Chris Tomaras / Straight Talk / January 31, 2009

Americans are stunned and totally confused listening to all the Washington rhetoric when it comes to the new stimulus package for hundreds of billions of dollars, job losses, foreclosures, banks not lending - yet receiving billions and every other unimaginable thing that could possibly go wrong. So what’s really going on and where do we go from here?

This week the new $816B stimulus package was passed by the House of Reps. without a single Republican vote in its favor. What does this mean?  It means we’re back to old party politics and the election that was supposed to change the world is only 2 weeks old.  So much for change. The left side of the House has more representatives so they won and the bill passed. One side wants to spend while providing a pittance of stimulus including a minor tax cut and at the same time trying to sneak in all of its special interest projects. The other side wants more stimulus including deeper tax cuts and less pork barrel spending. I have said repeatedly, we’re letting the wrong people decide the American taxpayer’s fate. Look back in history and you will be amazed at the amount of greed and corruption that goes along with our politician’s concocted under-handed political agendas. It’s just amazing that when the country is in one of its darkest hours and is in the process of trying to pass the largest  multi-billion dollar stimulus package in history, they have the gall to stuff the bill with a bunch of personal garbage. There is no successful corporation in the world that could sustain itself with a decision making process like the one managed by Congress . Could you imagine Barney Frank, Nancy Pelosi or Harry Reid as the CEO of a major corporation? I think a great job for Larry, Moe, and Curly would be running Circuit City. And imagine this; these same people are taking greater and greater control of our destiny each day. That’s certainly reassuring.

Wait until this ridiculous stimulus bill hits the Senate floor. Get ready because they will tear it apart and that’s a good thing.

In order to lend perspective on what’s going on, let’s quickly review what has occurred and where we stand in light of our past mistakes.

Everyone is painfully aware that it began with the collapse of the housing market due to the enormous lending abuses, lack of proper oversight and because of the greed on the part of many.

As housing values began and have continued to decline, the after effects from deteriorating mortgage prices have negatively impacted investment portfolios around the world to say the least.

As a result it was followed by either the collapse or deterioration of several major financial institutions and that list continues to grow.

When people finally comprehended what was going on, as in any financial crisis they panicked and began withdrawing money from the banks and selling stocks which caused the stock market to crash where more than $5 trillion was lost in a very short period of time. The Dow dropped from 14000 to 8000 where it continues to languish.
The Banks and other lenders are now saddled with thousands of bad loans on their books and that number continues to grow.

While in a state of panic Treasury Secretary Paulsen convinced Congress and Pres Bush to pass and sign an emergency bailout plan which did not result in its intended purpose of unfreezing credit because it was not properly thought out and the banks didn’t lend out the money.

Along with consumers, the Banks are so traumatized by their losses, they're reluctant to lower their rates and make loans. Mortgage rates could well be close to 4% instead of 5% if they reflected traditional spreads.

Without significant pressure from Washington, the banks will continue to maintain the wide interest rate spreads to resuscitate their depleted balance sheets, rather than pass along the savings to consumers. What I mean by this is that banks are able to borrow money almost for free but are not passing any of the opportunity on to their borrowers.
While the banks are just doing what they feel is safe, it doesn't reflect taxpayer needs or the public well-being. This  tightening of credit has paralyzed businesses and consumers everywhere. So much for the banks caring about consumers and the economy.

While the housing market continued to deteriorate the government stepped in and rescued FNMA and Freddie Mac in order to continue to provide home loans. Freddie and Fannie are the largest sources of mortgage money in the U.S., owning or guaranteeing a combined $5.2 trillion of the $12 trillion home-loan market so without them it would be totally catastrophic therefore in no way is the government willing to let them fail.

Fannie Mae, the largest source of home-loan money in the U.S., said it will need to tap as much as $16 billion in emergency funds from the U.S. Treasury Department to stay afloat as deterioration in the housing market persists. This follows Freddie Mac’s recent request for an additional 35B. Unprecedented mortgage losses drove the net worth of both companies below zero last quarter. By the time the dust settles, taxpayers will be contributing many more billions of dollars to these GSEs than ever expected.

And then there was the bailout of GM and Chrysler in order to avoid millions of job losses and appease the labor unions. And Ford is not far behind. Jobs generate money which generates spending, at least that’s what the government hopes.

Because of the fear of the unknown, spending has now come to a screeching halt and businesses continue to close their doors as unemployment is increasing in leaps and bounds causing foreclosures and bankruptcies to grow in record numbers.

Given what has resulted up until now, what we are dealing with are the painful after effects and the continued trial and error as the Government and the FED struggle to pull our economy out of a nose dive knowing that even if they are successful, it’s going to be a really rough landing for everyone onboard.

So what is it that the government and the Fed are trying to do to stop the bleeding and heal the country?

They have pulled out all the stops to end the tidal wave of mortgage foreclosures and put the unemployed back to work. However, it’s a moving target. While they’re trying to put out the fire, the fire is burning out of control and they’re running out of water.

So what and why are the government and the Fed doing what they are doing: And keep in mind that they are learning as they go. There is no pre-existing formula for success when it comes to the mess that we’re in.
They’re providing:

Stimulus packages – in order to pump money into the system to initiate more spending
They’re bailing out financial institutions – which is considered the lesser of two evils –the thinking being that it would cost us far more to let them go under

They’re planning to buy up bad loans  -  to free up lenders to lend – the name of the program of all things is BARF – now imagine that

They’re restructuring mortgage loans – in an attempt to keep people in their homes – the idea being some money coming in is better than no money coming in and vacant homes are not at all in the lender’s best interest.
They’re trying to lower interest rates but the banks are benefitting and not passing it on.– the thought is that the more people borrow, the more they will spend.

They’re planning to  –buy back long term bonds, once again to pump money into the system in an attempt to force interest rates lower through a reduction of supply.

They’re talking about tax cuts – providing taxpayers more money to spend; the problem is that people are scared and not spending and the tax cuts in the proposed stimulus bill are a token.

As far as Rebate checks  they’ve been a bust- the amount of the checks relative to peoples’ debt is too insignificant
And finally a new jobs program  repairing and rebuilding our infrastructure  is a good thing but it will takes several years to implement – and what we need is immediate stimulus.

So what will be the consequences of doing all of these things going forward?

1. Enormous debt – borrowing 2 trillion dollars on top of our already existing debt will definitely stress America’s checkbook
2. We will be facing hyper-inflation in the future – we’ve been there before in ‘81 and ’82 which was followed by an induced recession driving rates through the roof
3. and a weak dollar
In the past the US has been able to support its budget deficit by borrowing from foreign countries.
Our major problem which I have talked about before is this. We are a country that operates on debt. We encourage Americans to borrow money to buy things they otherwise cannot afford. It’s our way of life. If people are frugal and save money it doesn’t help the economy.
Here’s our current dilemma. The ability for the US to borrow money from foreign investors by selling treasury securities is losing its appeal especially when we are in the financial crisis that we are in, which has destroyed a great deal of our credibility and those same countries have their own financial woes thanks to their American buddies.

So the US has a choice: support our dollar or support our domestic economy.

In our present condition we have opted to support our economy. In doing so as part of the stimulus package, lower interest rates are a must, however lower interest rates do not attract foreign investors thus the catch 22.

My question is this. As we spend all of this money on stimulus packages and bailouts where will all this money come from and what will be the future cost of paying it back? The only thing I can tell you is that it’s going to be very expensive. So strap yourself in and stay tuned because there’s going to be a rocky road ahead of us. Maybe just maybe, we should consider turning a deaf ear to the liberal press and civil libertarians and focus on prayer in every aspect of our life because making idols out of politicians, Hollywood actors and professional athletes hasn’t seemed to work very well. Do you think?

And that’s this week’s straight talk.