Another Stimulus Package? Say It Ain't So.

Just months after millions of checks made their way into mailboxes, there's talk of yet another stimulus package.

Nothing's official, but all signs point to a $300 billion bill that along with tax cuts will increase spending on infrastructure, unemployment benefits, and aid to cash-strapped states … all areas that are, of course, vital to the economy and embarrassingly underfunded.

Like the last package, don't hold your breath for a quick fix. I don't think the stimulus will do anything. In fact, it'll probably make the problem worse, as most attempts at reviving consumers with money fresh off the printing presses do.

Here's why
Few disagree that consumers could use a little boost right now. After a month of nonstop news of banks getting billions, heck, trillions of dollars of taxpayers' money, people have every right to step back and say, "OK, where's my money?"

But, to be fair, it makes little sense to compare the money put forth to keep banks from going under to money spent on propping up consumers.

Who's going to pay for this?
A central theme to the bailout backlash has been, "They're using my (taxpayers') money." Is this true?

Ha … ha …ha. It's much worse than that.

Please don't think the government keeps your tax dollars stashed away in a rainy-day fund to fix the ills of the economy. That would make way too much sense.

The money comes from borrowings. Short of tax increases designed to offset the cost of these bailouts (which, of course, could happen), the money doesn't necessarily come from current taxpayers as much as from future generations of taxpayers. The real questions, therefore, are how, when, and by whom the debt gets paid off.

That's where stimulus packages find a gaping hole.

If you're gonna bail, do it the right way
Whether it's been AIG (NYSE: AIG  ) , Freddie Mac (NYSE: FRE  ) , Fannie Mae (NYSE: FNM  ) , or any of the other financial institutions that have received bailouts in recent months, the government has taken as many steps as possible to ensure that taxpayers get paid back. Say it again: Taxpayers get paid back.

That's a tremendously important aspect that all too often gets completely overlooked. Last week's decision to pump $125 billion into banks such as Wells Fargo (NYSE: WFC  ) and Bank of America (NYSE: BAC  ) was not a handout or a donation … it was a $125 billion investment that came with $125 billion of preferred stock that'll be paid back before one dime makes it into common shareholders' pockets. That's not to say bailouts are to be welcomed. But when they need to be done, it's best they be done the right way.

There's also a scarcely talked-about section of the bailout demanding that if taxpayers aren't paid back in full after five years, the government can go after the financial-services industry until they are. Yes, the $700 billion bailout will add a sickeningly large amount of national debt in the coming years, but few ever cite the offsetting effects of demanding equity and demanding that taxpayers are paid back.

On the other hand …             
Stimulus packages to consumers, though? That truly is accumulated debt. Take the bailout earlier this year. We borrowed money and mailed checks with the hope that consumers would merrily spend them at retailers such as Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) . It may have done the trick for a month or two. Retailers had a nice quarter. Politicians got to point to a GDP report showing that, silly naysayers, the economy was in tip-top shape.

Of course, it was all bogus. The benefits have since been forgotten about. But the debt used to fund the stimulus? It's still here. And it'll be here until some politician has the gall to raise taxes and slash spending down to a pittance.

If you're going to print money to bail the economy out, you'd better have a plan on how to recoup those funds. The $700 billion plan does. Stimulus packages don't.                                                                            

Get real
Rep. Barney Frank went on CNBC earlier this week, rooting for a bailout and suggesting that "this is a time for a … dose of Keynesianism." By Keynesianism, he's referring to John Maynard Keynes, the famous economist who argued that governments should push deficit spending during economic downturns to soften the blow.

What Frank didn't mention was that we've had our Keynesian boost for years … boom or bust. When the economy was on fire? Deficits. When it tanked? Bigger deficits. That wasn't what Keynes had in mind.

As a recent New York Times article put it, "Empires Built on Debt Start to Crumble." At some point, we have to come to terms with the fact that money doesn't grow on trees, and that if there's no plan on recouping this money, the government will be the one looking for a bailout.

For related Foolishness:

What now? The Motley Fool is here to answer your questions about this financial crisis. Send us an email at AsktheFool@fool.com, and check back at Fool.com as we answer your questions and cover the latest on the Panic of 2008.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Bank of America is a Motley Fool Income Investor pick. Wal-Mart Stores is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2008, at 6:04 PM, socialconscious wrote:

    The stimulus is simply a tax reduction and placed in the holiday season it is a boon for retailers that will just cease to exist if not in place.WE all got bailed out when the banks were bailed outand the richer you are the higher the bailout. So you lost 20- 40 % not 60-70 %. If you do not agree see my link below for the average specs on a mutaul fund owner in 2007. The real point is that we assume the bailout will cost us no or little money eventually. I somewhat agree. Historically however mortgage bailouts cost no money. My property is paid for and I am good with credit. Failing mortages are the true underlying problem. We can put the blame anywhere we want but stopping them is as essential as the bank bailouts. All presented IMHO Some proof and link below.

    http://www.icifactbook.org/fb_sec6.html

    Characteristics of Mutual Fund Investors (2007)

    $175,000, median household financial assets

    64 percent hold more than half of their financial assets in mutual funds

    68 percent own IRAs

    76 percent own defined contribution retirement plan accounts

    Mortgage bailout proposal:

    http://www.nytimes.com/2008/02/24/business/24view.html?_r=2&...

  • Report this Comment On October 22, 2008, at 6:45 PM, mlaursen wrote:

    There is no possible way you can know that 60-70% of personal assets (you don't really specify whose personal assets, richer people, all people?) would have been lost in some alternate universe where the bailout hadn't occurred.

  • Report this Comment On October 23, 2008, at 10:18 AM, socialconscious wrote:

    Mlaursen

    . Yes I can say and yes agreed all figures approximate but close. Most mutual fund underperform the S & P 500.So let say you have a mutual fund that performs on par with the The S&P. The S & P lost approx 40% of it value year to date. Most agree had their been no bailout that would have been worse.Some have said it would have been another depression. See CNBC, FOX, business etc for numerous opinions bolstering that thought

    I agree the economy would have been worse. If we don't agree that without the bailout the economy would have been worse off thent was a monumental waste of money. The average mutual fund holder makes $175,000 a year as per my link. Therefore the bailout helps mostly the upper middle class to wealthy. Logically if you have more money you have more to lose. Hopefully most understand it a paper loss. I do agree that the bailout affect all to some degree and their 401Ks but not to the degree it affects the well off.That and the need for mortgage help are my only argument.The whole point is that the underlying problem is Mortgages and most Americans want mortgage relief. See money CNN link below.

    http://money.cnn.com/2008/10/21/news/economy/paulson_poll/

    Since most Americans want mortgage help why are those who need it not getting it? Because some are crying thats socialist and i have been called a socialist. The truth is by that that definition the financial bailout was as socialist as you can get.To some degree we all have been already been bailed out. To make it capitalist lets make money off those banks or at least get America's money back.To that point there already is historic president of a program that made money in the 30's new deal for mortgage refinancing. It was called HOLC See wonderful NY times article below

    http://www.nytimes.com/2008/02/24/business/24view.html?ref=b...

    If you have any articles bolstering your opinion please forward. Thank you for your response. I apologize for the spelling no spell check on this thing. This credit crisis is a bipartisan effort. There is no time for party bickering./ respectfully submitted and all best..

  • Report this Comment On October 25, 2008, at 12:52 AM, Theskyispurple wrote:

    "The stimulus is simply a tax reduction and placed in the holiday season it is a boon for retailers that will just cease to exist if not in place."

    It is likely that Stimulus 2 will consist of public works projects, extensions of unemployment benefits and allocations to healthcare entitlements. Not quite sure how that equals a tax reduction for me.

    "The average mutual fund holder makes $175,000 a year as per my link. Therefore the bailout helps mostly the upper middle class to wealthy."

    Actually, the average mutual fund holder earns significantly less per your link. For the average mutual fund holder, their home represents there largest financial asset. Many responsible homeowners who went the traditional 80/20 route, highly resent the idea of the government guaranteeing these sub-primes. All that aside, further gov't intervention will only lead to less risk management, and future malinvestment in the financial sector. HOLC operated during a time of deflation concomitant with large bank failures. This is not analogous to the 21st century mortgage "crisis". Besides, from what I've seen, the HOLC's return to the treasury was paultry and did not include the borrowing cost of $200 million needed to fund the program. Why can't we leave it to the banks to negotiate what they can?

    If were talking short term, then I can at least entertain the notion that gov't intervention ameliorated what could have been catastrophic losses (still not sure where the 60% - 70% comes from, maybe from the same place Paulson came up with $700 mill?). Shouldn't we be more concerned with the longterm implications of this stuff. Being in my mid 20s I am almost certain we will see another housing bubble in our lifetimes, and probably sooner rather than later. I don't want to set anymore damn precedents laid for future irresponsibilities.

  • Report this Comment On October 31, 2008, at 6:00 PM, socialconscious wrote:

    In response to TheSkyisPurple

    "The stimulus is simply a tax reduction and placed in the holiday season it is a boon for retailers that will just cease to exist if not in place."

    You wrote "It is likely that Stimulus 2 will consist of public works projects, extensions of unemployment benefits and allocations to healthcare entitlements. Not quite sure how that equals a tax reduction for me"

    For the sake of argument I stand corrected. I was calling for a second round of tax refunds in addition to the most common proposal.ll.

    "The average mutual fund holder makes $175,000 a year as per my link. Therefore the bailout helps mostly the upper middle class to wealthy."

    You wrote "Actually, the average mutual fund holder earns significantly less per your link"

    Wrong. My link was the industry source that has been around since 1940.They speak in front of congress frequently. Please see my links and respectfully please provide research to supplement your points.

    http://en.wikipedia.org/wiki/Investment_Company_Institute

    Home page of ICI and latest developments

    http://www.ici.org/

    You wrote " For the average mutual fund holder, their home represents there largest financial asset. Many responsible homeowners who went the traditional 80/20 route, highly resent the idea of the government guaranteeing these sub-primes"

    Agreed. I present the bigpicture a conservative leading blog

    http://bigpicture.typepad.com/comments/psychologysentiment/i...

    You wrote "All that aside, further gov't intervention will only lead to less risk management, and future malinvestment in the financial sector"

    There could be no worse risk management then the prior system. a link on CDS

    http://www.newsweek.com/id/161199

    Excessive deregulation caused malinvestment.also the government is already involved one way or another More foreclosures = more bank failures = bigger FDIC obligations

    HOLC operated during a time of deflation concomitant with large bank failures.This is not analogous to the 21st century mortgage "crisis".

    Sound familiar?The prelude to that national crisis was unfortunately familiar: a period of good times and confident lending and borrowing. The 1920s featured many interest-only loans, balloon payments, frequent second mortgages, the assumption of rising house prices and trust in the easy availability of the next refinancing. Then came the defaults.

    from the good folks at Washington Post

    http://www.washingtonpost.com/wp-dyn/content/article/2008/03...

    Besides, from what I've seen, the HOLC's return to the treasury was paultry and did not include the borrowing cost of $200 million needed to fund the program.

    Incorrect and highly reported conservative misconception form the above Washington Post Article" The Treasury was authorized to INVEST $200 million in HOLC stock..... The HOLC tried to be as accommodating as possible with borrowers but did end up foreclosing on about 200,000, or one-fifth, of its own loans...A key provision of the Home Owners' Loan Act was that the directors "shall proceed to liquidate the Corporation when its purposes have been accomplished, and shall pay any surplus or accumulated funds into the Treasury." In 1951, they did, returning to the Treasury an accumulated surplus of $14 million.

    Why can't we leave it to the banks to negotiate what they can?

    From the Big Picture link above".., but the bulk of it is simply because the people living in these homes cannot reasonably afford to pay for them, even after a 20-30% workout"

    If were talking short term, then I can at least entertain the notion that gov't intervention ameliorated what could have been catastrophic losses (still not sure where the 60% - 70% comes from, maybe from the same place Paulson came up with $700 mill?).

    the market is down 40-50 % with government intervention but I cannot have 10-20 % further without. Ok you win.

    Shouldn't we be more concerned with the longterm implications of this stuff. Being in my mid 20s I am almost certain we will see another housing bubble in our lifetimes, and probably sooner rather than later. I don't want to set anymore damn precedents laid for future irresponsibilities.

    My only point is the underlying problem is home foreclosures. The more money you had the more the 700 Million Bailout helped you on a simple per dollar basis. Thus use a program that had success in the past.

    Respectfully submitted

    Social C.

  • Report this Comment On October 31, 2008, at 6:02 PM, socialconscious wrote:

    all Imho

Add your comment.

DocumentId: 760003, ~/Articles/ArticleHandler.aspx, 4/17/2014 6:08:19 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

TREND TRACKER: Get Rich When the Web Goes Dark

It's time to say "goodbye" to your Internet! One bleeding-edge technology is about to put the World Wide Web to bed. And if you act right away, it could make you wildly rich. Experts are calling it the single largest business opportunity in the history of capitalism… The Economist is calling it "transformative"... but you'll probably just call it "how I made my millions." Big money is already on the move. Don't be too late to the party – find out the 1 stock to own when the Web goes dark.


Advertisement