Dreaming about high-speed trains in the U.S.

Those of you who have traveled in Japan’s bullet trains or in Europe high-speed trains (be it in France, Italy, Germany or Spain) know how comfortable and reliable they are as well as how much time they save. Read the rest of this entry »

Netanyahu to form new government in Israel

Ten days after the inconclusive elections, Israel’s President Shimon Peres chose this Friday Likud leader Benjamin Netanyahu to form a new government, giving him six weeks to put together a ruling coalition. Read the rest of this entry »

And now a plan to help with mortgages

This past Wednesday President Obama unveiled a plan to cut mortgage payments for up to 9m borrowers after saying that the housing crisis was a threat to “the American dream itself”. He tried to make clear that the plan would help homeowners who had acted responsible. “It will not rescue the unscrupulous or irresponsible,” Mr. Obama said. “And it will not reward folks who bought homes they knew from the beginning they would never be able to afford.” And yet… Read the rest of this entry »

The 59th Berlin International Film Festival

Today, February 15th is the last day of the 59th Berlin International Film Festival which ended with the announcement of the main prize, the Golden Bear, going to La Teta asustada (The Milk of Sorrow) made by the Peruvian director Claudia Llosa. Read the rest of this entry »

Stimulus, bailout…Let us print $!

Well, the stimulus finally passed in the Senate. Before it is signed by President Obama, the administration together with both the House and the Senate have to put the final touches. That means we don’t know yet what will the final product contain. Read the rest of this entry »

Taking apart the Stimulus package

The “Stimulus” package…ah, yes…this is the silver bullet that is supposed to save us.  Let me say up front that I’ve been calling for the U.S. economy to crumble for a couple of years now, and really wish we’d quit jump starting it with taxpayer dollars that ultimately drain down the gaping hole that is our economy right now.

Look…we enslaved ourselves to inflated housing values, cheap credit and lax lending standards in order to borrow lots of cash, create imaginary financial trading vehicles to sell to each other and used to money to purchase cheap Chinese crap or too many vacation homes, depending on which end of the financial trough you were feeding from.  The problem is, any house of cards will eventually fall when someone shakes the table.  Strangely enough to these financial geniuses, falling housing prices shook the table and now everyone wants to be saved.

From what?  A resetting of markets to their normal growth?  Go back and look at a chart of the Dow from 1980 through the present.  Starting in 1995/96 we get a huge up tick in the market followed by a reset around the start of Bush’s first term, then more growth.  Internet bubble, pop, housing bubble.  People got used to it, so there were unreasonable expectations that we should always have 40%+ returns.  In reality, there’s nothing to be saved from, other than our delusion that abnormally high performance is actually normal.  People should look up “reversion to the mean”.

We tried a rescue once already in recent times.  In February 2008, as signs of a slowdown emerged, Congress passed a $168 billion package of tax cuts and rebates. Later in the year, after Wall Street crumbled and economic activity contracted sharply, Democrats called for a far larger stimulus, and after his election, Barack Obama declared that what he preferred to call a “recovery” package would be his top priority.  So what happened the first time?  The underlying problems were not addressed and money was shoveled to the financial sector - the same people responsible for the problem through off-book accounting, bad loans to maximize profit, and unregulated trading of poorly understood investment vehicles (CDS’s and CDO’s among others).  It’s a textbook example of a definition I love:  insanity - “doing the same thing again and expecting different results”.

So let’s take a look at what we’re going to attempt this time.

I had to think some more about this today as there was something about it all that was bothering me, but I couldn’t put my finger on it;  there are actually two packages as I see it:  the big stimulus one everyone’s talking about and TARP.  Let’s ignore TARP for now.

The overall package’s tally? Nearly $900 billion.  Just under $1 trillion.

Current U.S. government debt: $10 trillion.  So we’re going to add 10% to the overall debt.  Given that we can’t seem to repay our current debt, passing on an additional 10% to ourselves when we hit retirement, as well as future generations, doesn’t seem too bright, unless there’s a really good reason.  So before we get into the problems we’ll face by jacking up the debt another 10%, let’s look at what we’re getting for it.

What are the major provisions of this stimulus package?

The provisions intended to have the swiftest impact are the tax cuts, totaling $275 billion, roughly a third of the package.  Mr. Obama’s signature tax cut would provide a credit of up to $500 for individuals and $1,000 for couples.

One area where analysts say the bill would be relatively effective is in providing assistance to states, many of which, to comply with balanced-budget requirements, are facing the prospect of steep cuts in jobs and services.  An $87 billion provision increasing the federal contribution for Medicaid costs is expected to go a long way to help states close their budget gaps.  The bill would also create a $79 billion state fiscal stabilization fund, disbursing half the money in late 2009 and half in late 2010. The Congressional Budget Office has estimated that little of that money would be spent this year.

$140 billion in the bill’s spending on education:  some quick-spending, but some like $20 billion for school renovations much slower to kick in.

Similar scrutiny could be trained on health care and especially on alternative energy programs. Like some of the education spending, a large chunk of health care spending would not start until 2012 or later, when, most experts think, the recession will be over.

The House bill would spend $20 billion over five years on added food stamps.  The legislation would also devote roughly $43 billion over two years to extend and increase unemployment benefits.

But there’s a misguided belief in Congress that you can’t just have a bill that addresses a simple need, with a simple bill.  That’s why this one has items that also probably won’t help the economy much, such as $650 million to help people without cable receive digital signals through their old-fashioned televisions or $1 billion to fix problems with the 2010 Census.  Did we ask anyone to fix the 2010 Census right now?  No.  Especially not with $1 billion of extra debt.

But, to summarize, we end up with about 1/3 tax cuts, 1/3 in education and state aid, and 1/3 in miscellaneous.  While I agree with the aim of much of this spending, and wouldn’t mind cutting defense spending and using that money for these goals in a regular budget, I have several objections to this package and how it’s being done.

1)  The Obama administration’s stimulus bill reflects the work of those hurrying to meet a deadline. Predictably, but disappointingly, it hews closely to existing policy frameworks.  Is the economy really so close to collapse that we need to shove this through with no time for reflection on what’s being done, and the resultant horse-trading that puffs up bad parts and drops good parts of a bill?  In the same fashion as the Patriot Act, I feel that we’re getting handed legislation that will have a long-term impact without being given a chance to review it sufficiently.  Are you really going to believe that all of Congress has read and understood the entirety of this bill?  Of course not - it’s not even in final form yet.  Either the economy is in such bad shape that we need to pass something now, in which case the spending that kicks in 2 years from now does us no good, or we actually have a little time to debate the details.

2)  Let’s touch on the TARP thing now.  Treasury Secretary Timothy Geithner also planned to announce the details of a separate financial stability package on Tuesday, structuring how the administration would use another $350 billion in emergency relief approved last year to prop up U.S. banks on the brink of failure, a senior administration official said Saturday evening.

So why are we throwing more money at the financial sector?  If the stimulus package is going to get things moving, why not put the money there, instead of giving more money to banks that aren’t lending, so that they can pay bonuses and shore up their balance sheets without actually lending?  Makes no sense.

3)  Tax cuts?  Isn’t that what got us (to an extent) into this mess?  And are people really going to spend it?  No…they’ll pay off late bills.  So a one-time shot in the arm that ultimately will only prevent the next set of financial reports from looking even worse.  And what happens next month?  $1000 one-time credit is great - if you still have a job and can pay your bills.  Otherwise, you’re stuck next month without that $1000 and then what?

And tax rebates for buying cars or houses?  Puh-leeze…who’s buying houses or cars?  People are worried about holding on to the ones they already have, not buying new ones.  At best, it will help people who were already going to make these purchases.  It’s not going to stimulate a new bubble, which is apparently the hope.  Inflate our way out of the last bubble that deflated.

I just don’t see the practical short-term benefit to shelling out this cash.  I don’t see people returning to spending so much to bring businesses back.  Businesses over-extended, people over-consumed, and banks over-everything.  It was an unsustainable model and we finally saw that the Emperor had no clothes.  So let’s stand here full a minute, accept that he’s naked, and move on, not attempt to convince ourselves that maybe he had on a pair of socks.

I’m in favor of letting a true bottom hit.  Will it be painful?  Sure.  But save the $1 trillion for rebuilding from that, once bad banks, home loans, businesses, etc. have died off.  Is it a bitter survival of the fittest in economic terms?  Yes.  But otherwise, we could be in for years of slow meltdown (since there is no guarantee this will work) coupled with dollar devaluation.  And where’s that put us?

I’m pessimistic because I think this is short-term vision.  Here we are working and saving so that the government can print a bunch of money to bail out people who spent irresponsibly.  The result?  The dollars we’re saving will get taken away when/if we get to retire, since the tax rate in 10-15 years will have to be astronomical to recoup the money we’ve borrowed.  Not to mention that, of those fewer dollars we’ll have to spend, they’ll be worth less, since we’ll have lowered the credit rating of the US, hence the value of the dollar.

In short, if we try to sugar coat this, we’re toast.  Maybe not this year, but in the near term.  But I’m just a bear that way.

German troops back in France

For the first time since the second world war, German troops are going to be stationed on French soil. This decision whose announcement has been received with equanimity among the French residents of Alsace and Lorraine, Read the rest of this entry »