The Stimulus is a Distraction

If you’re worked up about whether or not the government is going to spend $800 billion (not counting interest) or $900 billion (not counting interest) in Obama’s stimulus plan, you’re been successfully misdirected:

Bloomberg.com: News
Feb. 9 Bloomberg — The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.

The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed. The total already tapped has decreased about 1 percent since November, mostly because foreign central banks are using fewer dollars in currency-exchange agreements called swaps. The Senate is to vote early this week on a stimulus package totaling at least $780 billion that President Barack Obama says is needed to avert a deeper recession. That measure would need to be reconciled with an $819 billion plan the House approved last month.

The stimulus if Obama’s Iraq War – big, expensive, controversial, not as good as he hopes, not as bad as the opposition claims. It might well do some good, whether or not its primary objectives are met

The Obama bailout, or TARP III (which will be unveiled Tuesday), on the other hand, is incredibly dangerous. It’s going to be executed through the Federal Reserve, instead of the Congress, because there’s no way the Congress would agree on $10 trillion in guarantees to Citi, BOA, etc., but which Obama thinks is a good idea.

Britain did the same thing recently, and that’s where talk of the bankruptcy of Britain (not likely, but no longer unthinkable) came from, too. Letting Citi and BOA go bankrupt would be a catastrophe, everyone agrees on that. My difference with Obama is whether or not it’s good for the country to promise to pay back those loans, if Citi and BOA can’t.

9 thoughts on “The Stimulus is a Distraction”

  1. I can’t figure out exactly what they are pledging. It sounds like they want the banks to make 9.7 trillion in new loans with money they will be getting from the government. And it sounds like the banks are too chicken to lend the 9.7 trillion to borrowers, so the government is going to guarantee that the banks will not have to pay the government back if the new borrowers stiff the banks. Am I way off here?

  2. Wasting my time thinking about this a little more, perhaps a fairly significant proportion of the “guarantees” is the enhanced deposit insurance.

  3. i think you’re still talking about distractions unfortunately. the real news today (and possibly for the next 6 mo.) is another $400B bond market dislocation.

    this time, caused by what looks like another russian default.

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aY97svgDNkiM

    “The euro fell against the yen after Russian banks asked the government to moderate talks with foreign creditors on $400 billion of loans and UBS AG reported a larger-than-forecast quarterly loss, adding to speculation financial turmoil is worsening. ”

    deceivingly small space … but this is the prime mover right now.

  4. I honestly don’t remember for sure, but I don’t think there were any guarantees to the investors who purchased the bad assets from the RTC – other than they were getting them for amazingly cheap prices.

    So they’re trying to avoid selling bad assets at cheap prices?

  5. FedX is a valuable contributor to the tdaxp community.

    More on the possibility of the Russian default, culled from the web:

    Russia about to default on soveriegn debt (again) [1]:

    The Nikkei newspaper has released a very troubling if not totally surprising story, that Russia will ask foreign lenders to reschedule loans worth $400 billion, potentially the equivalent of a debt default depending on how it is structured. Just a reminder, the last time Russia defaulted on its bonds it set off a cataclysmic chain of events that terminated with Long Term Capital Management’s implosion and the first major Wall Street mediated rescue of the financial system. This report has already caused the euro in early Japanese trading to drop significantly against both the dollar and yen

    ‘Dead’ Russian Bond Market’s 80% Yields Squeeze Firms [2]:

    Feb. 11 (Bloomberg) — Russian companies, the biggest emerging-market borrowers during the last three years, are shut out of the international bond market after yields jumped sixfold since August amid plunging energy prices and a weakening ruble.

    No Russian company has raised money through foreign bond sales since August, compared with $80 billion raised by more than 200 companies in Latin America and Asia outside of Japan, according to data compiled by Bloomberg. Yields on bonds due next year from Moscow-based Transcapitalbank and JSC AIKB Tatfondbank in the Russian republic of Tatarstan are trading at yields above 80 percent, up from 12 percent in August.

    “The primary market is dead,” said Stanislav Ponomarenko, a fixed-income analyst at ING Groep NV in Moscow. “I wouldn’t be too surprised if there are no bond deals done by Russian corporates for most of 2009, if not the entire year.”

    Fitch Cuts Russia Debt Rating First Time Since 19 [3]:

    Feb. 4 (Bloomberg) — Russia had its debt rating cut by Fitch Ratings for the first time in more than a decade as falling oil prices contributed to dwindling foreign currency reserves and record capital flight.

    The rating was lowered to BBB, the second-lowest investment grade, from BBB+, Fitch said in a statement today. Fitch maintained its negative outlook. Standard & Poor’s Ratings Services took the same action on Dec. 8. Russian stocks erased earlier gains, while bonds were little changed.

    Emerging markets are being battered by the global financial crisis as investors shun assets seen as being riskier. Russia, the world’s largest energy supplier, has spent $210 billion, or more than a third of its currency reserves, supporting the ruble since August, Fitch said.

    Russia Faces ‘Toxic Assets’ Threat, Deripaska Says [4]:

    Billionaire Oleg Deripaska, reckoned last year to be Russia’s richest man, said the nation faces a problem of “toxic assets,” such as property and industry projects that no longer make economic sense.

    “No one talks in Russia about toxic assets but it’s already an issue,” Deripaska told reporters in Moscow today, adding that industry conditions may worsen next quarter before the economy begins to recover in a year.

    Russia, the world’s biggest energy exporter, is facing its worst crisis since defaulting on $40 billion of domestic debt in August 1998. The ruble has tumbled 36 percent against a dollar- euro basket since August as oil prices fell. Companies have sold about $110 billion of foreign debt due this year, according to the central bank, double that owed in Brazil, India and China.

    “Maybe we are in June 1998, not in September yet,” Deripaska said, referring to conditions before the Aug. 17 default. He added that the situation isn’t as bad as then.

    The City fears Russia’s default [5]:

    MOSCOW. (RIA Novosti political commentator Andrei Fedyashin) – The first Russian-British financial consultations in early February in London will reveal what Russia can expect from European banks. Regrettably, Russia cannot hope for much.

    It should not expect to receive loans because its credit ratings are falling, and without loans, its ratings will continue to fall – a vicious circle.

    Experts in London’s City are openly talking about a risk of Russia’s default on foreign debts, although they do not think it will be as bad as in 1998. After all official speeches, Deputy Prime Minister and Finance Minister Alexei Kudrin had to persuade the City that Russia will not fall so low.

    sonofsamphm1c,

    Excellent link! It toes into the broader issue of saving or destroying the wealth of Citi’s and BOA’s owners [6], as well.

    [1] http://www.ehmac.ca/mac-ipod-help-troubleshooting/55958-reuters-com-malware.html
    [2] http://www.bloomberg.com/apps/news?pid=20601087&sid=aa9y6adTM0ZE&refer=home
    [3] http://www.bloomberg.com/apps/news?pid=20601087&sid=a60wjgr6gGeI&refer=home
    [4] http://georgiandaily.com/index.php?option=com_content&task=view&id=9902&Itemid=74
    [5] http://en.rian.ru/analysis/20090205/120003979.html
    [6] http://www.tdaxp.com/archive/2009/02/11/what-is-the-difference-between-sirius-and-citi.html

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