Thread: Why Bush's bailout wouldn't work

Why Bush's bailout wouldn't work

Everyone from the White House and the presidential candidates to your barber has a plan to ward off a recession -- and they're mostly lousy ideas that'll waste our tax money.

By Jon Markman
That rumbling sound you hear coming from Washington, D.C.? It's Treasury Department helicopters packed with bags full of cash about to be dropped on voters, as the federal government prepares to launch a brazen, desperate election-year effort to rescue the economy.

If you thought the government's delayed response to Hurricane Katrina was a study in out-of-control largesse -- replete with no-strings-attached debit cards handed to anyone with a Cajun accent and a damp shirt -- wait until you see what the government has in mind for the rest of us this year.

The latest is President Bush's just-announced call for $145 billion in tax relief aimed at preventing a recession that is actually already here. The intent of the plan is simple: "Letting Americans keep more of their money should increase consumer spending," the president said. Bush said Congress should take steps to implement a stimulus plan as soon as possible.

As you can see from the stock market's response, the plan suffers from being too little, too late. After years of turning a blind eye to economic imbalances that have thrown thousands of people out of their homes and jobs, Bush now offers the economic equivalent of a Band-Aid. But he's not alone. Members of Congress, presidential candidates and Fed governors have all made promises in the past two weeks to turn the federal piggy bank upside down to ward off the ill effects of a recession.

With so many offering so much, so fast, with so little examination of the real costs, you just know this has to be a bad idea and rife with waste. Yet there's no stopping politicians backed into a corner with their jobs and reputations at stake. More than $200 billion could fall from the skies before the year is done -- a windfall meant to pad the holes in wallets eroded by rising mortgage and gasoline costs, falling home values and lost jobs.

It seems politicians' big idea is that since they couldn't protect us from predatory lenders, outsourcing manufacturers, the crashing dollar and energy speculators, they can at least numb the pain by mailing us $20 bills to rub on our wounds.

Propping up the American consumer
There's definitely a bull market in cynicism, in other words, but I suppose economic naiveté and public pandering have always been growth industries in Washington. Won't those be our own $20 bills, after all? Let's take a look at the proposals and how they might affect our investments.

There are basically two key ways to stimulate a faltering economy: through monetary policy governed by the Federal Reserve or fiscal policy governed by Congress and the president. The first puts more money in circulation through cuts in the cost of credit. The latter is achieved by legislation that sends citizens rebates on taxes or provides more money for public works projects such as highway and airport construction.

The debate between the two types of efforts comes down to a discussion over speed and effectiveness. If the Fed acted now, the effects wouldn't be felt for six months, as lower-interest federal-funds rates worked their way down to auto, home and business loans that people could use to buy the sort of stuff that would boost manufacturing and service activity. The Congress and Bush administration, in contrast, couldn't take action until they reached agreement on such thorny issues as exactly which groups of taxpayers were the most worthy of government attention, how long tax cuts should remain in effect and when the checks should get cut. But once legislation got passed and the Treasury dropped the checks, the effects would likely be immediate.

Now, the problem for most people reading this column online is that the fattest rebate checks probably wouldn't go to you. Sorry, but you probably have a job and a higher-than-average income. The government fears you might do something stupid with the rebate check, like save it.

No, the government is most likely to try to push money to people in lower- to middle-income brackets who are the most likely to go out and blow the money right away on a TV at Best Buy (BBY, news, msgs), a pair of jeans at American Eagle Outfitters (AEO, news, msgs), a Volcom (VLCM, news, msgs) jacket at Zumiez (ZUMZ, news, msgs), a recliner from La-Z-Boy (LZB, news, msgs) or a new compact from Ford (F, news, msgs). Expect beaten-down retailers, apparel makers and consumer-durables manufacturers to rally, in other words, as the stimulus talk heats up.

On the menu: Cash or a tax cut?
Like Bush, the presidential candidates and congressional Democrats have taken the stage to promise the sun, the moon and the sky.

If you believe in the tooth fairy, the Democratic candidates' proposals are the most compelling. Sen. Hillary Clinton has offered a $70 billion stimulus plan that includes low-income fuel assistance, extended unemployment benefits and outright grants to local governments for things such as health care and street repair, as well as a $40 billion tax cut contingent on certain negative events occurring, such as continued job market contraction.

Sen. Barack Obama naturally felt like he had to one-up her, offering a $75 billion tax-rebate plan that would send $250 to most working people to encourage immediate consumer spending. John Edwards has added to those ideas something he calls a "home rescue" fund to bail out folks in danger of losing their houses.

Meanwhile, the Republican candidates have mostly focused on toeing the administration line, with Rudy Giuliani, for one, pushing permanent tax cuts for individuals and corporations.

I'm all for getting my own money back, but it's got to be done in a way that's equitable, swift and meaningful.

A pair of economists have written a great paper for the Brookings Institution that lays out an analytical framework for understanding what has worked in the past, and though that institution has served as a think tank for Democrats and will therefore be dismissed out of hand by the GOP, I hope all sides will take the paper's findings to heart. The paper by Douglas W. Elmendorf and Jason Furman says effective stimulus must be timely, targeted and temporary, and that a combination of tax rebates and direct government spending on anything but infrastructure (because it takes too long) has the most immediate boost to the economy.

The paper says the most popular Republican ideas, such as cuts in marginal tax rates and investment incentives, take effect too slowly.

A $200 billion jump-start
All these proposals make free-market advocates grit their teeth, but we have to recognize that when John Maynard Keynes is in the kitchen, there will be a mess to clean up. Keynes, you may recall, was the pre-World War II British economist who popularized the idea of government intervention to smooth out the hills and valleys of natural economic cycles.

He lost a fortune in the worldwide 1929 crash, and I suppose we can see the same thing on the horizon today, as not only is the U.S. economy slowing down, but recent reports show faltering activity in countries as far-flung as Germany, Ireland, Hungary and the Philippines. We've got new lows in the stock market and junk bonds, higher unemployment claims, falling retail and auto sales, plummeting corporate earnings forecasts and successful big companies across the spectrum -- ranging from American Express (AXP, news, msgs) and Tiffany (TIF, news, msgs) to Target (TGT, news, msgs) and AT&T (T, news, msgs) -- complaining of worse to come.

So here's what we can look forward to: at least a 1-percentage-point cut in the federal funds rate by the end of February that should provide a half-point increase in gross domestic product over the next 12 months and fiscal policies that will provide at least a 1.4% boost in GDP. That's a $200 billion jump-start. The market doesn't like the idea right now, but by the time of Congress' summer recess in mid-July and the death march toward the November election, the pumping of this much money into the economy's arteries will begin to matter, and then we can start looking at making money on the long side of the market again.

In the meantime, continue to protect your money in government bonds, bond exchange-traded funds and cash, or speculate on the decline by buying inverse-return ETFs such as the Short Dow30 ProShares (DOG). Prevent yourself from getting pulled into any false rallies in financials, retailers or techs by staying out of those stocks until the following levels have been breached and held for at least a week: Select Sector SPDR-Financials (XLF), above $33; Retail HOLDRS (RTH), above $97.50; and Select SectorSPDR-Technology (XLK), above $26.75.

Fine print
To check out the Brookings Institution paper on fiscal stimuli, download the .pdf. . . . To learn more about John Maynard Keynes, read his profile at Time magazine's Web site chronicling the lives of the 100 people it says were the most influential in the 20th century. . . .

To learn more about Clinton's economic-stimulus package, visit her blog page on the subject. Here is Obama's fiscal-stimulus proposal. . . . To keep up to date with more views, check out the lively blog Economist's View, which is run by University of Oregon economist Mark Thomas.

Meet Markman at The Money Show
MSN Money columnist Jon Markman will be one of more than 120 investment experts sharing their strategies for 2008 at The World Money Show in Orlando, Fla., Feb. 6-9. Meet Jon in person at the MSN Money booth Thursday, Feb. 7 at 1:00 PM, Friday, Feb. 8 at 3:00 PM and Saturday, Feb. 9 at 1:00 PM. Spend four days planning and refining your portfolio as you choose from more than 320 workshops and panel presentations.

http://articles.moneycentral.msn.com/In ... tNeed.aspx

Could this be a trick to move attention away from illegal immigration and onto the economy?
I bet any rebates will be smaller than announced and will go to lower income people who don't pay much in taxes, including those with ITIN numbers. ( Mostly illegal aliens)

"Now, the problem for most people reading this column online is that the fattest rebate checks probably wouldn't go to you. Sorry, but you probably have a job and a higher-than-average income."

Well, just when I thought I couldn't feel any lower about myself, along comes this. I think I'll just get it over with and walk around with my fingers making an L sign on my head, instead of trying to hide it. It would help if I weren't surrounded by rich foreigners half my age EVERYWHERE I go.