This is my first blog, and thanks for visiting. I hope you enjoy what I write.
People who know me know that I am not a great believer in the long term prospect of the US economy, and the latest proposed stimulus package only further degrades my belief. In very simplified terms, the president, the presidential candidates, and many members of congress are all favored of a >100 billion tax relief stimulus package, in the form of tax rebates and tax cuts to savor the economic crisis exposed by subprime mortgage issues. I am aghast by such blatant waste of the federal funds.
The current crisis stems mostly from rapidly degrading balance sheets in the banking systems and the monline insurers. The emergency rate cuts might accelerate inflation, but it’d be necessary in order to save many banks from failing. If a few prominent large banks fail, it probably won’t do any good to the US either in the short term, or in the long term. To stop the bleeding of the banks, rate cuts are necessary, and other uncomfortable side effects will just have to be dealt with later. However, the tax relief is unlikely to help anyone to solve their mortageg problems, as the amount for each household might only help them out for 2-3 mortgage payments (if at all), and are more likley to be spent on food and other dispensing items, and will only prolong the crisis.
Some current estimates are that there could be additional $250 billion for banks to write down. Wouldn’t it be more productive for the government to put the funds to act as insurers of some of the toxic mortgages so a floor price on them can be established, and investors can then come in and help to create a market for them? Or how about using the funds to insure potential failure in money market funds much like what FDIC do for savings accounts? But no, it has to go to TV purchases and clothing stores for many people who do not really need them.
For a government with huge budget deficit to act in such manner, no wonder so many countries do not share the optimism that Americans have. Given that USD has depreciated so much in the last few years, and yet there are relatively few takeover of US businesses, it should be a wake up call for many.
