losses

Risk Management, Or Risk Manipulation

Mr Tan,

As a number of other comments have already noted, VaR has been criticized by Nassim Taleb (and many others) for years. Many finance models, including the Black-Scholes option model, use a set of assumptions designed to make the math into an equation that can be solved with existing math techniques-- rather than assumptions that reflect reality. Black Scholes relies on no transaction costs (commissions and bid/ask spreads do not exist?), no taxes (guess we are left with just death as inevitable?), and Gaussian distribution (which does not fit historical distributions, but has solvable equations).

I wish you had touched more on the human / behavioral side of why risk management has problems. Most Wall Street firms operate as though sales and trading are 110% of the firm. All back office functions -- including risk management -- are cost centers that need to be minimized and marginalized.

An extra dollar spent on risk management hurts the bottom line, and the CEO's paycheck. On the other hand, there is no way to quantify the benefit of spending that extra dollar --- and certainly no incentive for CEOs to focus on risk. By the time big banks got the bills for the lack of risk management-- the CEOs had long since collected hundreds of millions in pay. So what if the bank collapses? That does not effect the long term compensation of the CEO one bit

How Wall Street Keeps Dooming Itself

We should really look at the foxes guarding the hen house... Over the last 40 years, Congress has been controlled (at different times) by both major political parties. Both major political parties have controlled the White House. Both major political parties have controlled both Congress *AND* the White House.

They have never once run balanced spending. Yes, I am sure someone will whine that that so-and-so cooked the books and produced balanced "budgets" -- but no one ran balanced spending.

No one produced an energy policy beyond Jimmy Carter suggesting we all wear a sweater. No one properly funded infrastructure like railways and highways. Adjusted for purchasing power parity, the US spends more per student on education than any other country on Earth -- but I would suggest our schools do not reflect that. While administrators sit in newly refurbished offices, teachers are forced to buy their own supplies.

For this "public service", government bureaucrats (both elected officials and career bureaucrats) have enjoyed pay raises that exceeded CPI. While stated salaries are generally less than the private sector, productivity is WAY WAY less than the private sector -- adjusting for lower productivity, public sector workers get paid LOTS more than the private sector.

And that is before we take into account benefits that are much better than almost all private sector workers

These underworked, overstaffed and overpaid bureaucrats are the ones who are (and were) supposed to be regulating all these banks.

What right do voters have to whine about bank bonuses (which are admittedly obscene) when we have been tolerating the "pay for lack of performance" compensation of our so-called public servants?