Most assuredly NOT.
What the proposed stimulus constitutes is NOT A BAILOUT but rather a modest effort at achieving a SLIVER OF A BAILOUT. As such it is a component of the ongoing policy of what we have called: "Bailout by Bits and Pieces." This is not to suggest that there actually exists a coherent, integrated, well thought-out strategy constituting a bailout by bits and pieces. Not at all. The government is responding to a very serious crisis the way it typically responds to a crisis which has taken it unawares: emergency measures, ad hoc measures, seat of the pants moves.
When we examine the fiscal stimulus proposals, let us consider what we are really looking at. The government proposes to create $150 billion, give or take, out of the thin air and give it to millions of taxpayers. Is this a bailout? OF COURSE. But it is a bailout -- on a very small scale, to be sure -- of millions of Joe Sixpacks. While in fact constituting a bailout -- or rather a diminutive bailout effort -- it is dressed up as "stimulus" "tax rebate" "Keynesian policy," or whatever. This has the great advantage for the politicans and the central bankers of allowing them to maintain the politically useful fiction that there will be no bailout for the malefactors who have created this huge mess. Moreover, the instantaneous juice supplied to the generality of the public will, hopefully, reduce public anger and defuse demands for significant reform. In addition, it is undoubtedly hoped that this offering will deflect demand for punishment of the malefactors, who truly have wreaked unimaginable stress and misery on the legendary "little guy."
The application of Calvinist morality to public policy, and the precedence accorded political self-interest and central bank self-justification over sound emergency response to an acute threat to the banking system, will come at a high cost indeed, we believe.
In plain fact, the stimulus will, at best, chip only marginally the awesome iceberg which is floating our way. The answer to the question: what would constitute the most useful employment of $150 billion of freshly printed money is very clear analytically, though it is politically and psychologically unpalatable in the extreme. The use of this money to PURCHASE, AT PAR, the severely (and justifiably) depressed junk mortgage-backeds the banks have been forced to absorb onto their balance sheets would expand the banking system's lendable capital by a significant multiple of the sum. It would also reduce the psychological stress on both banks and the mortgage-backed market. The relaxation of the credit contraction would have an effect on the economy MORE POWERFUL BY ORDERS OF MAGNITUDE than the rather pathetic proposed tax rebate.
An urgent crisis cries out for urgent remedies. Yet neither the Administration, the Congress, nor the FED are at present willing to countenance the above-mentioned policy.
