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Quote, Unquote: Biased Credit Rating Agencies?
Airlines: People Won't Fly, So We'll Raise Fees
Trading Radar: GDP Highlights a Thin Week
California Oversteps with HDTV Regulations
Goldman, Beaten But Unbowed

The Real Reason Small Business Loans Are Gone
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Unemployment Projections Through 2020
Homebuilders Win Senate Vote, Everyone Else Loses

In the CBO report was this vital recognition as it relates to fiscal stimulus targeting consumers:

"In general, tax cuts or increases in transfer payments from the government to people (such as Food Stamps or unemployment insurance benefits) increase household demand by providing consumers with additional spending power."

True, but here's the recognition and caveat from CBO:

"But households do not predictably spend a fixed proportion of the extra income left in their hands when taxes are reduced or transfers are increased. Rather, a household’s propensity to consume appears to vary with its income and depends on expectations of the household of what will happen to that income over the longer term."

In other words, you can lead a horse to credit, but you can't make it consume. That is why the combination of both monetary and fiscal stimulus will inevitably lose out in a deflationary credit contraction and unwinding of debt. Keep the following in mind: Fifteen rounds. Fifteen long rounds.

Thing's That "Can't" Happen

Fifteen long rounds sounds about right. Land prices in Japan fell 18 consecutive years. Supposedly that couldn't happen. Fifteen long rounds is plenty of time for Things That "Can't" Happen to happen.

Fortunately, the Treasury is against raising the GSE loan size limit.

The U.S. Treasury Department said on Wednesday it would not support raising the size of home loans that Fannie Mae (FNM) and Freddie Mac (FRE) may buy until a comprehensive reform package is passed by lawmakers.

"With the potential for an economic recession increasing, now is the time for all of us to put aside our parochial interests and focus on the job of stabilizing the housing market and getting the economy back on track," said Brian Catalde, president of the home builder group.

I disagree with Catalde and suggest we look at the role GSEs played in creating the housing bubble and dismantle them, perhaps over a period of 5 years or so. For now anyway, this "stimulus idea" is DOA where it belongs.

Bush And Congress March Ahead

Bush and Congress are marching ahead without ever bothering to ask why we are in this mess in the first place. Here we go again. Bush Stimulus Plan Includes $1,600 Rebate, People Say.

The Bush administration is close to completing an economic-stimulus proposal that will include $800 rebates for individuals and $1,600 for households as well as tax breaks for businesses, people familiar with the plan said. Congressional leaders say a stimulus package may be as much as $150 billion.

Businesses would get a tax break under the plan that would allow them to deduct 50 percent of the price of new equipment they purchase this year. Small businesses would be able to deduct as much as $200,000 in new equipment purchases, up from the current $112,000 limit.

Asked about the details, a Treasury spokeswoman declined to comment. A package of $100 billion "would certainly be measurable, it would not be window dressing," said Bernanke.

How Much Stimulus Comes From $100 Billion?

$100 billion sounds like a lot. It is a lot. It is measurable. It is nowhere near enough to matter.

Look at this another way. Banks such as Citigroup (C), Bank of America (BAC), and Washington Mutual (WM), and brokers like Merrill Lynch (MER), Lehman (LEH), Bear Stearns (BSC), and Goldman Sachs (GS) have written off over $100 billion in capital.

Remember this is capital we are discussing, not spending stimulus. Because of fractional reserve lending, most banks are leveraged 10 to 1. A destruction of $100 billion in bank capital will result in reduced lending power of $1 trillion.

Ambac and MBIA Alone Affect $200 Billion In Losses

Ambac (ABK) and MBIA (MBI) appear headed for bankruptcy. Ambac Odds of Default are 73%, and MBIA 71%.

Losing the AAA stamp would cripple the bond insurers and throw doubt on the ratings of $2.4 trillion of debt the industry guarantees, causing as much as $200 billion in losses.

Consider California

California is just one state. However, if California was rated as a country, it would be the 6th largest economy in the world.

I outlined my budget proposal for California in Mish's California Budget Proposal. Whether or not anyone agrees with that proposal is irrelevant. What is relevant is the state of California is going to reduce spending by 10% by hook or by crook. That is a $14 billion dollar hit right there. How many jobs is that? Expect many more states to be put in a similar situation.

Asymmetric Benefits

Think about California for a second. Look how asymmetric the Bush proposal is. Everyone gets $800. Whoop-to-do. Double that. It's double whoop-to-do. Does an extra $133.33 a month constitute stimulus? For who?

It is very helpful for those at the very bottom of the socioeconomic ladder that need income to buy food and gas. But that will not "stimulate" anything. It may mean the difference for some small set of people being able to buy pork chops instead of pork steaks and perhaps go out to dinner once a month on the side. For others it will pay a fraction of a credit card bill.

It will not do much for anyone reasonably well off. Nor will it do anything for anyone in California (or anywhere else) that is about to lose their job in state spending cutbacks, financial cutbacks, retail cutbacks, or any other kind of cutbacks.

Here is the key question: What does a onetime payment of $1,600 mean to someone who just lost a $45,000 job? The correct answer is not much.

We have still not accounted for waves of commercial real estate defaults, rising unemployment, rising credit card defaults, and rising foreclosures on Pay Option ARMs. Furthermore, I still expect a mammoth cascade of collapsing CDS dominoes at some point. There are $500 trillion in derivatives out there. What if 10% of them default? Heck, what if a mere 1% of them default? This is uncharted territory.

In the grand scheme of things, $100-$150 billion spread evenly is irrelevant. Such "stimulus" is doomed from the start.


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