Can Obama Make Sense of All This Debt?

by: Jonathan O'Shaughnessy November 27, 2008    

Jonathan O'Shaughnessy

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Early Tuesday morning, the federal government announced a new, massive $800B program to buy up bad debt and pump money into the sagging credit markets. According to a NYTimes article entitled: “U.S. Unveils New Programs to Ease Credit,” the program would be structured as follows:

The Federal Reserve said that it would buy up to $600 billion in mortgage-backed assets from the government-sponsored mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE). The agency would also buy up to $100 billion in debt directly from the companies and up to $500 billion in mortgage-backed securities.

In addition, the Fed and the Treasury unveiled a different $200B package to help commercial lending (car loans, student loans, etc).

The NYTimes article describes the move as:

The action by the Federal Reserve on buying mortgage-backed securities brings the full force of monetary policy to bear on the credit markets. Having already reduced the benchmark federal funds rate to just 1 percent, the central bank is now effectively using what economists call “quantitative easing” to reduce the costs of money.

Instead of trying to reduce overnight lending rates in the hope of influencing longer-term interest rates for things like mortgages, the Fed is directly subsidizing lower mortgage rates. It is doing so by printing unprecedented amounts of money, which would eventually create inflationary pressures if it were to continue unabated.

It begs the question though: how much spending is going to occur as a result of the crisis? With additional programs, government spending is piling up quickly: $700B banking bailout plan, $50-$150B on the Citi (C) bailout, the new $800B credit program, $200B commercial lending program, the looming question of government-backed aid package to the American auto industry, and talks of additional stimulus packages being put into place.

The NYTimes article stated that:

Democratic leaders in Congress are gearing up to move quickly on an economic recovery package that aides said could cost more than $500 billion. The goal is to have a legislative package approved by the House and the Senate and ready for Mr. Obama to sign, perhaps on his first day in office, in January.

Clearly, with such unprecedented spending, it begs the question what is the net result when it is all said and done, and is the federal government overcompensating?

Obama has already issued some ‘belt-tightening’ language such as:

The economy’s likely to get worse before it gets better, full recovery will not happen immediately. And to make the investments we need, we’ll have to scour our federal budget, line by line, and make meaningful cuts and sacrifices.

However, even with his proposed reduced military spending, they are still going to be grossly over budget with the proposed programs being implemented. U.S. Markets remained turbulent Wednesday and are currently relatively even. Emerginvest will be extremely interested to see how the proposed plans are both structured and carried out in the upcoming months as the Obama administration transitions into the White House.

Related Articles

This article has 9 comments:

  •  
    Nov 27 09:09 AM
    I'm no forecaster, but all this debt has gotten my attention. So far it seems as though Obama is making a lot of good moves. Whether he can carry this momentum forward will be the real test. I'm certainly willing to give him a chance. It's refreshing compared to what we've had for the last 8 years.
    Reply | Link to Comment
  •  
    Nov 27 09:15 AM
    You know, it's a prudent question to ask. Is the government (along with the Fed) over reacting? It really is hard to say at this point.

    If the banking system is due to collapse, a soft landing approach may be the right move and money well(?) spent. I hope this is followed by massive deleveraging, then we might be okay for a while and recover nicely.

    If the banking system fails utterly, anyway, well...then we've already over spent trying to prevent the inevitable "correction."... But, maybe we can keep a few more folks in their homes.
    Reply | Link to Comment
  •  
    Nov 27 11:52 AM
    Jim Rogers got it right. This bailout nonsense to the benefit of banks and domestic car industries just takes away money from competent people (these are those that live and work within their means and to pay taxes like me) and gives it to incompetent people. Outcome is that those can continue to fatten up their ugly balance sheets, hide their mistakes under the rug or compete with their gov afforded handouts against those that are not eligible or not needy. This is absolutely horrible and utterly outrageous. It is costly because of higher taxes looming. The alternative printing money is unfair to those that are reasonable and save their money, because the gov proposed out of control spending will devalue those assets for sure. The right medicine would be to let those failed institutions get bankrupt. Let the competent people take up the lumps. This is two years of tough hardship, and then we are through. The alternative is endless misery a la Japan.

    Dont forget to flush the present and the next administration into the toilet. Problem is there is not a politician anymore in charge with a hint of a backbone to sell what is right to the fellow Americans. There is nothing in the resume of the the new boss elect that lets me expect that he has any better idea to deal with the crisis than the old boss.






    Reply | Link to Comment
  •  
    Nov 27 06:44 PM
    Debt-fueled bailouts will ensure that massive federal deficits are on the horizon for the forseeable future. Any talk of fiscal discipline is just that: talk.

    Emerginvest may be interested in examining whether Asian and Middle Eastern SWFs will be making more investments closer to home as long as the dollar is strong and U.S. interest rates are low.
    Reply | Link to Comment
  •  
    Nov 27 07:59 PM
    Freefall, what you say is true. That's the ugly part of bail outs...with the consumer's tax money. If you're not angry about it, you're hiding under a rock.

    But, I think I understand what the Fed is doing. They will not let the financial system fail regardless of cost. This will help us stave off a depression.

    Where do you think the Fed got $2tn shadow money? From the very people who do not want to see the banking system collapse. The real power brokers.

    Anthony, yep. The federal debt has taken a back seat for now. But, unless I miss my guess, we'll come out okay after about 2 years of deep recession.

    New monetary regulations will limit the money supply, and this spells good news for dollar assets long term. Well, in my dream world it does.
    Reply | Link to Comment
  •  
    Nov 27 10:16 PM
    Is the Fed creating a treasury market bubble by pushing new supply (i.e. another window opening)? Has the Fed become a debt machine? 'Quantitative easing' is a euphemism for more debt. How do we stop the debt machine in debt city i.e. D.C.? i thought defending the value of the dollar was one of the functions of the Fed. Europeans understand the importance of preserving a currency's value. Who will just say No to more debt? Market forces, of course, in the guise of creditors.The private sector is deleveraging, whereas the public sector is cranking up the debt machine, courtesy of the Fed and politicians. Increasing debt is the 25 yr cause of the problem , not part of the solution.
    Reply | Link to Comment
  •  
    Nov 28 09:23 AM
    Freefall51,

    In a normal world your point is very well taken. But we are not in a normal world. Paulson's actions are not at all about asset rescue or freeing credit markets. That is all smoke and mirrors. It is about propositioning liquidity in the system to try to cover a Credit Default Swaps financial nuclear weapons cascading detonation that will take down the financial system of the entire world. Otherwise, why not print more money and buy every foreclosed home in the U.S.? It would be a lot cheaper.

    The dire truth of this situation is not being clearly discussed in the MSM.

    www.youtube.com/watch?...

    www.youtube.com/watch?...

    tinyurl.com/5sob6h

    tinyurl.com/6ycfaf
    Reply | Link to Comment
  •  
    Nov 29 10:36 PM
    Zan, yes, market forces in the guise of creditor...confidence, is my guess. The best I can tell is Ben "the helo" Bernanke has been working hard with all major central banks coordinating a global liquidity injection. I believe that's part of the plan, inflate ourselves out of a deflationary spiral. Surely massive inflation will result.

    Then, again already planned and coordinated with the world's central banks, shrink the money supply like there is no tomorrow to get inflation back under control, along with (possibly) some quantitative tightening?

    Now, will this work to avoid a "technical" depression? I guess in theory it might, and it just might in the real world, too. But, that's the risk creditors have to understand and take. I suspect they do and will.

    If Bernanke can sell this and pull it off, he will probably be more popular than Greenspan. And, the real bankers, the "shadow bankers," are behind him 110% to save the current banking system. Maybe Obama is too. So, he might just pull off the miracle of our lifetime.

    Dirac, thanks for the URLs. Lemme check them out before I respond.
    Reply | Link to Comment
  •  
    Nov 30 01:32 AM
    Dirac, here's another great explanation.

    www.youtube.com/watch?...

    BTW, do you take your moniker from the great mathematician Paul Dirac?
    Reply | Link to Comment
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Jonathan O'Shaughnessy

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Government Policy
Economy
Bonds
Dollar/Currencies