Categories: Andrew Coyne, Capital Read

Stimulated yet?

by Andrew Coyne on Tuesday, December 16, 2008 4:30pm - 44 Comments

So the Bush presidency draws to a close, with a four-month barrage of economic recovery plans issuing forth from various parts of the US government, most of them improvised in great haste with little thought for their long-term consequences. Politico adds up the bill:

It’s a package of about $8.7 trillion dollars’ worth of potential taxpayer commitments for loans, guarantees and other bailout goodies for businesses and distressed homeowners.

Amid the tissue paper:

• More than $1.5 trillion in Federal Deposit Insurance Corp. loan guarantees, including a $139 billion assist to the lending arm of General Electric Corp.

• $1.8 trillion in cash, tax breaks and loan guarantees doled out from the Treasury Department to taxpayers, financial institutions and credit companies.

• $300 billion for homeowners from the Federal Housing Authority.

• $25 billion in assistance for auto companies from a program overseen by the Energy Department, which is separate from the bailout proposal that tanked last week in the Senate.

• And $5 trillion worth of new money, loan guarantees and loosened lending requirements from the Federal Reserve Bank.

According to Bianco Research President James Bianco, who crunched these numbers, that amounts to more government aid and assistance than nine other historic bailouts and big government outlays combined.

The New Deal, for instance, cost an estimated $32 billion in its day, which would be about $500 billion in today’s dollars. The Marshall Plan cost about $12.7 billion, which is the equivalent of a paltry $115.3 billion. The Louisiana Purchase? The French got $15 million, which would be worth about $217 billion today.

If you take those three items, add in the adjusted costs of the Race to the Moon, the savings and loan crisis, the Korean War, the Iraq war, the Vietnam War and assistance for NASA, you still get to just $3.92 trillion — not even half of the taxpayers’ exposure today, according to Bianco.

If that weren’t enough to make you want to upgrade your holiday gift list, it’s useful to remember that Congress isn’t done and President-elect Barack Obama’s team hasn’t even started.

Tags: bailouts, stimulus

More by Andrew Coyne

http://www.wart.ca Steve Wart

Raging Ranger – look at this this way. The big risk is deflation. Inflation is the opposite of deflation. Therefore inflation will cure deflation.

Or if we want to use a medical analogy. The patient has overdosed on barbiturates. Amphetamines are the opposite of barbiturates. Therefore a massive dose of amphetamines will cure the patient.
http://www.wart.ca Steve Wart

I feel like it’s the dark ages and the likes of Bernanke and Krugman are standing over us with filthy hands and rusty blades.
http://wells kc

Stimulated yet’
i’m worried. I think AC may be headed for a nervous breakdown. still i don’t suppose he’ll be the only one.
Sisyphus

If you free market mavens are in a froth now, wait until The Great Global Regulators start stirring the pot.

Bubble, bubble, toil and trouble.
Jack Mitchell

We must distinguish between the bailouts to industry and the bailouts to the financial sector. The former are just bandaids. The latter are meant to prevent Total Credit Meltdown. Whether they’ll do that or not is an interesting question, quite unresolved as yet I think; and whether the helicopter approach is the smartest way to do it is, ah, open to debate. But a Total Credit Meltdown would be, um, well, ah . . .

Don’t blame Krugman and Bernanke, blame the complete idiots who were chanting that the US could simply borrow its way out of the 2001 recession. Man, it was total madness at the time and yet the various self-anointed bishops of the Capitalist Faith — everybody who felt pretty good about themselves financially, really — kept looking at US GDP and personal wealth and all that and saying, “Only a moron would doubt the integrity of the system.” Meanwhile TV ads in California were openly selling ordinary people on the idea of mortgaging their homes to pay off credit card debt, on the theory that the bubble was generating free and limitless money. I remember looking at those ads and thinking, “This economy is completely f*cked.” But the same sort of person who is now decrying the bailout of Greenspan’s mess would have told me I was a Leninist or at least a pessimist. You don’t like multi-trillion-dollar bailouts? Don’t trust investment bankers on economics ever again. And don’t let the Fed act as the White House’s white knight. Basically burn all your copies of Ayn Rand.
Maurice

Why is the Macleans website commenting or writing articles on internal US financial system? Canada couldn’t fathom this kind of money or power the US has. We as Canadians should be focus on our internal problems.
David

I feel a knot in my stomach, but my private sector is not getting stimulated at all by this.
http://wells kc

jack M
burn all your copies of ayn rand. We may be burning a lot more than that before this is over. Does create a bit of a dilema, it’s cold outside, but i’m also running low on toilet paper.
Al Heck Brakes

“look at this this way. The big risk is deflation. Inflation is the opposite of deflation. Therefore inflation will cure deflation.”

A message arrived today for Ben Bernanke and all his pals in central banks around the world. It’s from North Korea. It says, “Communist central planning doesn’t work for food, clothing, transportation, health care, manufacturing, retirement savings, insurance, banking, monetary policy or anything else. See you in hell.”

The big risk is increasingly desperate government interference in the market, leading to the collapse of major business activity, followed by the flight and sidelining of capital and skills as everyone either flees or sits on their hands waiting for their government takeover or bailout, followed by trade wars, then by famine and civil unrest, finally ending in a genocidal world war. Laugh all you want at the monetary cranks and nanny-loving governmentopians, but they are completely serious and they looooove their jobs. Give them too much power over you and you’re dead.
http://ragingranter.blogspot.com Raging Ranter

Jack Mitchell, aren’t Krugman and Bernanke now recommending exactly that? That the US attempt to borrow its way out of recession? Particularly if Bernanke starts purchasing government T-bills directly.

Steve Wart, I find the fear of deflation to be absurd. If prices drop a few percentage per year over the next several years it will be good for us. As for it turning into a deflationary spiral, that won’t happen. Every developed country now has a government that spends in excess of 30% of GDP each year. That’s more than enough to maintain a base level of consumption and prevent a deflationary spiral, without any added “stimulus”.

Back when Keynes was alive, government’s comprised about 10% of GDP, and he had a very good reason to encourage an increase from that level. He is unfairly pilloried by right wing economists nowadays, but he was right in his time. However, I doubt very much he’d be calling for massive doses of “stimulus” today with governments already running large deficits and already supporting large welfare states. The fiscal stabilization policy that Keynes dreamed of is built right into the system.

Today’s economists believe that if some Keynes is good, then more Keynes must be better. By that logic, I should take a whole bottle of vitamin pills every day. One is good, so one hundred must be fantastic. I’ll probably clean up at the 2010 Olympics.
Jack Mitchell

Al Heck Brakes: “The big risk is increasingly desperate government interference in the market, leading to the collapse of major business activity”

Um, Al, as I understand it the financial bailout is happening because the alternative is the collapse of major business activity. Home-grown! You may have seen it in the papers.
madeyoulook

Have faith, everyone. Soon enough there will be so much cash around you can use it to start your fires to stay warm. Or to wipe your private sectors, kc, if you’re out of TP.
Jack Mitchell

Raging Ranter: “aren’t Krugman and Bernanke now recommending exactly that? That the US attempt to borrow its way out of recession? Particularly if Bernanke starts purchasing government T-bills directly.”

It’s different, though, because in 2001 the borrowing was done by consumers and home-buyers, whereas this time it’s the government doing it. I’m not an economist, but it seems to me that the US is now effectively borrowing collectively what it spent excessively on an individual basis in 2001-2007. It’s worse when it’s the consumers and home-buyers doing the borrowing because such loans are not guaranteed, to say the least, whereas the USG can’t default. What Bernanke is doing now is not trying to borrow his way out of a recession, he’s trying to borrow his way out of a major financial meltdown, which would be much worse than a recession. He’s trying to keep it at recession levels, in other words, while the credit markets recover from their 3rd degree burns.
http://londonbanker.blogspot.com/2008/07/fishers-debt-deflation-theory-of-great.html Steve Wart

Raging Ranter – I can’t say whether fear of deflation is absurd. Honestly, the entire economy is absurd. Nobody knows what’s going to happen.

I worked in the fixed income derivatives department of a major investment bank when the credit markets blew up. When you’re in IT you get to talk to people at a lot of different levels in the company (IT people don’t officially know anything, we just “serve the business”). I talked to a lot of people about the “toxic waste” in the CDO market and the laughably bad quality of data going into the risk models. Everyone knew it was a disaster waiting to happen, but the bank was making lots of money, so nobody rocked the boat.

So while I’m happy to wear my technician’s hat and look to others for wisdom, I occasionally find things like this that ring true, even if it somewhat contradicts what I read in Reuters and the Times:

Since August of 2007 we have been seeing a steady constriction of credit markets, starting with subprime mortgage back securities, spreading to commercial paper and then to interbank credit and then to bond markets and then to securities generally. While the problem is usually expressed as one of confidence, a more honest conclusion is that credit extended in the past has been employed unproductively and so will not be repaid according to the original terms. In other words, capital has been betrayed into unproductive works.

The credit crunch today is not destroying capital but recognising that capital was destroyed by misallocation in the years of irrational exuberance. If that is so, then we are entering a spiral of debt deflation that will play out slowly for years to come.

/londonbanker.blogspot.com/2008/07/fishers-debt-deflation-theory-of-great.html

You might be right. I can’t say categorically that government spending will prevent deflation. A lot of people have been waffling back and forth on deflation versus inflation, which makes me wonder how they can actually be opposites if nobody’s really sure which train is making that light at the end of the tunnel.
http://www.woecanada.com don

the most intelligent column and list of comments I have seen here in ages. can’t see a hateful rant in the bunch . just intelligence. well done contributors
Brad Sallows

>look at this this way. The big risk is deflation. Inflation is the opposite of deflation. Therefore inflation will cure deflation.

Is there any reason to believe the people in charge won’t oversteer more and more with each successive attempt to correct the skid?
oompus boompus

I think the chicken little scenarios, e.g. “print/borrow jillions of dollars or the economy gets it” are completely false. It’s the printing/borrowing of jillions of dollars which has caused the weakness in the first place. The cure for problems caused by inflation – malinvestment in unproductive sectors – is not more inflation. The alternative to stimulus is to let the unproductive investments die and wither away so that the valuable factors of production – capital, land, machinery, workers, etc. – can find their way back into productive use.

Only the free market is capable of determining which activities are unproductive and should be shut down or scaled back, and which activities are productive and deserve to be allocated more resources. If politicians and bureaucrats are allowed to decide what happens in the economy then they will act in the exact opposite of the public interest, because it is not in their interest to fix the economy and build up a strong free market economy. To do so would cause there to be very little need for welfare, stimulus, subsidies, protection, etc. (all the usual rackets) which would mean a loss of power, income and perks for the politicians and bureaucrats. Placing their faith in politicians and bureaucrats is therefore an economically suicidal policy for the vast majority of the citizens.

Only the Austrian School economists and the financial planners who understand the Austrian business cycle theory predicted these problems. They realize that at any level of organization above a barter economy, money is the only possible way of measuring wealth. If central bankers like “Helicopter Ben” are allowed to play with the value of money by counterfeiting it at will and literally hosing it into the market as if it were confetti, then the yardstick is destroyed and nobody will be able to determine the value of anything any more.

If nobody can measure the value of their paycheques, their savings, their investments, their real estate, their jobs, etc. because the value of money as a yardstick has been destroyed, then highly organized and productive business activities (the ones which depend on money for transactions made along the various stages of production) will cease and people will naturally revert to a relatively unproductive form of barter economy in which they earn very little, but at least they understand the value of what they earn. By this I mean, that farmers trade eggs for haircuts, taxi drivers are paid with bottles of liquor, labourers work for food, and so on. That is what a depression means. It means that governments have destroyed the value of and confidence in money, they exercise their monopoly on force to prevent any competing forms of money from being used and to prevent the foreclosure of non-performing assets, and until something cataclysmic happens (like a great war) they will do everything possible to hinder the rational restructuring of the economy which would happen if sound money existed. They do so because they benefit from poverty and chaos.

That’s all you need to know about central banking, bailouts and stimulus.
Bert

Mr Coyne
I would like you to tell me why the Bank of Canda keeps lending financial institutions our tax dollars at a low rate. Is it so they can rip us off charging us 9-18% on plastic and other loans.
Maybey its time the Bank of Canada lends directly to the taxpayer ( bypassing the banks).
If the government does not take action on this gouging by the banks, I will remove as much of my money from the economy and encourage my family and friends to do the same thing. Mabey if a lot of us do not spend ( except for necessities) the economy will really tank and the government might take some positive steps for ordinary Canadians.
Call me fed up.
Thank you.