Will an economic stimulus package help us during recession?

[Ridgerunner]

I might sound naive, but I don’t fully grasp why the government was allowed to ‘dip into’ SS funds…taxes should be used for programs government is seeking to implement–not our future’s financial security money. (not that it’s enough even if it wasn’t tampered with, but you know what I mean) Why has this been allowed to go on?

GoofyJim can answer for himself, but until he does, here’s mine.

It has been allowed to go on because the government is the government, and there’s nobody who can prevent it. Congress votes budgets knowing that’s exactly what they’re doing. Presumably the voters could stop it by “de-electing” all the legislators who have voted to do it. But even though many people have tried to call peoples’ attention to it, it still goes on. Basically, I guess, most people don’t care, as long as the projects they vote for get paid for in some manner.

The government doesn’t “steal” the money, exactly, it gives bonds (debt) in return. In other words, we’ll pay you back out of other money we get from the taxpayers. Except, of course, they never pay it back. They just keep issuing more bonds.

But I will also say it was flawed from the beginning. If each person’s “pay-in” was kept for him/her separately, and invested in something other than government debt, it would be different. But that’s not the way it is. From the beginning, nobody has been able to reform Social Security. Reagan talked about it, but got slapped down. Bush tried to “privatize” part of it, allowing people to own some of their own money they paid in, but he got slapped down too.

 

[whatevergirl]

GoofyJim can answer for himself, but until he does, here’s mine.

It has been allowed to go on because the government is the government, and there’s nobody who can prevent it. Congress votes budgets knowing that’s exactly what they’re doing. Presumably the voters could stop it by “de-electing” all the legislators who have voted to do it. But even though many people have tried to call peoples’ attention to it, it still goes on. Basically, I guess, most people don’t care, as long as the projects they vote for get paid for in some manner.

The government doesn’t “steal” the money, exactly, it gives bonds (debt) in return. In other words, we’ll pay you back out of other money we get from the taxpayers. Except, of course, they never pay it back. They just keep issuing more bonds.

But I will also say it was flawed from the beginning. If each person’s “pay-in” was kept for him/her separately, and invested in something other than government debt, it would be different. But that’s not the way it is. From the beginning, nobody has been able to reform Social Security. Reagan talked about it, but got slapped down. Bush tried to “privatize” part of it, allowing people to own some of their own money they paid in, but he got slapped down too.

I think that it’s turning into another ‘tax’ that comes out of my paycheck…and that I might never see? I mean–isn’t it supposed to be SECURITY? I have a 401k, and pension–and each quarter, my company sends me what the estimated monthly income would be for me when I hit 67. (that’s a looooooong ways off so who knows if this is meaningless) But, SS at this point, is only accounting for like $2k per month–at 67?? That’s like $200 now. hahaha I mean, that’s nearly 30 years away.

Suppose I want to retire at 60? Can I still collect SS if it’s around? Thank you for replying RR, btw.

 

[Texas_Roofer]

The President does not determine what the Fed does. …

He is not supposed to however Bernanke’s actions indicate the decisions are being made outside of the Banking Industry.

 

[Ridgerunner]

He is not supposed to however Bernanke’s actions indicate the decisions are being made outside of the Banking Industry.

It’s possible, certainly. However, I do note that the primary stock market beneficiaries of Bernanke’s rate cut today were the banks. When you get right down to it, the primary duty of the Fed really is to protect the banking system. And, of course, the Fed is owned by the banks.

Likely, Bernanke’s actions are actually prolonging the recession and tempting inflation. Look at gold today. The “gold bugs” clearly believe it was an inflationary move on his part. But was it really to help the President?

Aside from the fact that the market’s concept of banking is that if rates are moving up, banking’s profitability moves down, and the reverse, in this particular environment it may actually be so. As rates move down, their cost of money moves down, and usually moves down just a tad less than their interest charges do. But besides, if ever there was a way to help with subprime and ARMs, moving the discount and fed funds rates down are right there at the top of the list.

In any event, the market perceived it as beneficial to banking. So I don’t know that doing Bush a favor was necessarily the motivation behind the action.

 

[Ridgerunner]

Suppose I want to retire at 60? Can I still collect SS if it’s around? Thank you for replying RR, btw.

You have to be at least 62 to get SS retirement benefits. However, they are reduced from what they would be at whatever your applicable full retirement age would be. For some, full benefits can come at 65, for others, 67, and it’s moving up. If you take SS retirement at 62, your maximum “outside earnings” are $12,000. Earn more than that, and they’ll offset it against your benefits, dollar for dollar. That’s not so good. At 65 (or 67 as the case may be) they won’t offset any of it, and you can earn whatever you’re able to earn.

 

[whatevergirl]

You have to be at least 62 to get SS retirement benefits. However, they are reduced from what they would be at whatever your applicable full retirement age would be. For some, full benefits can come at 65, for others, 67, and it’s moving up. If you take SS retirement at 62, your maximum “outside earnings” are $12,000. Earn more than that, and they’ll offset it against your benefits, dollar for dollar. That’s not so good. At 65 (or 67 as the case may be) they won’t offset any of it, and you can earn whatever you’re able to earn.

I don’t feel very ‘secure.’

 

[Angainor]

Will an economic stimulus package help us during recession?

No.

The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they’ll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It’s like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn’t get any deeper.

 

[Texas_Roofer]

It’s possible, certainly. However, I do note that the primary stock market beneficiaries of Bernanke’s rate cut today were the banks. When you get right down to it, the primary duty of the Fed really is to protect the banking system. And, of course, the Fed is owned by the banks.

Yes however there is more. The bank operates on the difference between the amount money cost and the amount money loans for. So the drop in the discount rate should make old loans more valuable. Of course the system has to repeat the cut or stabilize at a fixed rate. Today we know these rates will increase in the future so future losses are pretty much guaranteed. If you are near broke this is a good option for you. However if you are fiscally responsibility this is a future problem.

Likely, Bernanke’s actions are actually prolonging the recession and tempting inflation. Look at gold today. The “gold bugs” clearly believe it was an inflationary move on his part. But was it really to help the President?

Aside from the fact that the market’s concept of banking is that if rates are moving up, banking’s profitability moves down, and the reverse, in this particular environment it may actually be so. As rates move down, their cost of money moves down, and usually moves down just a tad less than their interest charges do. But besides, if ever there was a way to help with subprime and ARMs, moving the discount and fed funds rates down are right there at the top of the list.

In any event, the market perceived it as beneficial to banking. So I don’t know that doing Bush a favor was necessarily the motivation behind the action.

Bernanke’s actions ( or reactions) to short term issues are inconsistent with banking. Yet, Bush has acted this way all through his Presidency. I believe Bernanke is appeasing the administration.

btw - Ben Stein called for his resignation today for overreacting though Ben says Hedge fund trades are who pull the string

No.

The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they’ll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It’s like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn’t get any deeper.

Your author failed to identify the loss of incentive which creates recessions.

 

[Ridgerunner]

I don’t feel very ‘secure.’

The only wise position to take. Nothing earthly is secure. But when the whole country endorses a falsehood, knowing that it is one, but hoping to “get mine” regardless of what it means to others in the future, it’s particularly insecure.

 

[Ridgerunner]

Yes however there is more. The bank operates on the difference between the amount money cost and the amount money loans for. So the drop in the discount rate should make old loans more valuable. As raises in the discount rate make them less valuable. But that’s only if you have a lot of “shelf loans”. Of course, few banks hold any significant number of long-term, fixed-rate loans on the shelf. They “securitize” them and sell the securities to institutions that, for their own purposes, want fixed income. (And we’re going to see trouble in them too, very soon.) Those they do hold are short-term or variable, with the rate tied to LIBOR or something of the sort. Of course the system has to repeat the cut or stabilize at a fixed rate. Not really. As long as they’re under the “ceiling” of consumer resistance, they can maintain the desired spread, for the most part. To a bank, rates, in themselves, mean nothing. Only the spread matters. It’s when they bump up against that consumer resistance ceiling that the spread gets squeezed. Today we know these rates will increase in the future so future losses are pretty much guaranteed. ** Though I’m inclined to think so, we might or might not see significant rate increases in the foreseeable future, barring unusual events. But to the Fed that might of secondary importance. In the last few years, banks (and the Fed) have considered a net worth of between 8 and 10 percent, more the former than the latter, of total assets to be the most profitable and desirable. Leverage diminishes rapidly over 10%, and reserves against potential losses get scary under 8%. I’m not privy to the information to which the Fed is privy, but my suspicion is that Bernanke was seeing the potential of a number of banks going below the desired level. It doesn’t take too many loss quarters to do it, and it happens automatically if you grow, even with a small profit. If you don’t grow, at least moderately, you run into liquidity problems. I remember seeing financial institutions go from solvency to insolvency within months back in the 1980s. Remember when the FSLIC itself went under?** If you are near broke this is a good option for you. However if you are fiscally responsibility this is a future problem. **“Near broke” is in the eye of the beholder, and to a bank, a diminishing net worth to assets ratio, which I suspect a significant number are experiencing, is “going broke”. **

Bernanke’s actions ( or reactions) to short term issues are inconsistent with banking. Yet, Bush has acted this way all through his Presidency. I believe Bernanke is appeasing the administration.I don’t think he felt he had a choice, whatever Bush might have thought about it. If we see another couple of quarters like the last one, and I think we will, we’ll see more clearly how threatened the banks really were and are. Last quarter was terrible for the big banks, and pretty bad for most of the regionals. Small banks are taking a hit, but they’re better off from what I have seen. But that’s usually the case because they have better liability control going in, as well as when the flag goes up, because they actually know the collateral and the customers, instead of doing it by the numbers like the big banks do. They can also more easily reduce assets and curtail liabilities to raise net worth, if it comes to it. They are better at controlling liquidity as well.

btw - Ben Stein called for his resignation today for overreacting though Ben says Hedge fund trades are who pull the string I could neither confirm or deny whatever Stein bases his opinion on concerning the hedge funds. But I do agree that the rate drop was not a good thing at this time, UNLESS Bernanke sees more weakness in the banks than I am aware of. And he might. Look at Citicorp and B of A. Citicorp is raising new capital to put into the net worth column (at least theoretically) as well as to raise liquidity, and they wouldn’t do it if they didn’t feel they had to. And the crisis is just starting. I only know how fast a bank can go south, particularly if it was highly leveraged to begin with. Again, Bernanke might have seen no good choices, and took what he thought was the lesser of two evils…

 

[whatevergirl]

The only wise position to take. Nothing earthly is secure. But when the whole country endorses a falsehood, knowing that it is one, but hoping to “get mine” regardless of what it means to others in the future, it’s particularly insecure.

oh, good point! The truth hurts! (unfortunately, all of us) Thankfully…my dh and I have other investments…hopefully, we will live comfortably in our elder years!

 

[whatevergirl]

PF read everyone’s comments…and thanks you all for your insights…he is working nights now…so, he won’t be on much …But, he thought everyone made some spot on points!

 

[Texas_Roofer]

…

I agree with a lot of what you are saying but I think you are dating yourself. Today no bank has a 8% or 10% reserve maybe 2% and the difference is a major issue. If the fed releases a $100 at 10% reserve it generates $1,000 in loans ($100/10%) if the reserve is 2% the it generates $5,000 in loans ($100/2%).

Additionally cutting the interest rate by 0.75 as was just done allows you to float more bad loans. That is exactly why they did what they did. Cutting from 5.75% to 5% allows you to float an additions 15% in bad loans (0.75% / 5.0%). So is that a good thing? Well if your finance plan allows for a 3% failure rate and your current failure rate is 8% the win-fall ( known in economics as sticky, or sticking) will easily cover you until the sticky wears off. So what to do then?
*
Note: Sticky is an old loan made at 7% fixed under the old system should drop to 6.25% fixed under the new system. However it will not drop until a refinance is performed. Similarly a 6% ARM should fall to 5.25% however it may be one year or more before the actual update occurs to drop the rate.*

 

[vern_humphrey]

Additionally cutting the interest rate by 0.75 as was just done allows you to float more bad loans. That is exactly why they did what they did. Cutting from 5.75% to 5% allows you to float an additions 15% in bad loans (0.75% / 5.0%).

The interest rate has nothing to do with whether the loan is a “good” loan or a “bad” loan – that depends on the borrower’s credit history and for a business loan, management skills.

However, it is possible for a borrower to be unable to pay off a loan at a high interest rate when he could pay it at a lower rate.

 

[Ridgerunner]

I agree with a lot of what you are saying but I think you are dating yourself. I can EASILY date myself. My kids tell me that all the time. But maybe we really have a terminology problem. By “reserves” I was using the term to mean net worth to total assets. I guess that really is an old S&L use of the word (my first job), and bankers don’t really use it, preferring “book value” or just “book”. I did not mean “loan loss reserves” or liquidity reserves at the local Fed. Most banks of which I am aware try to keep around that 8% net worth/asset ratio. Today no bank has a 8% or 10% reserve maybe 2% and the difference is a major issue.** If you’re talking about liquidity, I won’t argue. Now, if you’re talking about “Book”, I will definitely argue. I will agree that many banks have overvalued assets on their books; assets that are going to have to be written down. But any bank with 2% book will normally be reorganized by Fed mandate, before it gets there, actually, not loaned more money.** If the fed releases a $100 at 10% reserve it generates $1,000 in loans ($100/10%) if the reserve is 2% the it generates $5,000 in loans ($100/2%).I really do think you’re talking about liquidity reserves, which is not what I was talking about.

Additionally cutting the interest rate by 0.75 as was just done allows you to float more bad loans. Well, maybe they’re bad, maybe not. That is exactly why they did what they did.You’ve lost me here. Cutting from 5.75% to 5% allows you to float an additions 15% in bad loans (0.75% / 5.0%). **I’m still lost. You’re assuming they’re bad, going in. ** So is that a good thing? Well if your finance plan allows for a 3% failure rate Frighteningly high, inviting regulatory intervention. and your current failure rate is 8% **Disaster. The Fed will require you to raise capital and make management changes, failing which it takes over.**the win-fall ( known in economics as sticky, or sticking) will easily cover you until the sticky wears off. So what to do then?

• I’m still not following. Whatever you call it, the regulators generally will not allow a bank to drop below somewhere around 6-7% book value (I can’t remember exactly now) without intervening in a lot of ways, including limiting the type of loans, paying dividends, changing management or the board, requiring the bank to shrink, etc. At a point, they just plain take over management entirely, and when the bank approaches insolvency, they liquidate it. Now, if a very big bank like Citicorp or B of A is below the “safe” line, they might be instructed to raise capital by selling stock, get rid of unprofitable lines of business, curtailing executive salaries, etc. under threat of direct intervention. Obviously, Citicorp and B of A have either been instructed to raise capital or they can see the handwriting on the wall and are doing it in advance of being made to do it. Of course, that dilutes the shares of current stockholders, but the Fed serves its own interests first. Liquidating a big bank can cost unimaginable billions of dollars because it creates a “buyer’s market” for the assets. That’s why, when a big bank fails, the Fed will normally give another big bank a lot of special rates not offered to others, and net worth forbearance, overvaluation of 'good will", etc., to acquire the whole thing.*
  Note: Sticky is an old loan made at 7% fixed under the old system should drop to 6.25% fixed under the new system. However it will not drop until a refinance is performed. Similarly a 6% ARM should fall to 5.25% however it may be one year or more before the actual update occurs to drop the rate.I think I do understand this. But that “stickiness” does not last long. In today’s market people will refinance to get a quarter point because most of the costs of doing so are fixed, or nearly so. The bigger the loan, the faster the refinance decision gets made. I am willing to agree with you that banks, particularly the big ones, are in bad shape right now. The regionals less so, and the locals very little so. But generally speaking, the Fed won’t go along with insolvency games unless the bank is “too big to fail”, in which event it uses other means of salvaging the situation, like sweetheart deals with other banks to acquire the failing institution. In any event, you can’t include a premium for a higher-than-current-rate loan in net worth. You can’t even do that with bonds under GAAP until you sell them, even though that premium is “market real” when you look at them, because that premium can change.

 

[Ridgerunner]

Texas:

To avoid further confusion. 2% liquidity for the whole institution is extremely low. I think maybe you’re talking about liquidity reserves held at the local Fed.

 

[Texas_Roofer]

Texas:

To avoid further confusion. 2% liquidity for the whole institution is extremely low. I think maybe you’re talking about liquidity reserves held at the local Fed.

Yes we have a vocabulary problem:

Reserve – the funds setting in cash or cash equivalents to cover unforeseen cash requests. Some banks are under contracts to maintain a fixed minimum

Equity = the difference in value of an asset verses it outstanding loans

Book value = determined by GAAP for land and buildings book value is original purchase price even if that purchase occurred in 1991 for a value at 1/3 of todays sales value. Thus the request to use “mark to market accounting”.

The interest rate has nothing to do with whether the loan is a “good” loan or a “bad” loan – that depends on the borrower’s credit history and for a business loan, management skills.

?? I think that clashes with the other part of your post

However, it is possible for a borrower to be unable to pay off a loan at a high interest rate when he could pay it at a lower rate.

Yes , a loan must generate a cash flow above its cost

Remember the saying “Cash is King” When the Fed loans 1 billion out ay 5.75% it needs 4.8 million a month in cash flow to cover the cost. If they are receiving only 4.4 million they are in the red, however if they lower the rate to 5.00% now they need only 4.2 million so now they are in the black! So why did the original loan not produce the planned 4.8 million dollar payments? simply too many bad loans. So now they can increase bad loan until cash flow falls to 4.2 million, so is that a good think?

 

[Ridgerunner]

Book value = determined by GAAP for land and buildings book value is original purchase price even if that purchase occurred in 1991 for a value at 1/3 of todays sales value. Thus the request to use “mark to market accounting”.

Remember the saying “Cash is King” When the Fed loans 1 billion out ay 5.75% it needs 4.8 million a month in cash flow to cover the cost. If they are receiving only 4.4 million they are in the red, however if they lower the rate to 5.00% now they need only 4.2 million so now they are in the black! So why did the original loan not produce the planned 4.8 million dollar payments? simply too many bad loans. So now they can increase bad loan until cash flow falls to 4.2 million, so is that a good think?

In banking right now, “mark to market” is used only negatively, and in some things. So, if a bond is “under water”, it isn’t discounted on the books. But then, the return of principal isn’t in question, so it isn’t important to discount it. If a loan is nonperforming, it most definitely is “marked to market”. I have no quarrel with requiring bricks, mortar and machinery to remain on the books at cost less depreciation. Gives a little cushion against inadvertently overvalued assets elsewhere.

 

[Ridgerunner]

Remember the saying “Cash is King” When the Fed loans 1 billion out ay 5.75% it needs 4.8 million a month in cash flow to cover the cost. If they are receiving only 4.4 million they are in the red, however if they lower the rate to 5.00% now they need only 4.2 million so now they are in the black! So why did the original loan not produce the planned 4.8 million dollar payments? simply too many bad loans. So now they can increase bad loan until cash flow falls to 4.2 million, so is that a good think?

In a sense, a “good loan” is one upon which the borrower makes the contractual payment. A “bad loan” is one on which he does not. I agree with your proposition to a degree, but I don’t think it’s that big a part of it. A quarter point in the rate is not that big a factor in whether the borrower can pay it or not. I have enforced loans for years and years, and defaults are usually catastrophic. Having said that, I thoroughly agree that lowering interest rates right now is probably a bad idea. But again, it might be that the Fed perceived it necessary to prevent bank failures.That’s my guess, anyway.

 

[Ridgerunner]

Hate to follow myself, and maybe the thread has run dry, so maybe I’m only talking to myself.

But I see the admin and congress have agreed on a stimulus package. To me, it’s typical American politics. Those whose income is over $75,000 (or couples over $150,000) won’t get a tax rebate. Those under that level will.

Both parties showed their true colors, exposing their rhetoric for what it is.

A. The Repubs adopted a clearly inflationary, deficit-increasing program that will only prolong the recession and weaken the dollar. “No fiscal responsibility here. Further, we would like to see everybody go out and buy more Chinese goods as fast as possible in order to make the balance of payments even worse.”

B. The Dems dropped extending unemployment benefits and increases in food stamps. “Who cares about the poor? It’s middle class votes we’re buying. Let’s give them money whether they need it or not.”

C. Both parties tacitly “adopted” the notion that anyone whose income is over $75,000 ($150,000 for couples) are members of “the rich”. My goodness! They determined that “the rich” would only SAVE any rebates they got, so nothing doing.

A miserable showing for both parties. And, of course, gold prices took off like a rocket. The politicians on both sides will give themselves rotator cuff tears patting themselves on the back before the tv screens, and the voters will believe the whole sordid mess is a good thing.