Chris Tomaras / Straight Talk / March 21, 2009

Last week I spoke to you about the ridiculousness of all the stimulus spending, bailouts and the politics that have created extensive confusion in the minds of most Americans. As I reflect on this I ask myself would I expect anything different when we have hundreds of politicians acting like brain surgeons when it comes to making financial decisions that are going to make or break the country. There seems to be something wrong with the system? Would you agree?

This week the focus was on the bonuses paid out to AIG executives. I for one am incensed about this, but did you really expect anything less. We need to try and keep this in perspective. It’s quickly become a political football and an avenue for angry Americans to vent, so the level of energy and attention is taking away from the more serious job at hand and that is to save the financial system. I don’t want to sell short the seriousness of the AIG bonus mishap because it is an example of the government’s mismanagement and AIG’s greed throughout this whole process much like the banks not lending, and it must be dealt with. 

I wish the politicos would react as quickly to much larger issues, as they did with a bill increasing the tax rate to 90% on AIG’s bonus money. We’re talking about 160mm in bonus money yet these same elected officials don’t have a clue what was included in a trillion dollar stimulus package.  I think psychologists call this transference.
Well I think we’ve reached another one of those times where I need to try and lend some perspective to the bailouts and stimulus packages and the latest announcement by the FED this week  which are being imposed upon us at record breaking speeds. It reminds me of the old roadrunner cartoons growing up as a kid. Remember the roadrunner bird that would go beep beep and buzz by you like a rocket. It’s kind of reminiscent of how the government is making decisions and spending our tax money.

Up until now the government has attempted to stimulate lending and bail out AIG and save the banks  and save the housing market and save Wall Street and save the auto industry and the list goes on and on. They’ve done this by continuing to spend money recklessly in a state of panic which they allude to as a plan. In that process they have made major mistakes, and you know as well as I do, when you make a mistake in the political arena it becomes magnified through the media and then the government must focus on damage control which leads to a whole different realm of problems and distractions. It’s humorous for me to hear some of these politicians ranting about AIG like they’re doing something serious protecting us from these villainous culprits to make it look like they’re doing something of consequence. What a joke. The vicious cycle just goes on and on and here we are again. The problem is that because we’ve never been here before, mistakes will be made, yet we live in a country that expects perfection and instant gratification. Not exactly what I would call a healthy environment to try and balance tolerance with oversight and regulation.

Well this week the FED announced a new spending spree buying back long term bonds and mortgages and other toxic assets to the tune of another 1.15 trillion in order to reduce the number of long term debt securities and bad mortgages in the market hopefully causing long term interest rates to decline. The Fed previously reduced short term rates by dropping the fed funds rate to 0%. Can’t go much lower than that.

To bring down long term rates the FED will now buy back long term securities. The way they can afford to do this is by ginning up the printing press and paying the tab with newly printed money. So the FED is going to create debt to buy back existing debt. Interesting concept or maybe not. Wait until you see what happens to interest rates in the future.

The assumption in all of this is by reducing long term rates it makes it more affordable for people to buy homes. The first question is can they afford to and will they buy homes? And the second question is, are there enough qualified buyers to make a difference given the massive number of homes currently for sale?
 Ok so we’ve thrown all these trillions of dollars at the economy and it hasn’t worked thus far.
Even Americans who can afford to spend money, will not until they are convinced that the people running the country know what they’re doing.

Now we are going to throw an additional 1.15 trillion at the problem as another attempt to stop the bleeding. When you combine everything thus far the bill has grown to $4.5 trillion.

If the Fed’s action “succeeds in driving primary mortgage rates” to about 4.25 percent to 4.5 percent, their assumption is that it would increase “affordability, which will in turn lead to increased housing demand.” Well maybe and maybe not.

FED Chmn. Bernanke is trying to prevent the credit contraction from deepening what already may be the worst recession in 60 years. U.S. employers have eliminated 4.4 million jobs since the start of last year. Industrial production fell 1.4 percent in February, the fourth consecutive decline, while factory capacity in use hit 70.9 percent, matching the lowest level on record.

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract,”. “The committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.” And that’s their hope and intent.

The bottom line in my opinion is  this. We are in a race to the finish to see if we can stabilize the economy and create an environment where people will once again feel confident to begin borrowing and spending before we destroy the American dollar by wearing out the printing press.

We’re using short term panic reactions to solve long term problems which has never worked in the past.
I go back to what I said a number of months ago and that is that we have three major issues that are killing us. The first is job losses, the second is the collapse of the housing market and the third is a total lack of consumer confidence. We are told that we need to be positive but how can you be positive as more people continue to lose their jobs resulting in more houses needing to be sold. We are facing a huge and growing imbalance of supply and demand in the housing market.

The dilemma as it pertains to the government and the Federal Reserve is that they are desperately trying to stop the deterioration of the economy while at the same time trying to stimulate the economy.

I’ve so often referred to it as the critically injured patient in the ER. You must first stabilize the patient and keep him from dying before you can prescribe rehabilitation. This whole process takes a great deal of time.

As an old Wall Street friend of mine and I were discussing during the week, we elected a 47 year old politician with very limited experience who talks pretty, to run the country, so he does the only thing he knows to do and that is bring in a bunch of well known economists and politicos and trust that they know what to do. In the meantime occasional appearances on the tonight show with Jay Leno can be used as a political tool to try and maintain his popularity in the polls.

Since we’ve never been in a crisis like this before I continue to say these guys are experimenting with one heck of a lot of taxpayer money. And so far they have made some fairly large blunders and now they’re chasing their tails pointing fingers and criticizing in order to cover themselves.

Historically it has been shown that when government and the FED try to control the economy and make up for bad behavior it has not worked.

We now have big government running our lives and controlling the checkbook and we have a hand full of major banks who now control the financial world. Sounds like a wonderful combination doesn’t it? BIG Government and big business and our tax money all in a state of chaos. I guess my only advice is be careful where you place your faith.

And that’s this week’s Straight Talk!