Monday, February 23, 2009

Sidestepping the Great Depression

We live in interesting times...for five months now, the aftershocks of the collapse of Lehman Brothers and the bailout of AIG (NYSE:AIG) have taken the U.S. and worldwide markets sharply lower, while absolutely obliterating the banking industry. The initial reverberations of the Lehman and AIG news was a catatonic credit market and a fear-stricken consumer - both which resulted in businesses sharply scaling back operations to address lack of liquidity and the sudden absence of the voracious appetite of the U.S. consumer. The ensuing impact is an economic collapse that we are reeling from on almost a daily basis.

The Obama Administration is focused in doing everything possible to avert what many have called the coming of the second Great Depression. The strategies all come with fancy names which try and convey hope and calm. We have the Financial Stability Plan (formerly the Troubled Assets Relief Program or TARP), the American Recovery and Reinvestment Plan (better known as the 2009 Economic Stimulus Package) and the Homeowner Affordability and Stability Plan (known around CNBC circles as the "Bailout of my Neighbor" act). Over the next several days, I will attempt to analyze these different plans, all with a singular strategy of substituting government spending for consumer absence, and how they may go in achieving their lofty goals.

Any analysis should start with the biggest of all these plans, which at the current time is the $787 billion Economic Stimulus Package. An analysis of the different components of the 2009 Economic Stimulus Package - many which clearly appeared to have received a failing grade from a suspect populace - is useful and insightful. I'm sure many of us have watched the proceedings from the sidelines and have been left with only soundbites as to the different components of the package. But an analysis of any spending package, let alone one as herculean as this $800 billion monstrosity, which critiques the various parts (but ignores the whole) can easily find faultlines, as there is rarely a spending package that moves through a government office that is not a result of many hard-fought compromises.

The presence of significant tax cuts in a bill engineered by Democrats is an enormous show of bipartisanship and an olive branch to the right, but Republicans and conservatives alike chose to ignore this aspect of the bill and instead resorted to bickering and blatant attempts to win back votes lost through eight years of failed policies. As a fiscal conservative, I also had enormous issues with many aspects of the bill, but recognizing the abyss which the US economy is quickly sinking into, I felt it more responsible to step back and analyze the overall impact of any spending package of this magnitude at this time.

There are many debatable consequences of this bill, but one that is undeniable in any economic corner is that $800 billion dollars WILL MAKE ITS WAY into the US economy over the next two years. This will boost a sagging GDP by 3% in each of the next two years, send checks back to a public that has felt disenfranchised and ignored throughout this crisis, and provide real spending incentives across many socio-economic sectors. For this, the Obama administration should be applauded for "railroading" this bill through Congress as quickly as they have.

The reality is that there is no stimulus package alone that can turn around a $14 trillion economy - but if we can enact one that is large enough to buffer the enormous vacuum of spending that has occurred due to the immeasurable fear and distrust that exists in the US today, then we may have a chance. The Obama stimulus package benefits many segments of this country that are currently cowering in their corner and we need these segments to begin to believe again in the future of this nation.

Add to this effort the $2 trillion dollar leveraged boost provided by Geithner and team (hopefully with some sort of plan) and we can again hold out hope that the US will be able to raise its proud head once again.

Had we instead paused and debated the various inputs to the bill and attempted to arrive at a package embraced by all, an impossibility in a country as divided as ours currently is, we will have undoubtedly slipped dangerously further into an economic downturn that could make the last six months seem like the iceberg that barely nicked the Titanic.

No comments: