Saturday Quick Hit

STIMULUS BEST CASE SCENARIO



The stimulus package the House passed without reading and signed into law totaled $787 Billion. The housing bailout plan proposed would add another $275 Billion. That would bring the total stimulus money targeted in the last week to over $1 Trillion, not counting the $150 Billion passed last spring, or the $700 Billion TARP package passed last fall.


Here is the best case scenario for success with the current stimulus:

The $787 Billion is injected into the economy this year, creating 3.5 million new jobs.
The private sector, reacting the the influx of cash, expands, adding additional jobs.
The housing bailout keeps people from foreclosing, slowing the skid in housing prices.
The housing market stabilizes.

Even with the best case scenario, there are glaring problems. First, if 3.5 million new jobs are created, when the stimulus cash runs out in a year or two those people will have to be laid off. If you're working in a job that exists only because of a one time injection of capital, once that money runs out you're out of luck. The private sector could react to the stimulus cash by expanding, but unless it expands at a rate that can absorb the 3.5 million jobs created you're still going to have massive unemployment within two years.

The housing market is currently purging itself of every bad mortgage that shouldn't be there to begin with. Even if you allow people to refinance, some analysts are saying those people just aren't making enough money to justify it. For example, some project that even if you reduce someone's interest rate to 1%, only 5% of the bad mortgages would be able to avoid foreclosure. Even with the lower interest rate, those loans aren't justifiable because the mortgage holder just doesn't make enough money. There won't be any stability in the housing market until we can reduce the amount of bad loans, and the only way to reduce them is to purge them from the system and start over. Any other measure is more like a band-aid than successful healing. We can't get a good idea of what homes are worth if the government is subsidizing the market by artificially funding bad home ownership. That speaks nothing to the political and moral arguments about whether we should be doing that to begin with.

Even if this package manages to create 3.5 million jobs for the long term, the housing market stabilizes, and everything we're hoping for comes to fruition there is still one glaring problem: we've just increased the national debt by over $1 Trillion in less than a month. This is a phenomenal amount of money we're talking about. President Obama will have spent over $1 Billion for every HOUR he has been the President. And his administration isn't ruling out additional stimulus packages. The amount of debt we're adding is at a level previously unheard of. It is more money than the United States spent on the Great Depression and WWII combined. In the future, we're going to have to service that debt, along with crumbling programs like Social Security, Medicare, and Education. Would the success of the stimulus package be enough to offset the negatives with carrying that much debt? Or are we taking two steps back so we can take one step forward?

When it comes to the stimulus, you can hope for the best, but even the best isn't a winning situation.