Crisis Diary as it unfolds ….

Obama Stimulus: American Recovery and Reinvestment Act

Finally, US senate passed much awaited stimulus plan aka American Recovery and Reinvestment Act last week and singed into a law. This is one three important policy measures of Obama team. The other two important policy measures are financial stability plan and plan housing mortgages.

The plan is to spend 787b$ over a period of four years. It comprises of apprx 300b$ in tax breaks and 487b$ in spending. Along with infrastructure spending, there is substantial portion allocated to energy and education. The key facts of the stimulus are well-captured by Associated Press

Many liberal economists were not happy about the size of the stimulus and also the share of spending in it.

Atlanta Fed macroblog has a great post presenting American Recovery and Reinvestment Act in pictures.

A year-by-year look at where the money goes:

Note: The dollar amounts listed below are denominated in millions of dollars.








Which adds up to:


Finally, the relative size of each year’s spending:


There you have it.

By David Altig, senior vice president and research director, and Courtney Nosal, economic research analyst, at the Atlanta Fed

The pie for 2010 is much bigger than 2009. I’m not sure how this gels with Obama’s ‘We need to act now‘ rhetoric.

Econobrowser’s recap of CBO’s stimulus analysis can be found here.

Once again, I want to stress the adjectives “massive stimulus” conjoined to the noun “bill” is a matter of context. Dividing by baseline GDP shows that in a proportional (rather than dollar) sense the bill is rather modest. The fiscal impulse to GDP ratio never exceeds 2.5 ppts in any given fiscal year.


Figure 2: Estimated spending and tax revenue reductions, per fiscal year, divided by GDP. Shaded areas pertain to spending occurring outside of the 19.5 month time frame. Source: CBO, H.R. 1, American Recovery and Reinvestment Act of 2009 (February 13, 2009) and CBO, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 8, 2009.


February 19, 2009 Posted by | Crisis Snapshot | , , , , , | Leave a comment

19-Jan-09 to 01-Feb-09: New trade on the street – Buy hope sell reality. Sigh!

Firstly, I would like to apologize to myself for not doing recap for two weeks. Aniket, don’t be such a bum ass sloth. Secondly, I would also like to apologize to rest of the world for mostly focusing only on US in this crisis diary. But then, this crisis mainly revolves around US (..and I have better access to news and blogs out of US ), so you should not complain rest of the world. For time being we must pay attention to this big bogey bummer and straighten him up first. Hey, don’t complain. You had a chance to decouple. But instead, you decided to couple more and more. Now you are suffering from some serious STDs, not my fault, okay?

The two most important developments of last two weeks were Obama’s stimulus plan and ‘bad bank’ idea gathering momentum. But we shall deal both of them separately. Also, Davos deserves its own space. So let’s look at the rest of the news.

Market Update

When markets come to terms with reality they go down, when Mr. Obama shows his mug on TV and injects new hope they go up again. So new trade is – buy on hope, sell on reality.

Some good news out of the equity markets was the earlier November lows are still intact. Earnings season on Wall st was mix bag. Several technology companies incl. AAPL, IBM, HPQ surprised on the upside. Among industrial names CAT surprised on downside, while X declared decent numbers. Financials continue to struggle badly. Overall, earnings underscored one important fact – rest of the world is somewhat isolating itself from the worries of financials and housing.
Bond markets showed significant trend. 10-yr treasury yields increased significantly and so were the increase in TIPS spread, decrease in TED spread, decrease in commercial papers spread. These are the signs of easing credit crunch, diminishing deflation worries. Also Gold went up by more than 10% (840$/toz to 930$/toz) in last couple of weeks. This is perhaps all-time high for gold in many other currencies considering recent US$ appreciation. What does the gold movement mean? Inflation protection or safe(st) haven (with rapidly declining safe haven status of US$).

Crisis Watch for the week

TED is still signaling easing credit crunch and that is a very good news.
TED spread 0.95
S&P: 825.88 (-2.7%)
VIX: 44.84 (-2.00%)

February 1, 2009 Posted by | Weekly News | , , , , | 3 Comments

05-Jan-09 to 11-Jan-09: New year, old worries

Summary of the week in one line – the crisis is back.
~~Another half a million jobs lost in US – but not as bad as some expected.
~~Equity markets ended lower, but bond markets, libor and VIX seem to be calming down, which is a very good sign.

Some tiny bits of much awaited Obama Stimulus are now available,
– Plan will be of the size of $775 billion and will span across two years
– 40% of the stimulus is of the form of tax cuts, but not exactly the kind of tax cuts supply siders would want to see. Though, most likely, existing Bush tax cuts will not be repealed.
– The plan for 4 million job creation is detailed by Christina Romer and Jared Bernstein here.

Who says what about Obama’s stimulus plan?
Paul Krugman is not happy about the size of the stimulus and the amount of public spending. He is more unhappy and even scared here.
Greg Mankiw doesn’t think Obama team is using right multiplier for tax-cut (0.99). This report uses 0.99 as tax-cut multiplier and 1.57 as Government spending multiplier. Greg Mankiw continues his stimulus skepticism in his NYT OP-ED as well.
Alex Tabarrok of Marginal Revolution was quite satisfied with overall composition of Obama’s stimulus plan in his initial reaction.

Crisis watch for the week:
TED spread 1.19
S&P: 890.35 (-3.8%)
VIX: 42.82 (+1.00%)

January 11, 2009 Posted by | Weekly News | , , | Leave a comment

08-Dec-08 to 14-Dec-08: GM, China, fat stimulus and bear bottoms

The news of the week includes failed auto bailout, further deterioration of Chinese economy, talk of fat Obama Stimulus and has the market bottomed?

Auto bailout

Finally, Bush gov’t little reluctantly presented bill for auto bailout in Senate inspite of strong republican opposition. Well, the democrats were pushing really hard – how can you ignore main street when you bailout wall street yada yada yada. But hardass republicans defeated the bill in senate and rightly so. The details of aftermath are here.

Some fun facts about the bailout,
– the bailout was in the form of bridge loan and amounted to only $14B
– It was intended to keep 3 American companies – GM, Ford and Crysler – afloat until Obama takes control
– It included a provision of so called ‘car czar’
– Bush decided to open TARP money to help automakers temporarily. The proposal is under consideration.

There are several reasons why this bailout made no sense.
– The principal problem facing US car industry is that of overcapacity. Somebody has to go down for market to become competitive and profitable again. That’s how market economy works. This was not the case with banks. Credits were freezing up and survival of banking system was crucial.
– From unemployment point of view, many experts and economists were suggesting chapter-11 prepackaged bankruptcy. This column by Joseph Stiglitz says it all.

Regardless of what they do with the three auto makers, I’d like to see the equity getting wiped out before gov’t injecting any capital and take losses on tax payers’ money.

Obama Stimulus

How big is going to be Obama stimulus? The buzz is around 1T$ – mostly in infrastructure and green energy. Although some economists like Greg Mankiw are suggesting a supply side stimulus in form of payroll tax cut. Although it is also an interesting proposal, but it is more likely that Obama and his economic team will go for more classical Keynesian package. SPDR for metals and mining XME is suddenly looking attractive considering Obama stimulus.

Market Bottomed?

Has the market bottomed at November lows? Actually its practically impossible to predict bottoms. Every new bit of information that hits the market can take market lower and you never know till what level. Nouriel Roubini is predicting bottom at S&P 600-720 (EPS=60 and P/E between 10 and 12). At the end of this week, S&P was at 880 and Dow Jones was at 8630. But Nouriel can get earnings forecast right, he can never predict P/E and the market may bottom much higher even of earnings forecast holds good.
All the signs are pointing that market might have bottomed in medium term (1-2 years). Of course, any unexpected negative surprise will invalidate that argument. But expected negative news like rising unemployment, sliding consumer confidence, fading quarterly earnings are probably all priced in. What can really shatter the market is another round of write-downs in banking and financial institutions and big hedge fund or mortgage blow ups.

If this bottom holds good we have market bottom at,
Dow Jones 7600 (S&P 750)
Oil $40
EURUSD 1.26 (USD peeked)
GBPUSD 1.46 (USD peeked)
Crisis watch for the week

TED Spread: 1.9
S&P: 880 (-2.93%)
VIX: 54.28

December 15, 2008 Posted by | Weekly News | , , , , , , , | Leave a comment

The staggering failure of monetary policy

Mattresses are in demand again to store the cash. In other words, treasury yields are hovering around zero and even treading negative territory at times.

Bloomberg reports, (When I last heard, they were thinking of a name change to Gloomberg)

The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.

Also, yet another testimony why this crisis is second worst after the 1929 Great Depression. Well, second worst as of now.

Most likely, the same TARP money injected in banking system is now flowing back into treasuries. All monetary infusion ending up in treasuries squarely defeats the purpose behind it. More than anything else, this is a crisis of confidence. Markets participants don’t trust other market participants any more. Same thing reflects in treasury yields, TED spreads, commercial paper markets and what not.

This ‘safe haven’ story will continue to repeat itself if Gov’t decides to inject stimulus in form of tax cuts, tax refunds etc. Although, massive gov’t spending program would mean more and more inefficiencies in capital allocation and stimulus to corruption, there doesn’t seem to be any other way out of this crisis.

… unless they really want to throw some money from the helicopter.

December 9, 2008 Posted by | News | , , , , | Leave a comment

01-DEC-08 to 07-DEC-08: The saga of bailout nation continues …

A pretty dull week I guess, no sensational hot news. Friday’s employment numbers from US (533,000 new jobless claims) were as dismal as they could be, market rallied 4% on the same day. I guess that was market’s way of saying F*ck you bad news, I am going up anyway.

US Auto industry is almost certainly getting a bailout, a massive stimulus is lined up. I am curious to see how USD reacts to all this. Markets are all ga-ga over proposed stimulus.

Stefan karlsson mentioned an interesting Keynes’ quote on his blog,

“If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is.”

Interesting, eh?

Keeping finger crossed, waiting to see what happens next ..

Crisis Watch:

TED Spread: 2.18
S&P: -2.93%
VIX: 63.64

December 8, 2008 Posted by | Weekly News | , , , , | Leave a comment

The Keynesian Moment for Greg Mankiw

The debate over US stimulus is heating up. While Obama’s much praised economic team in busy putting together the nitty-gritties of the stimulus package, the biggoes of academia are busy romancing around the depression economics.

Recently Greg Mankiw, a noted Harvard economist, stepped into the shoes of John Maynard Keynes in his NY Times column here to speculate what he would have done had he been around today. He analyzed the four components of GDP (C+G+I+X) and went on to comment how it is becoming increasingly difficult to influence any one of C, I and X in a meaningful way. This, according to him and many other prominent economists, leaves us with one option – Government Spending aka stimulus aka Keynesian Economics.

GOVERNMENT PURCHASES That leaves the government as the demander of last resort. Calls for increased infrastructure spending fit well with Keynesian theory. In principle, every dollar spent by the government could cause national income to increase by more than a dollar if it leads to a more vibrant economy and stimulates spending by consumers and companies. By all reports, that is precisely the plan that the incoming Obama administration has in mind.

But then he goes on argue why the huge stimulus package as some other economists are recommending is not such a good idea – primarily due to already burgeoning national debt.

The fly in the ointment — or perhaps it is more an elephant — is the long-term fiscal picture. Increased government spending may be a good short-run fix, but it would add to the budget deficit. The baby boomers are now starting to retire and claim Social Security andMedicare benefits. Any increase in the national debt will make fulfilling those unfunded promises harder in coming years.

Keynesian economists often dismiss these long-run concerns when the economy has short-run problems. “In the long run we are all dead,” Keynes famously quipped.

The longer-term problem we now face, however, may be more serious than any that Keynes ever envisioned. Passing a larger national debt to the next generation may look attractive to those without children. (Keynes himself was childless.) But the rest of us cannot feel much comfort knowing that, in the long run, when we are dead, our children and grandchildren will be dealing with our fiscal legacy.

He also then suggests the possible solution to the problem could be innovative monetary policy by Fed.

So what is to be done? Many economists still hope the Federal Reserve will save the day.

In normal times, the Fed can bolster aggregate demand by reducing interest rates. Lower interest rates encourage households and companies to borrow and spend. They also bolster equity values and, by encouraging international capital to look elsewhere, reduce the value of the dollar in foreign-exchange markets. Spending on consumption, investment and net exports all increase.

But these are not normal times. The Fed has already cut the federal funds rate to 1 percent, close to its lower bound of zero. Some fear that our central bank is almost out of ammunition.

Fortunately, the Fed has a few secret weapons. It can set a target for longer-term interest rates. It can commit itself to keeping interest rates low for a sustained period. Most important, it can try to manage expectations and assure markets that it will do whatever it takes to avoid prolonged deflation. The Fed’s decision last week to start buying mortgage debt shows its willingness to act creatively.

It is hard to say how successful monetary and fiscal policy will be in avoiding a deep downturn. But as events unfold, you can be sure that policymakers in the Fed and Treasury will be looking at them through a Keynesian lens.

From Greg’s conclusion, it appears that he is still hopeful about Fed and its monetary policy to carry us thru this crisis even though Fed has proved completely ineffective so far whether it is in unlocking the credits markets, in stimulating demand, in stimulating investments or in targeting the inflation. When conventional Fed policy fails, the only option left (pun intended) is G for Governmental expenditure aka stimulus package, no?

December 4, 2008 Posted by | Opinions | , , , | Leave a comment

09-Nov-08 to 16-Nov-08: Invoking god of depression economics

With severe recession staring at the face of most world economies, everyone is invoking one god – John Maynard Keynes. The only word that rules the marketplace … well, actually it’s a two word word .. ‘fiscal policy’.
Paul Krugman suggested fiscal stimulus as big as 600b$ for US whereas Roubini is calling for stimulus of somewhat similar size. There was also the push of coordinated fiscal policy measures in G-20 summit. Monetary policy could not unclog the frozen credit markets soon enough and now falling consumer confidence across the board has accentuated the threat of severe recession.

But can governments really spend their way out of this? Well, some governments can. But US has really hard task cut out in front of her. With big corporates failing right and left, with imminent cutbacks in consumer spending, and with US federal budget in such bad shape, Governmental discretionary spending is not going to come without some serious cost.

With all this pump priming everywhere, things may seem to coming back on track for a while, but will it last? What will be the cost of this in terms of inflation? Will it lead to hyperinflation or stagflation?

We’ll have to wait and see.

November 15, 2008 Posted by | Weekly News | , , | Leave a comment