Drama on Capitol Hill

Written by: David Lereah   Tue, February 17, 2009 Commentary

The drama surrounding the long awaited stimulus package and the highly anticipated rollout of the Trea¬sury bailout plan took center stage this past week. After much heated debate and some give and take, the House of Representatives and the Senate approved a compro¬mise $787 billion stimulus package late Friday. The package is designed to jump start an economy deep in recession with a mix of government spending programs and tax cuts/benefits. Specifically, it aims to create mil¬lions of jobs through massive new investments in en¬ergy, transportation, education and health-care projects, while reviving social safety net programs that have been shrink¬ing for nearly three decades.

The bill passed the House 246 to 183 and the Senate 60 to 38, both along party lines. President Obama is expected to sign the bill into law early next week. The legislation represents a bold new step for the Democratic con¬trolled Congress and the Obama Administration that positions the Federal government at the cen¬ter of the nation’s economic re¬covery. The package’s dollar value represents over 5 percent of the nation’s gross domestic product, which already exceeds the New Deal of the 1930s that equaled about 2 percent of the gross domestic product. But this could be only the beginning of a barrage of govern¬ment spending programs in efforts to revive a crippled economy, a broken financial system and stem the tide of rising foreclosures.

The Obama people predict that the stimulus package will create about 3.5 million new jobs over the next 18 months, helping to re-energize a sagging economy. But according to other analysts (and we agree) the stimulus package is more likely to create about 2.5 million new jobs.

Unfortunately, very little is in this package for di¬rectly reviving the housing sector. There is an $8,000 tax credit for families who have not owned a home for at least three years and make less than $170,000 ($95,000 for individuals) good for the purchase of a home between now and Dec. 31. Overall, the package is expected to lift economic activity but only over time. Some of the provisions in the bill are expected to have little impact on economic activity but other provisions are expected to directly stimu¬late activity and create jobs. Although the size of the pack¬age-$787 billion-appears large, it may not be enough giv¬en the depth of today’s reces¬sion. It is also important to note that this package on its own is not likely to lift the economy. We still need a plan to unfreeze the credit markets and revive a paralyzed banking system.

The highly anticipated rollout of the Treasury bailout plan fo¬cused on revitalizing the credit markets landed with a thud last week. Treasury Secretary Geithner laid out the Obama Administration’s financial rescue plan that was short on details. The plan was vague and offered just a sketch rather than a well thought out plan. The key areas in Geithner’s rescue plan include:

Stress Test-The Treasury will “stress test” banks with more than $100 billion in assets (13 banks) and provide capital to those banks that pass the stress test and need the funds.

Credit Financing-The Treasury will provide $100 bil¬lion in seed money to expand the Federal Reserve’s Term Asset-Backed Securities Loan Facility, in which investors in bonds backed by credit card and other loans can swap those bonds for Treasury securities, enabling them to get additional financing. The Treasury claims that this could create about $1 trillion in financing for consumers and businesses.

Private/Public Partnership-The Treasury is proposing to create a private/public partnership to remove prob¬lem assets off banks’ balance sheets. The plan will fo¬cus initially on using public financing to create as much as $500 billion in private sector buying capacity. The hope is for private sector buyers to bid and determine the price of these problem assets.

Loan Modifications-In an effort to mitigate foreclo¬sures, the government will commit $50 billion to re¬duce mortgage payments and establish loan modifi¬cation guidelines. Banks that receive Federal aid will have to commit to this mitigation program.

Geithner gets high marks for administering a stress test to banks. We certainly do not want to be throwing good money into bad banks. And pumping more money into our nation’s credit markets seems like a sensible op¬tion. But the private/public partnership to purchase bad assets needs more work and more details. At what price does this partnership purchase the bad assets? The Trea¬sury needs to work out the kinks in this model. Finally, committing $50 billion for loan modifications is a step in the right direction. But there needs to be principal re¬ductions with the government guaranteeing part of the losses. Again, the devil is in the details.

This past week’s economic and housing reports provid¬ed us with a mixed bag. Retail sales surprisingly rose 1 percent in January compared to a 3 percent drop in sales in December. This report is puzzling given that most retailers are reporting weak buying conditions. We be¬lieve that this report is just a slight bump upward in what is a downward trend in retail sales. Weekly jobless claims fell by 8,000 to 623,000 in the week ended Feb¬ruary 7. Although the dip in claims is a positive devel¬opment, the claims are still at alarmingly high levels, reflecting a very weak labor market. Economic reports this past week was a mix of bad news and good. The barrage of bad news over the past several months about the dismal performance of the economy took a respite this past week. Surprisingly, several reports were more positive than negative.

Business inventories fell 1.2 percent in December, the largest decline since November 2001. It is good to see that businesses were able to reduce inventories at the end of last year, but inventory levels remain high. The Michigan consumer sentiment index dropped to 56.2 in February, exceeding expectations. The index is now at its lowest level since November. Consumer confidence is at very low levels, reflecting an economy in deep re¬cession.

Mortgage applications to purchase homes and refinance mortgages both dropped markedly in the week ending February 6. The purchase index fell 9.8 percent to 235.9, while the refi index fell 30.3 percent to 2,722.7. The large drop in the indices is particularly troubling given that mortgage rates remained relatively low through¬out the week. It is clear that demand for home buying has dried up. A combination of job losses, deteriorating confidence and a tight credit market are adversely af¬fecting housing demand.

The National Association of Realtors’ quarterly metro prices were released this past week. The median home price for the nation in the fourth quarter fell 12 percent compared to the median home price in the fourth quar¬ter a year earlier, the largest home price decline on re¬cord. Price declines occurred in more metros but prob¬ably reflect an increasing number of foreclosure sales at discounted prices.

Finally, foreclosure filings fell 10 percent to 274,3

99 in January compared to December according to Realty Trac. Most of the decline is attributed to foreclosure moratoria imposed by Fannie Mae and Freddie Mac as well as other lenders and some states. The Obama Ad¬ministration plan to commit $50 billion to foreclosure prevention efforts is likely to keep future foreclosure filings down if the plan is implemented.

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