Hope for U.S. Economic Policy?

I'll be honest, the last blog of mine (which you should read before this one if you have time) rambled a bit. The economy is such a tough topic to tackle, especially in one sitting. I know I left out a lot of great points and probably included a few lesser ones. Still, it would only seem appropriate that the day after I post it, our economic policy received a big update. Yesterday, Treasury Secretary Geithner unveiled a new plan to have the government auction off 'toxic' banking assets to potential buyers. The stock market soared. Awesome! This would mark the first time off the top of my head that the stock market has reacted favorably to any economic policy announced by Geithner and perhaps even President Obama. If I was writing for a national newspaper instead of a personal blog with only a few readers, I might suggest that Geithner checked out my ramblings yesterday. Odds are likelier that I'll win the lottery tomorrow (I'd prefer the latter anyway). Why did the stock market go up? The plan acknowledges that the private banking sector is necessary to a recovery-the private sector is the answer, not the government!

A 'toxic' asset is basically an asset that is worth nothing. These are assets such as subprime mortgage packages that were purchased when they seemed valuable. When the economic crisis hit, nobody wanted to buy these assets so the 'market' value turned to '0'. In reality, the assets are worth something because they could eventually turn profitable, but if nobody wants to buy them right now the market value is nothing. Banks have had to write down these assets to 'nothing' because of government-instituted (by President Bush I believe) mark-to-market accounting regulations. Those write-offs led to huge artificial losses at banks across the country and translated into shaken investor confidence. The Treasury is hoping that by guaranteeing some portion of the value of these assets and auctioning them off, they can create some demand for the assets and improve bank balance sheets. While there are plenty of reservations with the plan, I think the idea is one of the best policy ideas put forth by this administration. I welcome President Obama's move to boost confidence in the banks in addition to recent comments by his administration expressing confidence in the economy.

Unfortunately, many banking executives will likely be reluctant to take part in this program because of recent government efforts to villify Wall Street. The administration realizes that they now need the help (and backing) of some of the same executives they have criticized. Still, President Obama realizes this and has expressed some disapproval over Congress's attempt to "tax away" bonuses paid to certain executives (i.e. AIG). Maybe he's starting to realize that an approach designed to aid the private sector is better than spending money like a teenage girl left in the Mall of America with a no-limit credit card.

Perhaps the no-limit credit card analogy is a bit overboard considering it's likely that the recent stimulus bill has some positive effect on economic recovery. Consider this though: the non-partisan Congressional Budget Office recently projected that under Obama's budget the federal deficit will reach over 80% of GDP by 2019. It's currently less than half that. Consider also that Europe has long passed spend-happy budgets to finance their welfare states. Europe has fairly unanimously (the European Central Bank agreed with this viewpoint today as well) rebuffed U.S. requests to pass a European stimulus package and insists that the government spending more money is not the answer. The current president of the E.U. today called the U.S. stimulus package "a way to hell." Interesting when you consider the continent this statement comes from.

Anyway, the stimulus package is already passed, and all we can do now is hope that we don't further test that no-limit credit card. I'm not going to hold my breath, but I do think some positive steps are now being taken. I may not be confident enough to put anything new into the market right now, but I'll go ahead and keep in whatever I already had invested (too much).