Fed Data Confirms Banks Are Lending

Contrary to what you might believe from Congressional grandstanding, banks receiving TARP money are in fact lending. According to MarketBeat on WSJ.com:

"According to the Federal Reserve, total commercial and industrial loans by all commercial banks were $1.568 trillion for the week ended January 28. That’s down from October’s peak, when those loans reached $1.61 trillion. The pace of lending is hardly robust, but the problem isn’t with the lack of bank lending, it’s with the collapse of the securitization market, something that most of those on Capitol Hill haven’t come to terms with yet in today’s hearing...

"Securitization issuance is down 91% from this point last year, according to Dealogic, with asset-backed issuance declining to $2.6 billion from $32.1 billion at this point a year ago. Most consumer loans, such as credit cards, auto loans, student loans and others, are relatively easy to bundle and sell as securitized assets, but not now, when buyers of such product do not exist."

James Bianco, president of Bianco Research, put it quite well: “But they’re [the banks receiving TARP money] being asked to make up for the loss of securitization and that’s too much to ask.” Apparently the key issue of securitization is lost on the House Financial Services committee. Problem is, the actual issues underlying the ongoing financial crisis simply don't make for an exciting hearing- or votes for that matter. Representative Michael Capuano's comments, for example, were extremely helpful and enlightening:

"All or most of you engaged in all or some of the activities that created this crisis. You come here today on your bicycles after buying Girl Scout cookies and helping out Mother Teresa. You're saying, 'We're sorry. We didn't mean it. We won't do it again. Trust us. . . . ' America doesn't trust you any more."

grand-stand: (v.) to conduct oneself or perform showily or ostentatiously in an attempt to impress onlookers

Obama Misses an Opportunity

According to the Economist, Barack Obama has missed a golden opportunity to help turn America's economy and the financial markets around. As the magazine's stinging editorial describes, Obama's failure is twofold, and rather large on both accounts.

First, the Economist on Obama's handeling of the massive exercise in useless spending more commonly know as the economic stimulus package:

"Mr Obama ceded control of the stimulus to the fractious congressional Democrats, allowing a plan that should have had broad support from both parties to become a divisive partisan battle...

"The fiscal stimulus plan has some obvious flaws. Too much of the boost to demand is backloaded to 2010 and beyond. The compromise bill is larded with spending determined more by Democrat lawmakers’ pet projects than by the efficiency with which the economy will be boosted. And it contains “Buy American” clauses that, even in their watered-down version, send the wrong signal to trading partners."

Now the Economist goes on to say that while imperfect, this near-trillion dollar "fiscal boost is vital for America's economy." I take serious issue with that, but nevertheless, the article does a fantastic job pointing out just how flawed the stimulus legislation is, especially if you actually believe in the effectiveness of Keynesian management of aggregate demand. But enough on stimulus. The Economist piled its greatest praise on Obama's bank rescue plan recently announced by Treasury secretary Tim Geithner:

"More serious still was Mr Geithner’s financial-rescue blueprint which, though touted as a bold departure from the incrementalism and uncertainty that had plagued the Bush administration’s Wall Street fixes, in fact looked depressingly like his predecessors’ efforts: timid, incomplete and short on detail. Despite talk of trillion-dollar sums, stockmarkets tumbled. Far from boosting confidence, Mr Obama seems at sea...

"But his [Time Geithner's] deeds did not live up to his words. His to-do list was dispiritingly inadequate on some of the thorniest problems, such as nationalising insolvent banks, dealing with toxic assets and failing mortgages."

Awesome plan, guys. Glad to know our nation's economy is in the hands such able communicators as Tim Geithner.

Spending Increases Are Likely Permanent

As an editorial in today's Wall Street Journal clearly demonstrates, spending increases included as part of the so-called "stimulus" are very likely here to stay. This is quite depressing for the younger generation that will be paying all this debt back.

According to the Journal:

"We are thus expected to believe that Democrats will let these additions to their favorite programs vanish after two or three years. To believe this, you have to ignore the last half-century of budget politics. Spending never declines; at best it merely fails to grow as fast as the economy.

"Far more plausibly, Democrats will take the stimulus increases and make them part of a new, higher baseline for future spending growth. Anyone who proposes to cut from that amount will be denounced as "heartless" and Draconian.

"The Republican staff of the House Budget Committee has calculated what happens to future spending if Congress continues to fund 19 of the most politically untouchable programs at their new stimulus levels. The list of 19 includes Pell Grants, Head Start money for poor kids, nutrition programs for seniors, Medicaid, special education, food stamps and cancer research at the National Institutes of Health, among others. Across a 10-year period through 2019, these 19 programs alone would increase federal outlays and tax entitlements by $1.59 trillion."

That is just a depressing number. I hope Barack Obama and the Democratic Congress enjoy their lovely liberal spend-fest. Apparently President Obama's stimulus public relations tour is somewhat working, though Americans are luke-warm at best to nearly $800 billion in most likely ineffective spending. Nevertheless, after the $700 billion TARP episode, what's another $800 billion?

Andy Kessler's Take on the Bank Bailout

Andy Kessler has some interesting ideas when it comes to the bank bailout. In this morning's Wall Street Journal, Kessler is deeply skeptical of the effectiveness of Tim Geithner's new plan, and apparently so is the stock market given yesterday's nearly 400 point drop in the Dow:

"Mr. Geithner announced a three-point plan yesterday to "clean up and strengthen the nation's banks," and made a vague declaration to use "the full resources of the government to help bring down mortgage payments and to help reduce mortgage interest rates." Unfortunately, those are conflicting plans. Hence the markets' skepticism."

Kessler seems to believe Geitherner's plan fails to get at the root of the problem: banks with too little capital and loaded with toxic assets that they simply refuse to unload out of fear of writing them down. As Kessler describes:

"What we need are healthy banks with clean balance sheets and enlightened risk assessment to provide consumer and business loans that will generate returns to shareholders. And to this end, Mr. Geithner wants to create a public-private partnership to buy toxic securities off bank balance sheets. This is a truly worthy goal, but I don't think his plan for doing so will work. Banks are more than able to sell these toxic loans today. They just don't like the price."

What would Andy have Treasury do instead of the newly announced plan? His thoughts are quite interesting actually. Treasury would take on billions in toxic assets and inject billions more of fresh capital. Each American taxpayer would then become direct shareholders in the recapitalized banks. If this sounds the same as what we have already heard, it's not. Kessler is talking about much more dramatic capital injections than anything already proposed:

"First, strip out all the toxic assets and put them into a holding tank inside the Treasury. Then inject $300 billion in fresh equity for both Citi and Bank of America. Create 10 billion new shares of each of the companies to replace the old ones. The book value of each share could be $30. Very quickly, a new board of directors should be created and a new management team hired. Here's the tricky part: Who owns the shares? Politics will kill a nationalized bank. So spin them out immediately.

"Some $6 trillion in income taxes were paid by individuals in 2006, 2007 and 2008. On a pro-forma basis, send out those 10 billion shares of each bank to taxpayers. They paid for the recapitalization.

"Each taxpayer would get about $100 worth of stock for each $1,000 of taxes paid. Of course, each taxpayer has the ability to sell these shares on the open market, maybe at $40, maybe $20, maybe $80. It depends on management, their vision, how much additional capital they are willing to raise, the dividend they declare, etc. Meanwhile, the toxic assets sitting inside the Treasury will have residual value and the proceeds from their eventual sale, I believe, will more than offset the capital injected. That would benefit all citizens, not the managements and shareholders who blew up the banking system in the first place."

I have not thought Kessler's plan all the way through, but I think he has some good ideas.

Perhaps It's Time to Buy

According to Warren Buffet's own metrics, it might just be time to start buying stocks. As Fortune explains, "The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy." Not exactly a shocker.

Nevertheless, Buffet asserts, "If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you." Well guess what? That's where we are right about now.

According to Fortune, Buffett has at least begun to put his money where his mouth is. Buffet went on record in an October 17, 2008, New York Times op-ed piece, saying that he was personally buying U.S. stocks after a long period of owning nothing but U.S. government bonds, (outside of Berkshire Hathaway stock). "He said that if prices kept falling, he expected to soon have 100% of his net worth in U.S. equities."

100% in equities is bold, but Buffet may be on to something. If I had any money to invest I would start putting it into the S&P 500, dollar cost averaging of course to dampen volatility.

Delaware Economists Oppose Massive Spending

Four University of Delaware economists have signed a Cato Institute statement opposing massive government spending to stimulate the economy. They include Burt Abrams, Stacie Beck, James Butkiewicz, and William Poole.

According to Cato:

President Obama says that "economists from across the political spectrum agree" on the need for massive government spending to stimulate the economy. In fact, many economists disagree. Hundreds of them, including Nobel laureates and other prominent scholars, have signed a statement that the Cato Institute has placed in major newspapers across the United States.

That statement reads as follows:

Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

Kudos to the Cato Institute and these University of Delaware economists.

Fiscal Stimulus is No Free Lunch

Economists Gary Becker and Kevin Murphy of the University of Chicago largely have the right idea when it comes to fiscal stimulus in a very insightful February 10 editorial in the Wall Street Journal, entitled "There's No Stimulus Free Lunch." Both are senior fellows at the the Hoover Institution, a distinguished free-market think tank.

Messrs. Becker and Murphy make a number of interesting points worth mentioning:

• While in theory, government stimulus will put unproductive resources to work in a recession, "much of the proposed spending would be in sectors and on programs where the government would mainly have to draw resources away from other uses." In other words, much of the spending is in areas which are already at full capacity. Capital and labor are thus not being underutilized and the net economic stimulus will be minimal and perhaps even negative.

• Though supposedly temporary, such dramatic expansions of government are likely to remain permanent. "Once created they [new spending programs] tend to survive and grow over time, even when the increases initially were said to be temporary. The underlying reason for this is that interest groups develop around new and expanded programs, and they lobby to keep and expand those programs."

• There simply is no government spending free lunch. "The increased federal debt caused by this stimulus package has to be paid for eventually by higher taxes on households and businesses. Higher income and business taxes generally discourage effort and investments, and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt. The burden from higher taxes down the road has to be deducted both from any short-term stimulus provided by the spending program, and from its long-run effects on the economy."