Fake Plastic Green Shoots

Back in March, I called for an end to Obamanomics. Months of happy talk about "green shoots" have yielded little real improvement. Instead, nearly all we’ve got is a lot of hope and some lousy ownership stakes in big corporate losers like GM and AIG (NYSE: AIG  ) .  

Some Democratic leaders (as well as high-profile Keynesian economists, and even Berkshire Hathaway’s (NYSE: BRK-A  ) (NYSE: BRK-B  ) Warren Buffett, who threw in a pretty awesome Viagra metaphor) are agitating for a second stimulus package. But given the lackluster effects of economic interventions thus far, and our shaky fiscal situation, isn’t that the last thing we need?

Bad medicine
So far, the controversial $787 billion government stimulus package has been less than stimulating. A recent audit from the Government Accountability Office showed that states have used funds supposedly meant for long-term projects like infrastructure and school construction to instead fund short-term projects, such as paving roads. Faced with eroding tax revenue and major budget shortfalls, the states are simply trying to tread water. That's not a cure for economic ills; it's barely even a Band-Aid.

Granted, the stimulus package was designed to dole out money over an extended period of time. However, there's also evidence that the small amount of money that has been getting into our economy -- through tax cuts, for example -- is being saved, not spent. We could accuse consumers of saving themselves to death -- Keynes’s favorite bogeyman, since excess saving does nothing to stimulate an ailing economy -- but in truth, far too many were too deeply indebted in the first place.

When forecasts go bad
Earlier this year, the Obama administration seemed to believe things would be looking much better once summer rolled around. But those rosy second-half predictions now look ever more unlikely.

First-quarter real GDP plunged by 5.5% pace, following a 6.3% drop in fourth-quarter GDP. Historically speaking, that's seriously bad news; apparently, the economy has never contracted by more than 5% for two consecutive quarters. The possibility that growth will remain sparse to nonexistent over the next few months bodes even worse, given the Obama administration's ambitious spending plans.

Meanwhile, the unemployment rate keeps reaching increasingly uncomfortable heights. It’s currently at 9.5% -- shattering previous government expectations of an 8.5% ceiling -- and expected to worsen even further. The Obama administration had expected its stimulus efforts to create or save 600,000 jobs by summer. The paltry 150,000 jobs the stimulus has thus far managed to save or create stand in stark contrast to those optimistic visions.

And if the government's guesses about the economy have proved so wrong, what about its assessments of our banking system? The stress tests passed by banks such as Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) , and JPMorganChase (NYSE: JPM  ) came with built-in assumptions of how our economy would fare. If those scenarios were off -- or completely wrong -- it's not crazy to think that some banks could still be insolvent, especially as delinquencies and defaults continue to rise.

Deep in the debt hole
I have to give the Obama administration credit for resisting growing demands for a second stimulus, and asking for patience. Whether or not you believe the initial stimulus will pan out as planned -- I have my doubts -- why should we keep throwing funds down a hole?

Here’s more reason for discomfort. Our budget deficit for 2009 is expected to hit $1.7 trillion, the highest deficit (as a percentage of GDP) since World War II. Calls for the government to keep on borrowing run contrary to the very real concerns that we could eventually face extreme inflation, if not hyperinflation.

And where will the trillions our government needs to borrow come from? Recent analysis from John Mauldin and others points out that the U.S. needs to borrow $3 trillion, bringing the world estimate to $5.3 trillion in new government financing. As Mauldin ominously noted, “There is simply not enough available capital under current conditions to do it all.”

Is all this “help” really helping at all?
Spending more money we don’t have on initiatives that don’t seem to work as expected seems like paving the way for even more disaster down the road. Our government's arguably gone too far already in bolstering zombie banks and companies that haven’t passed the market test. (It’s currently considering giving CIT Group (NYSE: CIT  ) a helping hand, too.)

Maybe the buck should stop here. Maybe we should say to our government leaders, "Guys, you can stop helping now." At some point, the creative energy of individuals and the marketplace trumps all the supposedly helpful, wrongheaded ideas governments and academics can come up with.

I’m sure plenty of you disagree, though. Feel free to chime in on whether a second stimulus is warranted or not in the comment boxes below.

Berkshire Hathaway has been recommended by both Motley Fool Stock Advisor and a Motley Fool Inside Value. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (18)

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  • Report this Comment On July 15, 2009, at 3:38 PM, Stkspeculator wrote:

    Wow, Alyce, I'm impressed. Someone from The Motley Fool questioning the Oracle of Omaha's self-serving words! Great article, and I couldn't agree more with everything you said. You must have children and clearly understand what they will be up against with this administration spending every dime we don't have for votes. Good luck and keep up the good work.

  • Report this Comment On July 15, 2009, at 3:43 PM, ChiroRef wrote:

    I feel like I am watching my country crumble in front of my eyes, cheered on by the MSM, and guided in its destruction by BHO. My senators and congressmen (Illinois) are helping to lead the charge into bankruptcy and socialism. Once there are no more rich left in this country, who are they gonna tax, then. For those that voted for this fool and his ilk, I hope you are happy when you lose your job, but get 'free' health care and cell phone. Can't someone stop this train wreck from happening? Please?!

  • Report this Comment On July 15, 2009, at 8:43 PM, xetn wrote:

    They don't need the rich to tax; they have all of us. But the tax is the hidden one, inflation of the money supply which leads to the reduction in the purchasing power of the currency. Since the inception of the FED, with its monopoly over the currency, a 1913 dollar now requires about $21.60 to purchase the same amount; a 95% reduction in its value.

    This is the tool of choice for government to do what ever it wishes, with out having to directly tax the citizen for payment. The FED can just print the money.

    As for bailouts, you are all dead-on. There should not have been any bailouts, let alone a follow up.

    Remember: the definition of insanity is doing the same thing and expecting different results.

  • Report this Comment On July 15, 2009, at 11:00 PM, Othello4U wrote:

    I don't mean to be rude, but when is someone going to get down to the facts. We are paying the principle and interest on money a private bank, the Fed, pulled out of thin air, thus creating this problem. Solution: abolish the Fed and the problem is solved. Just as the money came from thin air, the debt disappears into thin air. Just that simply. This whole money system is a lie. Please, will someone just stand, or am I just a fool?

  • Report this Comment On July 16, 2009, at 8:02 AM, EBerg13 wrote:

    The worst problem now is banks who, after being given huge sums of money by the prevous administration, are just sitting on it. There is no start-up money going out.

    One bright spot is the $1500 tax credit for energy assistance. I just ordered new windows and my contractor/builder said he has never been busier. Bet the same goes for heating/AC and the like. Time to invest in home remodeling suppliers?

  • Report this Comment On July 16, 2009, at 8:19 AM, catoismymotor wrote:

    Alyce,

    If I had an address to use I would send you flowers in thanks for this article. Well said. Well done.

    Cato

  • Report this Comment On July 16, 2009, at 12:23 PM, dymty wrote:

    So, banks are sitting on all this stimulus money, and regular folk are stashing and saving like they should have been doing for the past decade. I'm curious then, where is all this money going to come from? Who is going to spend it? We need people to buy stuff, but the banks are locked up tight and the poor working guy is saving for the inevitible day when he's laid off - can you blame him? So tell me then, who's going to buy the cars that keep the assembly lines rolling and the workers employed?

    Seems to me that more than just banks have huge sums of money locked up somewhere. Your arguement seems to be in favor of the private sector resolving this issue. I, for one, would delight in seeing the private sector get of their collective piles and pull this economy out of the ditch. But of course, we're all just a bunch of NYMBYs, all willing to point our fingers, but none willing to lift one to help.

    According to Forbes, as of March 2009, there are at least 366 billionaires in the US, not to mention the number of multi-millionaires that were just shy of ten digits. Okay, sure, that's net worth. But there's gotta be some cash lying around there somewhere. Maybe their money's fake too, just like the Fed's...

  • Report this Comment On September 01, 2009, at 7:24 PM, LuneUnion wrote:

    Ah, the Palin cooplex; where one believes they are far more capable than they are. I oppose the attack on intelligence in your article. You imply that the common uneducated folk actually know best and the "academics" are the true idiots. I would argue that just because you aren't smart enough to figure something out does not mean that others are equally incapable. Regarding the wrongheaded ideas of government: well we've certainly seen quite a bit of that in the past decade or three, but that, in and of itself, doesn't mean that government is incapable, merely the people we put there. Perhaps it is we who are incapable of choosing adequate leadership since as a group, we clearly do not understand many of the issues facing us. And what of the "wrongheadedness" of business and the market? Riiiight, all governments fault. Of course, your political beliefs are a bit self-fulfilling, as pointed out in the following quote:

    "Republicans are the party that say 'Government doesn't work', and then get elected to prove it."

    P.J. O'Rourke

    On the note of saving money being bad: perhaps those at the top need to do some spending since the top 400 households control more money than the bottom 150 million people in the US; something not seen since 1928. Not to mention that their incomes have increased several hundred percent over the last 30 or 40 years while the majority of households have lost ground (household income adjusted for inflation).

    I'd be happy to discuss further, but I fear this is already tl;dr.

    Cheers

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