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Five Things You Need to Know: Congress Inadvertently Passes Economic Save-a-lot Package


The economic "stimulus" plan may not provide the economic relief its backers had hoped.


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Paulson Urges Bailout, Dismisses Bailout as Bailout, Then Implodes

In an interview yesterday in the Wall Street Journal, Treasury Secretary Henry Paulson branded many of the aid proposals circulating in Washington as "bailouts" for reckless lenders, investors and speculators, rather than measures that would provide meaningful relief to deserving, but cash-strapped, mortgage borrowers.

"I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes," Mr. Paulson told the Journal. "Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street."

You know what? The plan is working. For a moment, I almost completely forgot about the bailout proposals Paulson helped engineer last last year:

Five Things, October 10, 2007: 1. U.S. Announces Major Toll Increase on Road to Serfdom

Five Things, November 12, 2007: 1. Paulson on Super-SIV: "Anything Worth Trying"

Five Things, December 6, 2007: 1. Homeowner Bailout Plan

The Journal article this morning noted the following caveat from Paulson: "It would be imprudent not to have contingency plans, but we are so far away from seeing something that would have me calling for a bailout that I don't see it."

In other words, the only thing currently separating the Treasury Secretary from those in Congress "calling for bailouts" is the magnitude of the crisis, which is ludicrous on its face. Bailouts are bad because they encourage the very behavior that necessitated the bailout. Period. There is no degree of magnitude to it, and it is both disingenuous and cynical for the Treasury Secretary to try and have it both ways.

2. The Mania Hypothesis

A bubble here, a bubble there, pretty soon we're talking about real bubbles! But what is a bubble? It's such a nebulous term without any real definition or meaning. We know that bubbles eventually pop, but just try predicting how big they're going to grow first. After all, that's what we're really worried about, the popping. Otherwise, every time we buy a financial instrument we're praying for bubbles. But a mania? Hmmm, now that's different. Now we're talking medical science.

According to the National Institute of Mental Health, Mania is part of a serious medical condition called Bipolar Disorder, which was previously known as Manic-Depressive illness. Bipolar disorder causes dramatic mood swings, from excessively high (Mania) to excessively low (Depression), with periods of normal mood in between.

About 5.7 million American adults or about 2.6 percent of the population age 18 and older in any given year, have bipolar disorder, the NIMH says.

Bipolar disorder typically develops in late adolescence or early adulthood. However, some people have their first symptoms during childhood, and some develop them late in life.

Hypothesis: if changes in social mood motivate changes in social action (Socionomics) - from economics to financial markets, politics and culture - then it is possible that social mood may periodically suffer from the same mental health illnesses and diseases as individuals within the group.

3. The Mania Diagnosis

According to the NIMH, signs and symptoms of mania (or a manic episode) include:

- Increased energy, activity, and restlessness
- Excessively "high," overly good, euphoric mood
- Extreme irritability
- Racing thoughts and talking very fast, jumping from one idea to another
- Distractibility, can't concentrate well
- Little sleep needed
- Unrealistic beliefs in one's abilities and powers
- Poor judgment
- Spending sprees
- A lasting period of behavior that is different from usual
- Increased sexual drive
- Abuse of drugs, particularly cocaine, alcohol, and sleeping medications
- Provocative, intrusive, or aggressive behavior
- Denial that anything is wrong

The NIMH says a Manic episode is diagnosed if elevated mood occurs with three or more of the other symptoms most of the day, nearly every day, for 1 week or longer.

Back in 2006 we looked at real estate to see if we could anecdotally spot signs that a mania was ongoing. Here is what we found at the time:

September 20, 2006
1) Unrealistic beliefs in one's abilities and powers:

September 17, 2006
2) Extreme Irritability

September 17, 2006
3) Spending sprees

September 6, 2006
4) Poor Judgment

September 20, 2006
5) Denial that anything is wrong

4. Ceaseless Talk of a Recession

Yesterday Toll Brothers (TOL) reported a quarterly loss of $96 million. Revenue dropped 23%. In the prepared remarks on the company's conference call, Chairman and CEO Bob Toll said, "ceaseless talk of a recession continues to dampen the mood of consumers in general."

Yes, that is true. Because that is what happens in every recession.

But that poses a problem for people in the homebuilding business. As Toll then explained, "only when customers believe we are done with housing deflation will the excess supply clear and the market return to equilibrium."

Indeed. According to Toll's logic, if only we would all believe in the ability of real estate prices to go up forever, they would go up forever.

5. Congress Inadvertently Passes Economic Sav-a-lot Package

The economic "stimulus" plan passed by Congress this month may not provide the economic relief its backers had hoped. Apparently, most Americans plan to save rather than spend their tax rebates, a Bloomberg/Los Angeles Times survey shows.

Only 18% of respondents said they will spend their rebate on purchases, Bloomberg reported. A bit more than 30% said they would prefer to use the money to pay down debt while about 33% said they would simply save it.

About $36 billion in rebates were sent out as part of a stimulus package during the 2001 recession, and consumers spent roughly 40% of the money, Bloomberg said.

No positions in stocks mentioned.

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