Tuesday, February 17, 2009

Promise $2 trillion, only implement $100 billion

Over the last few months, the Federal Government, FDIC, the Treasury, and the Federal Reserve have announced plans to stimulate the economy. One estimate of the amount proposed to be spent on programs to help the economy is around 2 Trillion dollars. While this is a huge number, the real questions are ; how much can the government get out of Washington and how much can they really implement?

Let’s use last year’s economic stimulus checks for about $100 billion as an example as to how quickly things can get done in the Washington quagmire. It took a great many people in DC working long hours six months to get out $100 billion and even then they didn’t get it right,how long will it take to get out 2 trillion dollars? Yes, I understand that the entire $2 trillion isn’t going to be spent in one year, but an amount much greater than what was sent out last year needs to go out this year.

Perhaps the markets were telling us this morning that the promises made to send out all of this money can’t be fulfilled. The rhetoric makes us feel good for a day or so, but then the reality of the problem comes back and smacks us in the face with a reality check.

Let me use an example of a government plan that was a good idea, but has yet to be fully implemented. In November, the Treasury announced a program to buy back $400 billion in home mortgage loans. As of this writing they have purchased $40 billion, just about 10% of what they intend to buy.

The market reacted favorably to the announcement and mortgage interest rates fell, but because of inaction on the part of the government to do what it promised to do mortgage interest rates are up again. The good idea lost momentum because the government could not execute. If the government comes up with a good idea that could help housing, but can’t deliver, it probably does more harm than good.

I understand that the new administration has made a great many promises that it would like to fulfill to the American people. The reality of being inside and in control of the process is showing the administration that it doesn’t have as much control as it thought it could exert when it was on the outside hoping to get in.

The capital markets seem to have no patience and don’t want to wait for things to develop. The “Obama Bottom” of 805 on the S&P 500 was violated this morning. In addition, the previous low in the Dow Jones of 7,552 was tested. If this is a true retest of the low then the S&P 500 could fall another 32 points to test the most recent low. At this point in time the President owns what is going on in the markets and the economy. It is no longer “W” problems that he inherited.

When a new incoming president comes into office he has a honeymoon of about 100 days of free rein to do what he wants to do. We are less than 30 days in the new administration and 100 days seems like a long time to go. I wonder if people will give the president the full 100 days before they start to criticize him and what he has or has not done?

The chart at the top of the page shows just how bad things are in my neck of the woods. If you look at it carefully you will see that things, while still negative, are moving in a positive direction. This above chart shows a leveling off, but no sign of things really turning around to the positive.

Have you ever seen the picture of the kitten hanging on the clothesline by its paws? This wonderful picture illustrates the real question we are concerned about today. You look at that picture and wonder how long it can hold on before someone comes to its rescue. Our economy is much like that kitten, how long can we hold on till help comes? Can the government get to us the aid (money) we need in time to get us off the clothesline?

Dan Perkins

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