Reflections on the Obama Economy & Stimulus

A recent InvestmentNews survey finds that the majority of money managers in the US don’t think Obama’s economic recovery plan will achieve its stated goal. Frankly, I’m yet to hear any one plan which I’m jumping for joy over. In my understanding of Obama’s plan, the economy would be stimulated using a bottom-up strategy rather than the Republican favored, top-down strategy of across-the-board tax cuts. Obama believes creating jobs through state-government mandated infrastructure projects will jump start consumer spending and pull the economy out of any further immediate danger. It’s nearly impossible to know if this will work. And if it does, will it be a temporary, shot-in-the-arm stimulus which ultimately fails due to excessive debt burdens and mounting inflation? I don’t think across the board tax cuts would work any better if we’re truly aiming to stimulate the economy and get more dollars circulating. Politics will undoubtedly interfere with the Obama plan and marginal tax rates will ultimately increase to balance future budgets and service debt. I am somewhat intrigued by the idea of government assistance for past-due mortgage payments and renegotiations of mortgage rates and terms. This concept would at least chip away at the housing problems which are at the heart of the financial crisis. I also think eliminating mark-to-market accounting is crucial along with restoring the uptick rule. A real concerted effort is needed right now to mitigate the economic problems and restore some badly needed consumer confidence.

My concern with Obama’s plan is that the stimulus will be temporary. One scenario could be that we ultimately create three million jobs rather than four million, and the new trend of saving rather than spending will decrease the effect of the stimulus dramatically. Stats show that lower income Americans tend to spend the large majority of their earnings but I think that may be changing in the foreseeable future. The Obama plan may succeed in giving the Dow a temporary bounce, perhaps up to 9,000 or so. It would seem impossible that nearly a trillion dollars of stimulus doesn’t improve our economic stats for a few months. But once the dust settles and we start to ponder paying back the trillions of dollars we spent jump-starting the economy and bailing out the banks, then what happens? We raise taxes on the rich and on small businesses, lose more jobs as a result, and hope that Bernanke and his crew are right about their ability to contain inflation. If not, we get this inflationary deep recession which could easily push the Dow below 7,000.
As for the housing crisis, I firmly believe that 80% of the solution will happen naturally. Any attempt to ‘float’ home prices or spend money to keep people in homes which they can’t afford is absurd. If prices drop another 10% or so, new buyers will likely venture back into the market and scoop up deals. If prices drop back to 2000-2001 levels, the historical chart of national home price appreciation will start making sense again. As for areas with high rates of foreclosure and abandoned homes, I agree with the response given by the Feds lately that allowing regional clumps of foreclosures can be viral and ultimately reduce the property value of broader neighborhoods. We don’t need to be as concerned about foreclosures rates on a national basis: it’s the individual regions which require additional oversight to prevent the scenario of spiraling price declines.
In terms of dealing with the bleeding stock market, I think we have to at least temporarily eliminate mark-to-market accounting. These onerous requirements, designed to improve transparency and fairness for investors, have caused financial stocks to fall apart. In testimony Wednesday, Ben Bernanke first defended mark-to-market by saying it’s logical that investors should have the right to see the actual market value of assets rather than fake ‘book values’ and other bogus valuations designed to dress up balance sheets.
He went on to say that the large number of complex financial instruments we have here in the US along with many illiquid assets make it very difficult to implement a ‘real-time’ valuation. Bernanke said he supports the efforts to further analyze mark-to-market accounting and would like to especially improve the illiquid side of the market.
Similar comments were made with respect to the uptick rule. Bernanke wouldn’t comment too closely on the issue because it’s ultimately the responsibility of the SEC, but he did say they are giving careful consideration to its implications going forward. He certainly left the window open for restoring it. It doesn’t take a genius to realize short-selling by hedge funds and other market-moving investors have exacerbated the downtrend of financial stocks over the past six months.
If we can swiftly address all of the issues above in some kind of organized fashion, I genuinely believe our economy will come out better a couple years down the road. At this point we desperately need some confidence boosting to lift stocks and give ordinary citizens something positive to talk about.
Please e-mail me with any questions or comments here.
Russell Bailyn

Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
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3 thoughts on “Reflections on the Obama Economy & Stimulus”

  1. Great article! I very much agree about the housing. Individual markets (Florida, Arizona, etc) may need help, but there are so many that are still overvalued and should not be artificially kept at those levels.

  2. I did not vote for President Obama, but when was elected, I had hoped that he would work for the good of our country, putting petty differences aside. However, by his actions, he seems intent in making America the next third world country. While doing nothing to alleviate the economic problems facing this nation and the world, his action in taking over interest in private enterprise is something that I would have expected from the Hugo Chavez’s of this world, not the leader of the free world.
    The deteriorating condition of our economy, the decline of the stock market, the failure of our industries, the loss of jobs by Americans can all be attributed to the wrong action taken by President Bush, and continued by President Obama. So much for his ‘Change’. Our government seems oblivious to the fact that the goals of the government and the goals of private industry are different. That is why the government has the power to tax, while private industry cannot. Therefore they are trying to merge the two, joining the worst of both sides, and putting the future of our nation at peril.
    Our government needs to get back into the business of regulation so that Americans are not taken advantage of by private industry, and let private industry do what they do best without further government interference. Our government needs to stop showing despair, and propagating doom and gloom. Our economic situation, while much worse then just a few months ago due to our governments actions, is not as bad as it is being made out to be.
    A show of confidence in our economy an a drastic step of putting money in the hands of Americans so that they can spend on goods and services that they want, can help turn the economy around. Putting money in the hands of business will do just the opposite, as we are all seeing, and as our financial markets are responding.
    If the current trend continues, the very people that President Obama says he wants to help, will be the ones who suffer the most. President Obama, and our government need to change their policy to promote spending, not lending.
    Neeraj Nigam

  3. The government is taking rather idiotic steps to fix the economy. First, changing the mark-to-market rules did nothing but let companies hide their true financial health from potential investors. Now, if the balance sheet looks a little weak — they need only to imagine a new value for their assets to give themselves a little boost. The correct answer would have been (if anything) to reduce capital requirements in the short term, to lend more liquidity to the market.
    I think another option that the government has had (especially local governments) that they’ve totally ignored is the use of eminent domain to clear the housing market of excess inventory, and remove the troubled assets from the banks’ books. Simply claiming vacant houses under eminent domain (on a massive scale) and tearing them down would do the trick nicely.
    Instead of bold steps, we’ve only seen the government make power grabs and spin its wheels, in turns. They’ve helped muddy the waters for investors, while doing nothing whatever to address the glut of vacant housing in the market that is destroying value for those still paying on their homes. They’ve left banks holding worthless assets (vacant houses) without giving them a way to legitimately moving those off of their books (opting, instead, for allowing them to reprice the assets to an unreasonably optimistic level). On top of it all, the inept government has only absolutely guaranteed high levels of inflation a year, or two, from now.
    Some have offered hedges that the government can take against inflation, but the likes of Goolsby and the rest of the Obama economic team aren’t up to the task. They’re pop-economists (re: Freakonomics) who have little of value to offer in terms of economic guidence or advice (as they’ve aptly demonstrated).
    Everyone who voted for Obama should really think about how intelligent it was to give a community organizer and school newsletter editor the top job in the nation at such a troubling time.

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