Showing posts with label Economic-stimulus package. Show all posts
Showing posts with label Economic-stimulus package. Show all posts

Monday, January 21, 2008

Global Stock Market Plunge and Minority Banks

According to the Washington Post, "Stock markets around the world plummeted today, as a financial crisis that began in the market for U.S. home mortgages spread to almost all corners of the global economy."

This challenges both theories concerning global equity market independence and equity portfolio risk management techniques that rely on global diversification to control risk. This is particularly troubling: there may be no safe haven for equity investors.

In 2006 and 2007, global economic activity was very strong. This was due, in part, to $458 billion dollars spent by the US, between 2003 and 2007, on the Iraq war. In an earlier age, stimulus of this magnitude would have all but guaranteed that the US would not fall into recession in 2008. To date, several factors have intervened:
  1. The US has outsourced the Quartermaster function. Thus, critically important military support functions, including meal preparation and service, are now handled by foreign nationals. Economic stimulus generated by these expenditures now accrues to the laborer's nation of origin, not to the US.
  2. An extremely small set of US and foreign firms have received the majority of the money spent on the war. Thus, economic benefits from these expenditures have been narrowly allocated, further limiting impact.
  3. A financial market crisis of unprecedented scale, scope and breadth, created by greed and supported by fraud, combined with a partisan, ideology driven approach to fiscal and monetary policy has severely limited the ability of policymakers to respond in a timely and realistic manner.
Important secondary and tertiary impacts are beginning to be felt. According to the Chicago Tribune, "Retail sales unexpectedly dropped in December, capping the weakest year since 2002." For the banking industry, the net result is a growing risk of contagion: even banking institutions not directly involved in subprime lending are starting to fail, as consumer spending slows.

Bottom line: we expect the FDIC to shut down several minority-owned banks over the next three months.

Thursday, January 17, 2008

A Socially Responsible Economic Stimulus Plan

We attended House Budget Committee hearings today.

As the New York Times noted, the Chairman of the Federal Reserve Board, Mr. Bernanke, testified that "A recession is probably not on the horizon, but quick passage of an economic-stimulus package plus aggressive action by the Federal Reserve are the appropriate prescription for the ailing economy.."

Let's hope he is right on the first count. As Fed Chair, he is pledged to political neutrality, so he cannot be specific on the second. We, of course, have no such limitation. Our suggestions follow.

Any economic-stimulus package should target low to moderate income consumers. We suggest implementing a $30 billion dollar increase in food stamp benefits. Given new distribution technology (EBT), this part of the stimulus plan would hit the economy first and quickly and, as an added benefit, would go a long way toward beginning to even the income distribution in the country. Benefits should be expanded to include more and newer consumption necessities, like disposable diapers and low cost (not greater than $400) computers.

Further, we would include a significant tax credit, up to $5 billion total, for investments in community development banks. (Our reasoning: someone will need to take the place of the lenders who got caught up in the Subprime lending mess.) We might also include a significant rebate for the purchase and use of energy efficient technologies.

We would also implement at full rebate of tuition, books and fees for low to moderate income (80% or lower of area median income for at least the last four years) persons studying at any accredited four year college.

Finally, we would include $20 billion for infrastructure repair projects (vetted, of course, to eliminate all pork) focusing on bridges. We suggest the infrastructure work first target US counties with an unemployment rate at least twice the national average.

Aggressive action by the Federal Reserve should focus on repairing the regulatory safety net that allowed subprime lending to damage the markets. This includes working with States as they seek to uncover subprime lending fraud.

Part of the economic recovery plan should require the Federal Reserve conduct a complete census (not a survey) of all subprime loans and borrowers. This would include collecting information on loan terms and conditions, reported borrower income at the time of closing, property location, and other demographic information on the borrower. We understand that a complete census will not be cheap (we estimate this would cost at least $100 million) but it will allow a better understanding of the exact nature of the problem.