Digesting the Stimulus Package

Well, while I am still uncertain about the severity of the economic downturn, and the CBO's projections support my conclusions, it is clear the Fed and now Congress and the President disagree. Along with cutting the Fed Funds rate by nearly two percent, the President and Congress have now agreed on a stimulus package.

In a rare display of election-year bipartisanship, the Bush administration and House leaders agreed Thursday on a $150 billion economic stimulus package that would send tax rebates to 117 million American families by spring.

With a possible recession looming, both sides made concessions that they normally might not have made, acting out of apparent fear over being punished by voters for doing nothing. And they did it swiftly, reaching an accord in less than a week of negotiations.

The proposal, which still has to pass muster in the Senate, would send slightly more than $100 billion in rebates to individuals, including many who paid no taxes last year, and provide nearly $50 billion in tax incentives for businesses, chiefly through faster tax write-offs of investments.

The U.S. economy is roughly thirteen trillion dollars, and thus it is unclear how much a stimulus package of only 150 billion dollars will do. It is clear that between this package and the aggressive rate cuts we have a lot of aggressive stimulus.

What continues to be unclear to me is if all of this stimulus is necessary. We haven't seen this sort of aggressive rate cutting since 2002. Of course then, we had the internet bubble crash followed by 9/11 followed by the accounting scandals.

No one needs to tell me how severe the housing crash is I lived it. Still, it isn't clear to me that the housing crisis is necessarily a pre cursor to a crisis altogether.

There is no doubt that the politicians are responding to election year pressures, and it seems pretty obvious to me at least that Bernanke's moves are a response to investment market demands. Once again, the Fed Chairman is selected not elected exactly so he doesn't do what I suspect he is doing. It is not the Fed's job to calm markets. If a bunch of traders are throwing a hissy fit, that is too bad for them. The Fed chairman is not supposed to lower or raise rates because they are. This is like a parent letting their child watch tv an extra hour because they are crying.

Short term moves in markets are frankly inconsequential. If the markets nosedive for a few days, weeks, or even months, because traders are freaking that the whole world is about to explode then so be it. The minute that traders start to dictate Fed action is the day that the inmates run the asylum of the economy. That is the day that the Fed begins to over reach and produce fed action that is counter productive, and that is exactly what I believe is happening here.

As for the politicians, it is not at all unsurprising that they jumped over each other to look as though they are providing relief to "struggling" families. The relief is token and unlikely to have much of an effect on anyone. Furthermore, with the Bush tax cuts about to expire, it is unclear what this stimulus will do. I for one believe that if the feds really wanted to send a stimulated signal to the economy they should have made the tax cuts permanent. A lot of spending is on hold pending that resolution. Giving everyone a one time check of $600 and up is all well and good, however all those folks are facing an uncertain tax future, and clearing up the tax future is much more stimulating in my opinion.