As House leaders unveiled their legislation for an unprecedented $825 Billion stimulus package that includes $275 Billion in tax breaks over two years and $550 Billion in new spending, we ask whether it’s going to be enough to really stimulate economic recovery?
The spending portion of the bill appropriates vast sums for projects such as infrastructure ($90 Billion for roads, bridges, highways, rail, etc.). Some $30 Billion is slated for improvements to the national electric grid to ease the transmission of alternative power from wind and solar sources. Another $20 Billion will go to help computerize the nation’s medical records and $39 Billion to subsidize health benefits.
However, in all this spending, we believe there is a lack of focus. First and foremost, a form of either capital injection or low-cost loan program is essential for the nation’s small and mid-sized businesses which, to this point, cannot borrow from banks. We believe the SBA should become a direct broker of loans from a new program, qualifying the loans via business plan evaluation, as they presently are mandated to do with larger loans. That program should be funded to $245 Billion. Its purpose is to provide sufficient capital so businesses can resume trade, now brought to all-time lows, rehire formerly laid-off workers, with tax credits for hiring new employees (from closed businesses), credits for training and for expansion.
We believe too that the proposed $90 Billion for infrastructure will be gobbled up in minutes and is insufficient to really do any serious work. For example, only three major projects in the North East that are essential would cost more than $20 Billion alone. If you add in all the important projects in the Boston-Washington corridor, they come to a figure greater than $90 Billion at a time when states and municipalities cannot afford to contribute to capital improvement projects, leaving the sole funding source to be the stimulus package.
As we’ve previously stated, it is our belief that the total cost of recovering the national economy is likely to exceed $6 Trillion.
At the beginning of 2008, hedge funds held more than $2 Trillion in investor funds. At the beginning of 2009, hedge funds had narrowed to less than $1 Trillion, indicating clearly that investors were retrenching and pulling money from markets in large volume.
Daily, the DOW transaction activity is less than half that of the same time one year before; another indicator of a lack of investor confidence.
To rebuild confidence, several things need to happen. Primarily, a new understanding must take shape in which government realizes that big business is solely and exclusively dependent upon small business for survival. With that in mind, the way to stimulate even the biggest of our nation’s companies, we must get the small business sector moving once more; hiring, producing and selling. Economic normality is turned upside down in a depressed economy. So it’s best to view things not from the top down, but the bottom up… a case of trickle up economics.
Next, the nation needs to get behind a major national project, led by President Obama. Something like developing a new rail transportation system with high-speed rail or mag-lev, as we’ve previously written.
Finally, government must put its strength and commitment behind fundamental changes in the way Americans do things. For example, air travel is a wonderful thing, but in bad economic times, the public cannot spend the money and the fuel consumed to fly a hundred people a relatively short distance is excessive and damaging to the economy as the money for the fuel ultimately ends up offshore.
The British set a great model in which an airline company, Virgin, became a ground transport operator, specifically running an upscale, superior rail service that is integrated into their British Rail service. Our airline companies, facing eventual demise, should begin, while this economic crisis allows, to convert their interests to a broader spectrum, and to use the infrastructure they have successfully built, namely reservations and customer service, ticketing and other systems. Those systems can equally be applied to high-speed rail routes, with an interchangeable system of ticketing.
At the end of the day, all the stimulus spending possible, will not cure the fundamentals of this crisis until Congress passes legislation that changes the way banks originate loans to a more secure, stable and independently verified process. Only then will investors come back to mortgage or commercial mortgage backed securities and help recapitalize the system.
Investors are scared off any commercial paper now, particularly mortgage backed, because they do not trust the default rate of mortgages within the securities. Consequentially, banks can’t make loans as they did, particularly the larger commercial banks that do the bulk of the nation’s business and commercial lending. However, if the banks were able to show they were qualifying the loans through an independent third party, and that business borrowers had to supply business plans that showed a realistic plan for marketing and management, then investor confidence in commercial paper would improve and the system would return to a more normal mode.
It’s true that some lending would be curtailed… specifically, those loans that had a high risk of failure. But isn’t the system supposed to weed out the higher risk loans? There’s a reason why SBA loans have a lower default rate than comparable loans made by commercial, non SBA lenders. Equally, the loans made by the bulk of community banks are far better than their commercial counterparts and the reason is simply stronger due diligence.
If commercial banks are to succeed in resuming their commercial lending operations with an acceptable level of defaults so that investors will return to the markets, they simply have to participate in a program to validate their loans.
Overall, we applaud the stimulus proposals, but expect the government will be surprised later to find the funding is insufficient to achieve the ultimate goal of economic recovery.
History is repeating, all over again. Roosevelt implemented the WPA and other major projects but was later convinced to cancel those projects, eventually resulting in extending, not shortening the Great Depression. Only World War II solved the crisis… not because of battles, but because the Japanese attack on Pearl Harbor motivated the American public to action and massive government spending created jobs. Taking a large portion of the workforce out of the private sector and putting them into military service actually resulted in better employment opportunities and helped fix many small business problems of the time.
Only time will tell.
