Tax Rebate

[mattp]

Don't start that up again, Kevbone. Jay seems to argue that if one terrorist cell was discovered in Newfoundland it proves the terrorists hate Canada just as much as they hate the US and will attack there for the same reasons. Its nonsense anyway.

 

Lets get back to the rebate. Cocoa posts that it doesn't matter whether the economic stimulus is pandering or not - the point is to stimulate "consumer confidence."

 

I know that has been accepted standard wisdom, but I've recently heard that tax rebates have in the past generated NO demonstrable impact on the economy. Is that true? Is it one of those things like "trickle on everybody" economics that is not prove-able or maybe even proven not to work but folks just like the idea anyway?

[marylou]

I get the impression most people are going to pay down debt with it, which wouldn't really stimulate the economy IMO.

[sexual_chocolate]

Lets get back to the rebate. Cocoa posts that it doesn't matter whether the economic stimulus is pandering or not - the point is to stimulate "consumer confidence."

 

I know that has been accepted standard wisdom, but I've recently heard that tax rebates have in the past generated NO demonstrable impact on the economy. Is that true? Is it one of those things like "trickle on everybody" economics that is not prove-able or maybe even proven not to work but folks just like the idea anyway?

 

perhaps that is the point. i'm not absolutely certain; i'm conjecturing here on possible motives other than simple "pandering". maybe you can google up some study results....

 

i do think the fannie mae mortgage restriction abatement will have direct effects though, limited to specific areas, whereas the recent ten year note market's effects on long term debt in general will affect all areas, imo. i might be projecting a bit, cuz it'll more than likely affect me quite directly.

[sexual_chocolate]

another perspective:

 

 

 

The worst market crisis in 60 years

By George Soros --- Published: January 23 2008

 

The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

 

However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

 

Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.

 

Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

 

Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.

 

The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.

 

Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks' commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever befor e. That made the crisis more severe than any since the second world war.

 

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an en d.

 

Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

 

The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.

 

The writer is chairman of Soros Fund Management

 

[Peter_Puget]

Interesting read.....

[mattp]

Interesting read.....

 

Have you read it? Can you offer a synopsis?

 

[Peter_Puget]

Matt I read it some time ago. I can say that it offers Mankiw's take on the history of macreconomic theory from the perspective of both an educator and a leading economic advisor. It is very short and well worth the few minutes it will take to read.

 

Oh and did I mention I am sick of work.

[JayB]

This pretty well establishes that whatever they are motivated by, it's quite a bit larger than support for, or participation in the war in Iraq.

 

This appears to establish that Jay can't seem to fathom the possibility that there may be more than one set of motivating factors that influence different groups of actors in different locations or at different times. The fact that some may target Spain does not in any way disprove the idea that the way we are going about our War on Terror or our attempt to establish permanent bases in Iraq may motivate others. You're wasting your time arguing, Hugh.

 

--------

 

Lets get back to the stimulus plan.

 

Does anybody really think that a tax rebate is going to cure a bad economy? David Brooks said tonight that nothing like that has ever had any measurable influence on the economy (he might have said it did once back in 1950 or something). And Ron Paul last night put it this way: "they can print money and hand it out but this won't fix the fundamental problems with the economy." Paul was referring both to the interest cut AND the tax rebate. Its great that the Democrats and Republicans are falling all over each other to "get out in front" on this, but is this really anything more than pandering?

 

Whadda you think, Jay? Will it work?

 

My point *was* actually that different actors have different motives at different times, and this is especially true of the Islamists intentionally slaughtering as many civilians as they can around the globe in pursuit of whatever objective they deem worthy of jihad in whatever context they happen to be operating in. The men committing honor killings of their female relatives, the Chechen rebels plotting to detonate a school in Russia, the people threatening Sweden and or the artist who used the concept of Mohammad in a way that they didn't find appropriate, the fanatics on the frontier in Kashmir. Clearly they have different ends that they are pursuing for different motives, but their understanding of their religious faith is clearly a central concept around which they self-identify as a group, organize to attack whatever it is they are attacking, and find theological justification for their actions. This is not incidental.

 

What spawns jihad and inspires plots for mass murder? The diversity of their causes, grievances, and targets is clearly quite variable. The guys who flew their planes into the World Trade Center clearly weren't upset over the notion of permanent bases in Iraq, and since the plot (like the previous attempt to blow up the towers under Clinton) was inspired by events prior the Bush presidency. What did Spain do to provoke the most recent plot? Follow the trial and perhaps you'll find your answer, but it won't be the ongoing presence of Spanish troops in Iraq. Even if they were only reacting to our moves, and had no agenda of our own inspired by factors that are rooted in their own convictions, history, and culture, the sheer variety of factors that have and will incite Islamist fanatics is such that it would be rather difficult to modify our values and policies in a manner that satisfies their demands or thwarts their anger. I have zero interest in living that way, or in living in a country where the citizenry aims to do so. This likely where we differ.

 

Not a fan of the rebate.

[JayB]

For Choco:

 

1. " Stimulus plan may lead to higher mortgage rates.

 

EW YORK (Reuters) - A key element of the stimulus package aimed at jump-starting the ailing U.S. housing market may have the unintended consequence of raising mortgage rates, said analysts studying the plan.

ADVERTISEMENT

 

A federal proposal to increase the size limit on loans eligible for purchase by mortgage finance giants Fannie Mae and Freddie Mac has unsettled traders in the $4.5 trillion market for bonds backed by the "conforming" mortgages.

 

Increasing the eligible loans to $729,750 from $417,000 would change the characteristics of mortgage-backed securities, leading traders to exact a premium for increased interest-rate risk.

 

Borrowers with large, jumbo loans are more likely to refinance since their savings are greater for each incremental drop in rates than for a smaller loan. The loans will taint the bonds since traders don't initially know the make-up of the securities known as "agency" MBS.

 

Higher mortgage rates would make it even harder to unload already high housing inventories and existing homes on the market, delaying any housing recovery and potentially extending the U.S. economic slowdown.

 

Potential damage to the "to-be-delivered" (TBA) market -- the most actively traded agency mortgage market where investors can buy bonds before they are actually created -- prompted Wall Street dealers to call a special meeting with the Securities Industry and Financial Markets Association at 3:30 p.m. Friday, market sources said. A SIFMA spokeswoman would only say the group is in ongoing discussions with its members.

 

"The amount of money that investors are willing to pay for agency mortgages (bonds) could be lower if these loans are TBA deliverable and so mortgage spreads could widen," said Ajay Rajadhyaksha, co-head of U.S. fixed income strategy at Barclays Capital in New York, who will listen to the SIFMA meeting by phone.

 

Mortgage rates would rise for the "vast majority" of agency-eligible borrowers, he said.

 

When falling rates prompt refinancing of loans in mortgage bonds, investors can be hurt since principal may be returned to them at a price below market value. The investor is also faced with reinvesting principal in bonds paying lower rates.

 

MBS paying low interest rates have been hurt in recent days amid expectations the addition of many jumbo loans will boost supply in those coupons, analysts said. As much as $500 billion in jumbo loans could qualify, according to Barclays research.

 

Wall Street MBS traders last beat down SIFMA's door in October when the advent of the Federal Housing Administration's FHA Secure program threatened to taint TBA pools of Ginnie Mae securities. The dealers got their way -- Ginnie Mae created new "specified" pools outside of their TBA issues for FHA Secure.

 

"The street is on high alert," one mortgage trader at a New York-based primary dealer said in an e-mail.

 

Rajadhyaksha and other analysts, including RBS Greenwich Capital's Noah Estrin, expect the TBA market will be protected if Congress and President George W. Bush approve the stimulus plan as written.

 

"When you start throwing a lot of jumbos into a pool you spoil the fungibility of the collateral," said Linda Lowell, a mortgage market veteran and principal of Offstreet Research LLC. "That has made the market as liquid as it is. Home owners have benefited from lower mortgage rates."

 

The stimulus bill is expected to move ahead despite the U.S. Treasury's opposition to raising loan limits without legislation tightening controls of the government-sponsored enterprises. It also "flies in the face" of the GSE's chartered purpose of creating affordable housing for Americans, Treasury Secretary Henry Paulson said on Thursday.

 

Brian Faith, a Fannie Mae spokesman, declined to comment about the plan's impact on its mortgage bond program. A Freddie Mac spokesman had no immediate comment.

 

Macroeconomic reasons for increasing the size of loans eligible for purchase by the GSEs are many. Home owners in high-cost areas where home prices exceed the current $417,000 cap have been unable to capitalize on the drop in rates on conforming mortgages because investors have been less willing to buy bonds without Fannie Mae and Freddie Mac guarantees.

 

As the credit crunch deepened in mid-2007, a jumbo borrower had to pay about 1 percentage point more in rate than one with a smaller loan, compared with a 0.15 percentage point premium during the housing boom. Today, jumbo borrowers pay about 0.75 percentage point more.

 

"To the extent that it is (available) in areas that are stressed, I think that it will help at the margin," said Lewis Alexander, managing director and chief economist at Citigroup Global Markets at a conference on Thursday."

 

2. Jingle Mail for the 21st Century...

 

"I am one of these people. My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June.

 

"Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify for loan mitigation is to get my boss to fire me, stop making payments, and wreck my credit. In fact, my bank won't even talk to me until I miss a couple of payments.

 

"I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money.

 

"I realize I agreed to the deal when I signed the mortgage papers, but I am within my rights to walk away from a bad deal and suffer the consequences, just as many corporations write down billions of dollars of debt, lose money for their shareholders, and lay off people as a result of their bad decisions.

 

"I don't really understand why people view a business decision by a homeowner as a terrible moral lapse. However, when large lending institutions, with access to more sophisticated information than any consumer could imagine, make mistakes affecting thousands of people worldwide, they are not excoriated and vilified with the same righteous zeal."

[Hugh Conway]

Fanatics on the frontier in Kashmir?

 

Would that be the Hindu Indian occupying army who've taken to randomly shooting suspected militants most of whom have are only guilty of being in the wrong place at the wrong time? Or is it the Hindu extremists who've taken to slaughtering innocent Christians in India?

 

I don't want a zealot of any stripe in charge.

[mattp]

OK, Jay:

 

so now you admit that different actors act at different times with different motivations. So were you just playing games when you argued, yesterday, that the fact Spain was targeted proves that our Iraq adventure doesn’t inspire any terrorists? Just yesterday you asserted that the fact of an attack in Spain proves that we would be no less likely to be targeted if we pulled out, and since I never advocated any rapid withdrawal in the first place I assume you must mean that if you want to narrow your claim even further to mean that our heavy footprint in the region doesn’t inspire terrorist attack.

 

As further proof, you point out that the 911 hijackers couldn’t have been inspired by our Iraq invasion because it hadn’t happened. Don’t you remember that the 911 hijackers were from Saudi Arabia and we’d had bases there for years? Bin Laden even spoke about this on a couple of occasions if I recall correctly.

 

---

 

What do you mean - not a fan of the rebate? You can take that $600.00 and buy one hell of a nice made in China mountain tent!

[JayB]

I haven't been arguing that our actions don't inspire terrorists. Clearly they do.

 

I have been arguing that we shouldn't tailor our policies to suit their preferences for a number of reasons. One of which (although by no means the most important), is that it's unlikely that it would work. Even if we collectively became craven and shameless enough to capitulate before the demands of one group of Muslim fanatics at one point in history, it's far from certain that this would insulate us from attacks from another set of Muslim fanatics inspired by another set of grievances at another point in time, even if we held up our end of whatever bargain we'd struck before.

 

Seeing as you take the opposite view - what actions would you like to see the US take to redress the grievances cited by Muslim terrorists? Which group(s) would you consult when defining them? What mechanism would you use to insure mutual compliance? Would this be a one-time negotiation or an ongoing process?

 

 

[mattp]

You're losing it Jay.

 

I have never argued that we should "tailor our policies to suit the terrorists preferences," never proposed any negotiation process with any imaginary group who could advise us as to what "They" want and how to assure that if we grant it "they" will stop attacking us, or any of the other ridiculous stuff you type here. I don't believe any of the Birkenstock clad metrosexuals you so deride ever have.

 

Its good to see you finally admit that our actions "clearly do" inspire terrorists. We can put the straw man to bed now.

 

What kind of Kayak are you gonna buy with your rebate so the economy can get better?

[olyclimber]

Regarding this tax rebate, I heard a new reporting gushing about how according to Bush the NUMBER ONE ISSUE ON PEOPLES MINDS RIGHT NOW IS GETTING THAT REBATE!!!!11

 

What the hell? That is *really* interesting! I GOTTA HAVE MY $600 SO I CAN SPEND IT NOW! Well I can understand some people really need some money (more than I do). But I thought this $600 was to save us from recession, not because everyone really needs $600. I wonder what percentage of people the $600 will mean the difference between them going homeless, etc?

[olyclimber]

http://www.marketwatch.com/news/story/great-fiscal-stimulus-package-/story.aspx?guid=%7BD3B850E5%2DE05D%2D40DA%2DA630%2D42B3CB838AE9%7D&dist=MostReadHome

[JayB]

Smoot-Hawley.

[olyclimber]

well hopefully who ever wins the election cracked the book in highschool history

[sexual_chocolate]

the same kind of fear-mongering has happened every time the US has had a down-turn. you know, the end is near, it's like 1929, everyone will die, etc etc. it's nothing new.

 

i have no idea how bad a down-turn will happen, if any; no one does. could it happen? of course! could it not happen? of course!

[olyclimber]

i think its called "considering the worst that could happen"...nothing wrong with doing that. at least then if it does happen you might have a chance of being prepared. or maybe not...perhaps if we all just think good thoughts our voyage on this sea of bliss will never end.

[olyclimber]

GOLD RUSH!!!

 

http://news.bbc.co.uk/2/hi/business/7209599.stm

 

RUN FOR THE HILLS!

[sexual_chocolate]

i think its called "considering the worst that could happen"...nothing wrong with doing that. at least then if it does happen you might have a chance of being prepared.

 

so how are the preparations going?

[Jim]

The tax rebate is little more than pandering during an election year. It's really too bad. Seems that something more targeted to the low income folks who both need it and would spend it would be better; or some type of public works program aimed at repairing some of our rusting infrastructure - which would pay some wages and get some needed jobs done.

 

As far as the current fiscal crisis - SC's quote of the Soros article is right on. Unfettered capitalism is interested in only one thing - short term gain. So the mortgage brokers, lending institutions, and Wall St traders made their commission and left others holding the bag. Hell, if Merril Lynch couldn't figure out the market implications how would you expect that some bureaucrat of a pension fund to know that Moody's AAA rating was a SOS?

 

The market will right itself, but it's going to take a long time and it will be bloody. Wouldn't it have been better to tighten down a bit on the financial market oversight - which was proposed in 2004 but trashed by the Rep. Congress. Merril Lynch has uped it loss forcast from 2.5 to $5.1 Billion. Despite comparative losses Washington Mutual's CEO just got a multi-million dollar bonus - great work guys!!

 

There is at least two more years of fallout from the subprime fiasco - some folks haven't even had their first rate jump. Can't wait to hear The Idiot's Wreck of the Nation speech tonight. What a contrast compared to how Clinton left the house in order.

[JayB]

If I were Porter I'd carve a secret door into the foundation of the unsold McMansion next door so that I could seek shelter within its copious and tastefully appointed interior spaces when the depression fueled mobs start roaming the streets...

[olyclimber]

i think its called "considering the worst that could happen"...nothing wrong with doing that. at least then if it does happen you might have a chance of being prepared.

 

so how are the preparations going?

 

i'm busy maxing out my credit cards buying supplies.

[olyclimber]

sadly though my purchases are only buoying the economy, delaying the inevitable.

 

on a positive note there are a lot of rich people in seattle, so we'll have plenty to eat.