The Great Deleveraging has provided us a wide array of plans and bailouts. From the unread stimulus pushed through the Congress to the Bush Administration's TARP legislation. The theme of this crisis of confidence is the government sponsored bailout. We can only hope they will read and debate the 2010 budget titled ,"A New era of Responsibility", in true Democratic form. Simply, it has been scary out there. The banks failed and our financial markets are in disarray. The consumer, our saving grace is more, or as over leveraged as our banking system. Our debt growing by the day, and our debtors are starting to get scared. But, don't worry the government will come up with a plan to save the day. FDR's great "brain trust" did it during the depression, right? Well, no they didn't. Their plans actually prolonged the contraction. Well these are different times, and there are some different plans. TARP, the Stimulus, the Fed $300 billion Treasuries buy out, the most recent Treasury plan, the housing plan (insert Rick Santelli rant here), the Great Auto Bailout, and the Budget are just a few of the plans that are supposedly going to save our over leveraged economy. Will they work?
Finally, Tim Geithner released a plan that didn't send the markets plunging. Martin Wolf of the Financial Times column today, "Successful Bank Rescue Still Far Away" provided a sober view of the Geithner Plan. This plan, though better than the last couple thrown out there by Treasury, still has many holes in it. Thus, the market has responded much better to this plan than any other of Geithner's comments and plans. There are still many problems with paper, and this plan leaves many uncertainties. Only time will tell, and hopefully it treats us well.
Last night I was watching the talking heads on CNBC prior to the Presidential Press Conference. Many of the guests were bullish, but I remain a bear. This is due to the current political environment. The markets are trading to more political news lately, and there is good reason for that. The Congress is leading a populist hoards wielding torches and pitchforks. This will do more to harm our system, if we let it spiral out of control. It only leads to distrust during a period when we need cooperation of both the private and public sector to unfreeze credit. The current AIG bonus fiasco is a prime example of this. The Congress passing a 90% tax against those bonuses and then all bonuses from corporations receiving TARP money undermines our legal system. Ours is a system that is base on contractual law, and the current actions by the Congress undermine their own function in the larger system.
There are many issues here, and the recent bear market rally has brought a ray of sunshine to a cavernous Wall Street. It will not last, but hopefully we can learn from the lessons of the past. The Geithner plan does include the private sector, which adds to optimism. However, there are still many problems to deal with.
The stimulus plan is based on outdated models and theories. A current article by four economists John Cogan, John Taylor (both from Stanford), Tobias Swik, and Volker Wieland (of Goethe University) measures the results of Keynesian multiplier applied by the President's economic team against that of a neo-Keynesian model that factors in may other factors left out by the outdated Keynesian model. The results will baffle you by Q4 2012 Percentage increase in GDP by the Obama model is 1.55, while the other predicts 0.40. Keep in mind that the both models have the fed funds rate at zero through 2010. Yes, that is right 2010. With Helicopter Ben running the printing presses, we may have to deal with some wild inflation.
I just hope that our Professor President doesn't think he can out smart the economic system. According to A story from the weekend's Chicago Tribune looked into President Obama's connection to the University of Chicago. The quote that caught my eye, and let's hope it isn't correct (per Steven Leavit Freakonomics) :
"Obama comes from the tradition that thinks you can get your way on social justice and economic issues without affecting productivity very much — and that’s simply living in a dream world. … [Obama and his economics team] are very smart, but the problem is these high-I.Q. guys always think they can square the circle; they always believe they can beat the system with a cleverer system, and they always fail."