Friday, February 06, 2009

A Stimulating Conversation

Generally speaking, I try not to wander too far afield from my areas of expertise. And I admit, forthrightly and without embarrassment, that economics isn't one of those areas. There's a damn good reason why I married an accountant. That said, I'm going to try to organize my thoughts about the current situation.

I think we needn't rehash the sub-prime mortgage mess. We've all heard about how the toxic paper got into the banks' portfolios, and touched off last fall's financial crisis. The TARP fund, set up last fall, was intended to staunch the wounds and allow time for more permanent fixes. And, most indicators seem to say that TARP is working more or less as intended. A system that had been heading towards total failure had, at a minimum, recovered some kind of normality. We are left with two major problems to address, near as I can tell.

Numero Uno: The banks are still holding a non-trivial amount of the aforementioned toxic paper. This issue must be addressed in some way, form, or fashion before banks really feel confident in lending again. The fundamental problem here is that no one knows what these sub-prime mortgages are actually worth. In the long run, the actual real estate is worth a good bit, though maybe not as much as was paid for it originally. In the long run the holders of those notes will turn a profit on them. If the government sets up a "bad bank" to buy some amount of these, it'll be an expensive proposition in the short run ... but remember, the RTC back in the '80s ended up turning a profit for the taxpayer. It's not unreasonable to think that might happen again. Maybe. I just don't know for sure.

Numero Two-O: This is the stickier problem. Aggregate demand has fallen off a cliff, and doesn't seem to be going anywhere. Consumers aren't buying, neither are businesses, and between them they form the bulk of the economy. The only agent left that is in a position to spend money is the government, and that's where the stimulus bill comes in. See, government does exactly two things well: it collects money, and it spends money. Government doesn't always spend it prudently, or for good reasons, but it's always spent on something. And here's where my foresight fails me. In theory, I think increased public spending is a good idea just right now, but on what? I got bupkis, man. Recapitalizing infrastructure sounds like a good idea. It'd need to be done sooner or later anyway. And I don't think tax cuts for consumers will do a whole lot. I know that if I got a one-time windfall, I'd probably pay down some bills instead of throwing down on a big-ticket purchase. Nice, but that doesn't pull us out of this ditch.

So, mostly, I'm going to pass on the stimulus discussion. A man's got to know his limits.

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