Stimulus 2.0? – Please no new Stimulus, the Effects Could Be Disastrous

[stevenleser]

http://www.opednews.com/articles/Stimulus-2-0--Please-no-by-Steven-Leser-090708-912.html
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July 8, 2009

By Steven Leser

As Vice President Joe Biden pointed out in an ABC interview on Sunday July 5, the stimulus isn't working as quickly as one would like and the economy is probably even worse than the administration figured. I wrote an article two April's ago http://www.opednews.com/articles/opedne_steven_l_080402_it_s_not_a_recession.htm that predicted:

... a Dow in the 7000-9000 range, the S&P 500 struggling to stay over the 1000 mark and a NASDAQ in the 1400-1600 range. I see unemployment and inflation both between fifteen to twenty five percent. I see many consumers defaulting on their credit cards and the major crisis in the banking and lending industry will be compounded by hordes of consumers defaulting on their credit cards
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My predictions regarding the stock markets turned out to be right on. The reason that inflation didn't get as high as I thought it would was that the other effects on the economy had such a dramatic impact on demand that they overcame the shortages in energy and food that I think still exist (I think these shortages will reassert themselves if the global economy turns around and demand returns to normal).

Unemployment is not going to get as high as I predicted because of the actions of two US Presidents to intervene in the crisis with bailouts and stimulus packages. Both Presidents Bush and Obama deserve credit for taking actions to prevent a greater collapse. Still, it seems like unemployment is going to hit 10%. While some people are angry and upset that it has gotten so high, and I feel for those people that are impacted, I am pleased it hasn't gone higher.

We have become a society and political culture that has no patience for anything. The talking heads criticizing the administration seem to have conveniently forgotten that during the last major economic crisis it took Ronald Reagan 18 months in office to make improvements in unemployment. I don't think it is possible for an administration to have a big impact on the economy in less than a year. Of course, the Obama administration deserves part of the blame here for not properly setting expectations. They should have said up front that we have to allow 12-24 months at a minimum to turn the economy around and they should have been out there regularly reinforcing that message.

The immediate problem that comes with the revelation that the Stimulus isn't working as quickly as some would like is that it has had an impact on the administration's polling in some states and this in turn has resulted in knee-jerk calls for a new stimulus package to accelerate economic recovery.

Besides the fact that we absolutely should not engage in any additional deficit spending out of principle alone, what those who are calling for this have not considered is whether a massive increase in debt may have the unintended impact of torpedoing the AAA rating of US Bonds.

The two main firms that are involved with determining Bond Credit ratings are Moody's Investors Service and Standard & Poor's. I wrote to Standard & Poor's asking them for an interview regarding whether a new Stimulus might impact US Bonds' AAA rating. While they declined the request, they sent me two recent (June 2009) releases by Standard & Poor's that discuss the creditworthiness of US Bonds and how they think there is no short term likelihood that the AAA rating is at risk. However, those politicians considering a second stimulus should be aware of this portion of one of those publications (see http://www2.standardandpoors.com/spf/pdf/events/FIArticle618097.pdf for the full article):

What Could Be Leading Indicators Of An Impending Rating Action On The U.S.?
.
.
.
Those implying degradation of the U.S. fiscal profile to a point where it would differ markedly from that of other 'AAA' sovereigns

Leading indicators could include:

A forward fiscal forecast of persistent deficits that result in a lasting and material rise in debt in terms of GDP.

Discontinuous and significant upward jumps in the U.S. general government debt burden, perhaps resulting from the cost of a second round of assisting distressed U.S. financial institutions or government-sponsored enterprises.
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So, the AAA rating is not at risk unless we do something to massively and negatively affect government debt... like another stimulus.

What would happen if US Bonds were downgraded from AAA to AA? This April 15, 2008 article, http://74.125.95.132/search?q=cache:yaaqiof1FSkJ:bigpicture.typepad.com/comments/2008/04/could-the-us-lo.html+http://online.wsj.com/article/SB120818189112412691.html&cd=1&hl=en&ct=clnk&gl=us in the Wall Street Journal suggests that if this were to occur, "it would cost the U.S. government so much more in financing costs as to cause a depression -- estimates are for between 1-1.5 trillion dollars."

It is imperative that there be no new stimulus. The previous bailouts and stimulus packages did what was necessary to stabilize the economy and prevent a greater collapse. Most economists are predicting a robust recovery to start at the end of this year. The administration should issue a mea culpa at least to not being more clear with people how long it will take to get to a recovery and say we are on the right track for the stimulus to turn the economy around at the beginning of next year.

[Rosa Luxemburg]

1. You have to look at the mess that we inherited from Bush

it's a long road uphill to mend this large wound

[stevenleser]

6. I agree. But I think everyone needs to understand what the risk is of another 500 Billion+ in debt

it seems like Standard & Poor's guidance is clear that this could cause a loss in the AAA rating and that would be catastrophic.

[Rosa Luxemburg]

9. the government had no trouble funding the Iraq war with borrowed money?

when money is put to good use people complain

[704wipes]

17. That will lead to inflation at some point

always has, always will

[stevenleser]

32. To groups like S&P and Moodys and Fitch, the why doesnt matter, its is the how much in aggregate

and how that compares to GDP. One more big hit will probably be the bridge too far, at least that is how I read S&P's recent guidance.

But to your point, yes, if you build up a ton of debt doing bad or stupid things, then when you need to be able to spend money, you wont be able to do it. That is the lesson here.

[Rosa Luxemburg]

40. well exactly, it is usually the poor who take the greatest hit

I don't know where our school system woulkd be without the stimulus?

[lapfog_1]

11. The risk of "official" 15% unemployment (25% real)

is actually a much worse outcome.

[stevenleser]

14. No, if we lose the AAA rating, it is like a reverse stimulus times 3.

and the risk is real and it is spelled out in S&P's recent guidance on the issue.

[Oregone]

20. Good point! Then lets fund this one by taxing the rich!

The source of the problem here is deficient demand. Private investors simply are not stimulating production due to the market condition, which reciprocally exacerbates the problem. If they won't spend the money (as the economy deflates), then by all means, the government should volunteer to spend it for them. In the mean time, in this deflationary period, they are gaining wealth by having it sit there. The only approach to fix this is to stabilize the economy and make it profitable to invest in again. That will not happen until production increases and more people on the bottom have a job and a paycheck.

[stevenleser]

23. That is a much more logical approach, BUT there is a problem with that as well...

we are already going to do that to fund Universal Healthcare.

If another Stimulus has to be done for some reason, it has to be done in a way that is revenue neutral. But try and find $500,000,000 Billion in new revenue or budget cuts. That is not so easy.

[Oregone]

28. No you are not going to have universal healthcare

You aren't going to have Universal Healthcare. Its going to be 99.5%+ mandated private insurance (and 20-30 million will still be uncovered according to CBOs last scoring). 60% of per capita health expenditure is already funded by the government, so how much more money do you really need anyway?

There is simply no excuse not to have a real stimulus to replace the withdraw of private money from the economy, and there is simply not a reason to tax the withdrawing investors to do so. Under Reagan, the top marginal rate averaged 56%, and now it is around 39%, right? Before Reagan, it was 70%+ up to 90%, and America saw wonderful growth through many cycles. Readjust the top marginal rate a fund a real stimulus and healthcare and a real sane government (instead of the most barbaric industrialized nation).

[stevenleser]

34. I'm not opposed to the idea... but... political realities? I dont think we get to

dip into that well twice.

[Oregone]

35. Being scared of using political capital is no reason to never attempt to use it.

[lapfog_1]

39. I beg to differ.

25% unemployment are numbers we haven't seen since the great depression, if then. This current downturn may do to us what a combination of events did to the old Soviet empire. But to not attempt to address the unemployment issue adequately, well we will STILL end up with that bond rating problem... only a little bit later (as tax revenues fall off a cliff because no one is working), plus we will have the unanswered problem of unemployment.

So this isn't a choice between one or the other, it's a choice of "bad bond rating now, more interest in the future, but more employment to help with revenues" OR "massive unemployment AND bad bond rating 1 year from now"

I choose more debt now for more employment now. Increased taxes to help pay off that debt (we need to run surpluses for 2 decades at least, but not start for 5 years).

In fact, we should go ahead and finance another 1 trillion dollar program to come up with highly distributed green power generation and conversion of our auto and trucking fleet to electric. If nearly every house had generation capability, the grid would not need to be replaced or upgraded.

Yeah, it puts us in massive debt. But at least we will start climbing out of the hole after we dig it another 5 feet down. Not sending all of that money to other parts of the world for their oil would be a big help. Converting the auto fleet to newer cars that are electric would fix up Detroit too. Not to mention that we would be going "green" much faster than the current bullshit Cap and Trade stuff would have it. And building and installing all those micro wind turbines and solar panels would create 100s of thousands of jobs. And it's an investment that we pay for over 20 years.

[depakid]

2. History and responsible economists say otherwise

[stevenleser]

4. About what? n/t

[depakid]

10. About the necessity of additional stimulus

to make up the spending gap and provide more revenue sharing to the states. Cutting back and worrying with the budget deficit too soon was the same mistake FDR made.

[stevenleser]

13. Did you read about the Bond rating issue or just the title of the article? n/t

[depakid]

15. Standard & poors is lucky that their executives and employees aren't in prison

where they belong.

If the Obama administration had an ounce of integrity, the ratings agencies would be in deep shit at the moment. And still could be, down the line- particularly is they pull something like this.....

[stevenleser]

19. Pull something like this? They have already done so to other countries based on similar criteria...

and are threatening to do this to several more based on debt to GDP ratio and other issues. They also did this to Berkshire Hathaway and several other firms. It's not like we can say they are picking on US Bonds.

[depakid]

21. Other countries don't have the means to prosecute them for fraud

and violations of multiple federal statutes for their role in the mortgage securities meltdown.

[stevenleser]

24. Now we are heading into the twilight zone. You want the US Govt to blackmail Moody's and S&P

to keep the AAA Bond rating. You realize that this would get out and then no one would trust the credit worthiness of US Bonds and the situation would be even worse.

[depakid]

25. Just sayin that if I were a ratings company I'd think twice about it

considering that they ought already to have been prosecuted.

[AllentownJake]

37. Show me a historical example

of a country printing more money with our current debt levels.

Don't forget to include the consumer and Mortgage Debt

[babylonsister]

3. Because you say so? No. I'll read a bit more. But thanks. nt

[stevenleser]

5. Nope, I never ask my readers to take my word for anything. But thanks.

There are links that back up my points. Did you read them? Do you understand what will happen if the AAA rating goes?

[babylonsister]

18. But aren't the facts in your links changing daily? As for AAA,

no, I don't know. I'm not worried about AAA. Should I be?

[stevenleser]

22. Yes, you should be worried about the AAA rating and so should everyone else

The loss of AAA would cause immense damage to the point of taking 1-1.5 Trillion dollars out of the economy. So it would wipe out the effect of any new stimulus and reverse the good effects from the last one as well. And that is only the damage from the first year or two. If we didnt cause conditions to change such that we got the AAA rating back (which would involve paying back the debt), it would keep costing us massive amounts of money well into the future.

[babylonsister]

26. I'm not a member of AAA. I could be but I'm not. And you seem

too attached to it. :shrug: I think you think it's more important than it is.

[stevenleser]

30. Don't take my word for it. See what happens to firms and governments when their Bonds are rated down

Do the research so you can see what the impact is. The WSJ says it would take 1 Trillion to 1.5 Trillion dollars out of the economy.

See how anxious other countries get at the mere suggestion this may happen to them and the impact on their currencies, etc. Here are a few articles to get you started:

http://news.theage.com.au/breaking-news-business/bond-market-retreats-on-uk-ratings-woes-20090522-bi57.html

http://ph.news.yahoo.com/rtrs/20090702/tbs-markets-euro-ireland-7318940.html

http://www.realtor.org/research/economists_outlook/quicktakes/quick052209ly

[BlooInBloo]

7. I'm more likely to go along with what Krugman says on the matter.

[stevenleser]

8. In this case, it matters more what Standard & Poor's says they may do as a result

Krugman can theorise all he wants.

[Jennicut]

12. Its too soon when not all of the money has even been spent.

And Steven, you are correct that we have very little patience, it took Reagan a long time (something Faux news would never say) and he probably made it worse by starting disastrous economic policies for short term gain but long term damage. Obama has done the right thing.

[zulchzulu]

16. I would rebrand it and call it something else... but we will need a second injection

I'd certainly wait for a while. And I'd use the Frank Luntz Playbook on rebranding Stimulus 2.0 into calling it something else. Since it should be some kind of tax deductions for supporting Stimulus programs, it should be called the Citizen's Rescue Act or something to that effect.

Again... nothing until 18 months or so into the Obama administration, which would be after the 2010 election.

[FrenchieCat]

27. I don't recall anyone mentioning a 2nd stimulus except for

the media. Do they "do" policy too? :shrug:

[stevenleser]

33. Hi Frenchy, it looks like Steny Hoyer was the originator...

http://news.yahoo.com/s/cq/20090707/pl_cq_politics/politics3159400_7

He and Baucus seem to be the ones who say all the things that get the right wingers all up in arms.

[FrenchieCat]

36. Steny Hoyer didn't propose a 2nd stimulus package......

He just didn't say that he opposed one.

Read this thread: http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=132&topic_id=8518125&mesg_id=8518125

[stevenleser]

47. The problem with when people like Hoyer and Baucus say things like this is...

... there is speculation as to whether they are "floating" the idea to see if there is any real objection to it. That may not be the case, but talking heads will all assume that this is what is happening.

[emilyg]

29. K/R see below

emilyg (1000+ posts) Thu Jul-09-09 03:27 AM
Original message
CNN poll re second stimulus
Quick Vote
Should Congress pass an additional stimulus bill to boost the economy?
Yes 28% 5712
No 72% 14533
Total Votes: 20245

[Zavulon]

31. Not only am I against a second "stimulus" package, I say cancel the unspent portions of the first.

It isn't working, and we don't need any more debt. Bush dug us a huge hole, let's not have Obama grab a shovel too.

[Hutzpa]

41. That would be perfect now

wouldn't it, yeah, cancel everything and lets just sit and hope
for miracle.

[Zavulon]

45. No, what would be perfect would be

to piss away more money and create even more debt on an idea which hasn't worked. How much money would you toss into repairing a '64 Rambler which hasn't shown any improvement after a series of repairs?

The administration misread everything and admitted as much. They don't know how to fix the economy, so why should we throw good money after bad?

[AllentownJake]

38. Steve

I'll disagree with you on the robust recovery, however I will agree with you a second stimulus would be bad.

[stevenleser]

48. I think we will have to be content with the fact that the complete collapse was averted...

it is unfortunate that Bush wasted so much money. Had he not, had he been fiscally responsible, then we could consider the idea of a second stimulus to jumpstart the economy. Mind you, piling on debt if it isnt necessary is irresponsible any way you look at it, but it is a conversation we could have if conditions were different. With the AAA rating at risk, it isnt anywhere near worth it.

[jesus_of_suburbia]

42. Steven, I always watch your appearances when you are on tv (only because you tell us about them)

It's shitty that your thread is (-) on the recommends.


Keep up the good fight.

[stevenleser]

49. Thanks, I appreciate it. I understand the - in recommends. People are shooting the messenger because

they dont like the reality of where we find ourselves and I am with them in that respect at least.

[grantcart]

43. A second stimulus is a dagger aimed directly at health care reform

Beyond the rating question is the question whether creditors have an unending patience for American Debt.

Germany, Japan and China have all indicated that their patience is wearing thin.


We probably have enough credit for one major program and if we accept the stimulus we could find it impossible to fund additional debt needed for implementing health care reform.

[KoKo]

44. I've never agreed with anything you've posted on DU before...but I DO agree on this one....

It's a "head fake" to put Obama in a position where the PTB shoot down Health Care for ALL and any regulation for environment or ending the Wars!

[stevenleser]

46. That is another excellent point that I hadnt considered

If people think we can do a second stimulus AND fund Universal Healthcare, they are really living in fantasyland.

[ItNerd4life]

50. Another stimulus would help the Republicans

It would just lead us into more debt and not help the economy. Voters will quickly change their minds and start
caring about the deficits and Democrats would start getting the boot.

Only 10% of the stimulus has been spent, it's way to early for more.

It's nice to hear other Dems thinking along these lines.