Death By Optionality

The next phase in preventing potentially insolvent banks (C and BOA) from backsliding into the abyss appears to be another accounting trick. The Treasury plan revealed earlier this week will seek to convert government shares of preferred stock held in beleaguered institutions to common stock. Whoopee! I've read that Geithner likes to preserve optionality,to leave as many doors open as possible. In this case Summers and Geithner both are not willing to concede that some form of nationalization is requisite in the case if C and BOA. They prefer to not exercise that option.

There may be some rationalization for the planned common stock conversion but not everyone agrees what that is. Coincidentally, a mention of the plan Treasury wants to implement can be found in the latest IMF GFSR report . The use of a stock conversion plan is mentioned in the section of the executive summary that discusses bank capitalization:

Most capital injections from governments thus far have come as preferred shares and these have carried with them a high cost that may impair the banks’ ability to attract other forms of private capital. Consideration could be given to converting these shares into common stock so as to reduce this burden.

My favorite members of the loyal opposition school of economics including Paul Krugman and Simon Johnson have cast doubt on this maneuver. I see their point on the seemingly futile nature of the stock conversion. The IMF report does provide some counterbalance to the critical outlook on the Treasury plan. This is the same IMF that Johnson used to work for.

Update:I recently purchased a Kindle and find it very conducive to reading dry and lengthy policy papers. More so than if I were to try to read them online. For what that's worth, I'm not quite sure.

Bridge Fencing And Berea Sandstone

The first round of federal stimulus dollars for local infrastructure projects have been announced and the complaints about government waste are already materializing. One of those projects, The Akron Y Bridge rehabilitation, includes installation of safety fencing along the bridge. The decision to fence the bridge has been batted around since several citizens have decided to jump to their deaths from the span. The cost has always been prohibitive until now.

Needed as it may be may be there is an undertone of criticism swirling around the inclusion of the fencing within the bridge project. Tim over at the Chief Source has some misgivings about the waste aspect of spending money on the fence. I Think he's mad about the diminution of the view. Grumpy Abe points out that the ABJ headline on the project implies there is a groundswell of dissatisfaction over the fence even though none really exists. To not be outdone I found a story on Topix from the International Herald Tribune that refers to federal stimulus dollars being spent on "anti-suicide fencing" to keep people from jumping to their deaths.

I can already see where these complaints are going. The Tea Party crowd will get a hold of these project names and individual components and turn them into anti-government invectives. All of this misses the point of the federal program. The dollars are being dedicated to local projects and those projects are being designed and planned by local governments. The overarching goals being to invest in infrastructure and employ people. This isn't a contest to see who can create the most spartan bridge deck.

The current federal funding program for roads and bridges is very similar to the Depression era programs of the 1930's that also had this dual purpose. The evidence of those historical initiatives can be seen all over the Cuyahoga Valley in the form of sandstone blocks that ring the parking lots and mark the park roads. All of these blocks were harvested from the local quarries as part of a program to improve the amenities of the park and keep your grandfather employed. Consider this passage describing a popular location in the Cuyahoga Valley National Park that benefited from the Depression era jobs program:

The Civilian Conservation Corps (CCC) accomplished much of the early work of transforming the private retreat into a public park. Structures in the park built by the CCC in the 1930s include Kendall Lake itself, completed in 1935 and built primarily for swimming, toboggan chutes in 1936 (later removed by the National Park Service), the Lake Shelter in 1937, originally used as a swimmers bathhouse and concession, and the unique chestnut wood privies.

That description was from the Trail Guide Cuyahoga Valley National Park, 3rd Edition. A critic of Roosevelt CCC's work could have been inclined to doubt the need for fancy wood outhouses and a swimming lake. Sure, the country was facing economic collapse and the government was paying men to build recreational digs out out of expensive materials.

The point back then was the same as it is with today's stimulus program spending. The country is facing a great economic decline, one that is chiefly demand driven. The point of infrastructure spending in 2009 is to employee people, drive up demand and get the national economy back on its feet. Not much different than in the 1930's.

Bridge fencing as part of an overall project to rehab an elevated roadway is not a far cry from those sandstone blocks that ring the parking lots or adorn the shelters in the CVNP. Why quarry large chunks of sandstone only to bury them halfway in the ground near park roadways? Why install unsightly fencing along the entire length of Akron's most notable bridge? The answer for both questions is the same. These projects were sanctioned to employ Ohioans and improve our infrastructure in the process. Whether it be park roads or city thoroughfares.

Some critics will be hanging on the the name and intent of every infrastructure project that gets tapped for stimulus funding. In the case of the Y Bridge the image of government waste will be intimated because the $1.5 million spent on the fencing will be puffed up to hyperbolic levels by every libertarian or anti-taxer in throwing distance.

I'd argue that the view was not the driving force (get it) behind the funding of the Y Bridge project. The City of Akron had a duel need of investing in infrastructure and uplifting the economic well being of the region. Directing the federal dollars towards a comprehensive design for revamping the bridge happens to include the maligned "suicide fencing" among other improvements.

You can argue that the views from the Y Bridge will be diminished once the fences go up, but don't tell me that it's a waste of money. Losing the unobstructed view from the bridge is a small price for building a safe and structurally sound piece of Akron's infrastructure. If you want to take in a vista of the surrounding terrain I would suggest the outlook trail at Kendall Ledges. While you're in the area stop by Kendall Lake and check out the Berea sandstone road markers and the stone lodge that sits alongside that lake.

Mashing The Stimulus

The power of the collaborative and mashable web is being applied to potential stimulus bill projects. StimulusWatch is to the tracking the ARR projects as IamCaltrain is to transit scheduling. I'm going to follow this and see how it compares with the actual projects submitted. Don't let the mention on O'Reily Radar discourage you.

The developers of the sight are depending on crowdsourcing and the flexibility of platform to generate constructive observations and a real grassroots evaluation of the proposed projects. The mash-up includes real time favorability data to "evaluate project efficacy" based on the description and cost.

Mash Away
Two caveats about the site are in order. The first is that the data source for the site is the U.S. Conference of Mayors submission, MainStreet Economic Recovery Report. The report is a good proxy for what requests will be officially submitted but they are just that, requests. At some point StimulusWatch should shift to following the projects that actually get implemented. This will be easy if the folks at Recovery.org make their data set available in a useful format.

Secondly the site is susceptible to the normal vulnerabilities we see in Web 2.0 outlets like wikis. Trolls, histrionics over the descriptions of projects and bad information are par for the course. Getting caught up on the names alone is not necessarily the best way to harness the wisdom of crowds. Maybe it will encourage citizens to follow up with their own bit of research.

I trust the Obama administration and support the Keynesian thrust of the spending package. I just wonder how it will take Recovery.gov, the official home of ARRA to catch up with StimulusWatch.org? Maybe we will end up being surprised by the web savvy of the official government site once it gets rolling. Who better to break the mold of the technologically Jurassic government than an administration that has shown a knack for utilizing the Internets?

What about the other 33% of the $787 billion program? Can we have one of these sites to track the tax cut portion of the bill? At least the project portion can be scrutinized and measured.

Akron Mashed
Searching by city shows Akron has requested over $1 billion in projects, the largest being the Central Interchange project at a cool $50 million. This is classic infrastructure that should be expected to appease some of the critics. There are plenty of millions more of projects like this if meat and potatoes is what you crave.

The Akron City Schools have requested $111 million to rebuild or rehab schools including $58 million for two new high schools. Getting these projects would be a boon for APS. This money would supplant the borrowing that the system had planned to do as part of the CLC master plan. The benefit is two fold- the schools free up existing dollars for other projects and the future year debt payments are reduced. This is one example of capital dollars having a beneficial operating impact.

It doesn't look like anything has been submitted by the city of Cleveland yet. Apparently the City elders did not have anything ready for the Conference of Mayors report, always a reassuring sign. I’m hoping for a dome on Cleveland Browns Stadium will make it to the list.

Powered by ScribeFire.

I Am The Stimulus

... I am the walrus.

Imagine if the Democratic party hired the PR firm that created the 'I am Tiger Woods' campaign to plug the ARR Act. I envision a one minute add with flashes of ordinary people saying "I am the stimulus".

A guy on an assembly line, a kid in a classroom or gal in a hard hat on a job site. Simple three second vignettes making the point that the thrust of the legislation was to help the average middle class citizen in a variety of ways.

I'd volunteer to be in that spot. Some of the so called gimmicks will impact my family in a direct way. We are attempting to sell our home. Surely the tax incentives for first time buyers will boost the number of potential buyers in the market. More participants means a quicker sale at a better price. It doesn't stop there.

The lease on our vehicle is up this year and I do plan to take advantage of the associated tax credit for car purchases. The federal dollars that will flow to infrastructure and green energy are front and center in my line of work, local government.

There are plenty of projects that are being submitted on behalf of the NEO local governments that will be able to go forward as a result of the funding. In these tough economic times we'll take what we can get. By my estimation there is nothing fringe about the Recovery Act.


Powered by ScribeFire.

Full Frontal Nationalization

The stimulus bill is out of the gates and the money will start flowing in the next few months. Count me in the Krugman camp . I think the bill was inadequate in size but it will go part of the way to plug the projected GDP gap and stave off unemployment.

The State of Ohio already has a web portal set up to start accepting project requests from interested parties. Visitors to the site are reminded that anticipated demand for dollars will well exceed the supply. What's interesting is that the State portal has no verification requirement for submitters. Anyone can make up a request and submit it on the website.

The Bailout Spectrum

Using government spending to increase employment was a straightforward approach to attacking the economic crisis. The financial system woes are not as easy to tackle. The focus of the Obama economic team (Geithner, Summers, Roemer et al) will be the ailing banking system. By banking I mean any financial institution but certainly the 18 or so money center banks in the hot seat.

As I see things the range of solutions can be viewed along a Bailout Spectrum. At one end of the continuum is doing nothing or tough love. Kind of like the market fundamentalists having their way.

Let nature take its course. No capital infusions, no buying toxic waste off the balance sheets no TARP no mercy. The taxpayer fronts nothing to prop up the banks and the whole system is left to rot on the vine. The only problem is that taxpayers, the government and everything will be along for the ride. There is no decoupling from the financial system.

The middle of the spectrum is populated by ideas that we've already employed. The original TARP plan to buy assets from banks resides here. The actions taken with the first round of $350 billion that Hank Paulson oversaw. This included the injection of equity and partial taxpayer stake in large institutions and the hundred billion dollar backstops placed behind pools of crappy assets. All these attempts reside in the lukewarm area of the spectrum.

Moving further down the road we have the unveiled by a sheepish Tim Geithner last week. This plan laid out more asset guarantees, more room for capital injections using convertible shares and a public private vehicle for purchasing more bad assets. The current plan is more a less a back door variety of nationalizing.

The perception is that the government control is less direct if the methods are more opaque. These tactics have been tried to some degree and there's no indication that they will get the system back on its feet anytime soon.

What the Geithner plan in its purported form would do is prevent a rapid move to nationalize the banks. A move that the Obama administration may not view with alacrity at first but the reality on the ground will force a change

Full Frontal Nationalization

The opposite end of the spectrum is full frontal nationalization. The government and the taxpayer gets the bank, the assets and most of the upside. This option is viewed as taboo in a supposed free market society like the U.S.

We're all bankers now. There is a wave of sentiment building for the nationalization strategy. Simon Johnson, Paul Krugman, Nouriel Roubin i and other economists have been pressing the issue for weeks now. The latest entrants into the nationalize are - GOP members of Congress . It's gotten so bad that the party of free market devotion is throwing in the towel.

Call nationalization something else like preprivatization or bank reincarnation to make it more palatable to Wall Street. The key thing is to get through this tough period and begin restoring the confidence and efficacy of the banking system. The full frontal approach also provides plenty of control and upside for chief investor the taxpayer. So what if we do something not viewed with love by Friedmanites of the world.

If you're not convinced read this"ransom" note from a large bank to the American taxpayer that was discussed on NPR's Planet Money.

Big Three Battlegrounds

Why can't we all just get along? The prospect of of having to intervene in another sector of the economy, the auto industry, has created a defacto battle ground of sorts. The attention being paid to the sad state of affairs at GM, Chrysler and Ford has exposed harsh divisions along policy, ideological and societal lines. What could have been a straight forward debate about loaning money to the Big Three has become a struggle along multiple fronts. You thought the people in Washington just wanted to entertain a new bailout package but there are more layers to this onion than meets eye.

The Fight For Stability in a Crisis
The guys in charge of the automakers will tell you that their companies are fighting to stay alive and the dysfunctional state of the credit markets is making things hard. They'd love to turn to the credit markets to borrow money and replace the cash they are burning through but there's a financial crisis in full swing so that's not an option. Considering all that is being done for the financial sector a loan to save or stabilize the U.S. automakers and the thousands of jobs that are at risk doesn't seem out of bounds.

Remember that $150 billion bailout of AIG (originally set at $87 billion) was deemed necessary because of their omnipresent status in the global financial system. The Treasury coughed up $150 billion to stave off excessive counter party risk. Surely a loan to car makers to bridge the economic crisis caused by the likes of AIG is in the realm of the possible. I think it's safe to say that GM workers will not be attending retreats at exclusive resorts during the loan period. That little fit the media is throwing over the use of corporate jets really seems trivial when compared against the massages and other pampering AIG employees received whilst on government sponsored holiday.

Definitional Schism
There's a low level verbal skirmish over the definition of what government action is, a loan or a bailout. The more loathsome someone feels about the Big Three the more emphasis that is placed on the term bailout. So it may sound like BAILout when muttered on cable television. I'll stick with the more accurate title, it's a loan.

The continued seizing of the credit markets would probably make a reorganization under Chapter 11 untenable. There is a consensus developing not a myth that the bankruptcy would quickly back slide into a liquidation. Consider that auto industry jobs have a multiplier of 9 or 10. A liquidation of GM et al means the evaporation of suppliers and other related industries that are supportive to the manufacturing sector. That includes the mom and pop (sorry for the cliche) diners, barbershops, pizza places etc. that will face untimely eradication from the local economies that depend on auto laborers to pump money into there businesses.

A Tipping Point in the Ideological Struggle?
The right wing pundits, columnists, policy makers and disciples of creative destruction see the argument over "bailing out" the Big Three as a tipping point of sorts. A victory would mean shutting the automakers out of receiving any federal loans and force them into a tailspin leading to liquidation or fragmentation into smaller entities. This scenario may sound detrimental to the U.S. economy as a whole but theses guys know the survival of their ideology is at stake. They have picked this debate, not the $700 billion one, as the final showdown in eradicating the perceived cancers of the free market system they crave.

Mitt Romney, Fox News, the WSJ Opinion page, George Will and others have weighed like an angry mob from the Roman Coliseum with a collective thumbs down. They may arrive at the prognosis using a different methodology but the conclusion is the same. Let them fail and we will be stronger is a common chant from the market worshipers.

The dialectic we are witnessing is actually a full assault on the soft underbelly of the nemesis of free market acolytes. Namely the economic safety net provided by organized labor over the years. You know, luxuries like living wages, health care, pensions and safe working environments. There's blood in the water and the antagonists are waging a proxy war against one the largest remaining strongholds of organized labor. Consider this, one of the graphics run on Fox News today read, "Is this a bailout of the union!". Bailing out shameful greed on Wall Street okay, providing loans to the Big Three (union workers), bad.

If a fatal blow can be dealt to the Big Three surely they think a significant remnant of industrial labor movement could be neutralized in one stroke. Attacking organized labor vis a vis the demonization of the individual worker is one more tactic utilized by the "on your own" crowd. This type of assault on the structure of union employment had been going on before the Big Three Battle of 2008. George Will wrote a celebrated column on the decline of GM in 2006 where he referred to the health care and pensions offered to GM employees as "welfare". He penned a reprise to that column in this week's Post.

Yes, the beloved Joe Six pack that the GOP crowed about during the 2008 election busted his ass on the GM assembly line for 25 years to become a welfare recipient, he in no way earned those benefits. Funny how propping up AIG artificially with unlimited billions doesn't draw the same animus from these guys.

You would think that the crumbling of one of the pillars of free markets ideology, unregulated markets, would have discouraged the protraction of the ideological war. Of course the abysmal attempt of the past few years to embrace free market dogma has been a train wreck all together but that hasn't abated the trumpeting from the sons of Friedman.

Powered by ScribeFire.

Lest You Think I'm That Popular

My Site Meter reporting has shown a spike in views the past week. If one were to see this activity they may be lead to believe that the 260 views of BCR today were a sign of interest in what I have to write. Not Really.

What this blog is experiencing is like something out of a chapter of the Long Tail or The Wisdom of Crowds. Give people all the content that's out there and a good filter (Google) to find it and then look out.

Here's the story. I ran a post back in January titled "Where's My Stimulus Check" that outlined the progress of the economic stimulus plan as it wound its way through Congress. The title was a harmless poke at the impatience of the average citizen waiting around for the gov'ment to send out their damn check. Fast forward to last week when the actual checks started going out and now you see what's on peoples' minds - money. The links to BCR through Google searches are driving the links to the blog. Basically all those searches using the same phrase as the post title get referred to this humble little blog. I unintentionally Google bombed myself. I'm willing to rent out space in the side bar to those of you looking for exposure.

Where's My Stimulus Check?

As predicted by briefcase radical Senate Republicans resorted to filibustering the economic stimulus plan rather than allowing additional benefits to be incorporated into the final product. The proposed spending increase would have broadened the reach of the plan by getting dollars into the hands of people who would spend it. From the AP story,

The fate of $600-$1,200 rebate checks for more than 100 million Americans is in limbo after Senate Republicans blocked a bid by Democrats to add $44 billion in help for the elderly, disabled veterans, the unemployed and businesses to the House-passed economic aid package.

With no chance of surpassing the sixty vote limit Harry Reid and Company will have to compromise with the Republicans and get something approved soon. The flip side is that the GOP caucus takes some heat for yet another mean spirited power play, not a stretch.

The Chinese connection to the stimulus plan, also highlighted in these pages, was not lost on Sen. Byron Dorgan. According to an article on Politico the North Dakota Democrat wants to remind rebate recipients to divert the flow of stimulus dollars away from China and other U.S. Creditors,

In fact, Dorgan has offered an amendment to the Senate economic stimulus bill that would require millions of rebate checks to have the slogan "Support Our Economy - Buy American."

I plan to heed the good Senator's request. Although with that limitation I'm not sure what I will purchase with my stimulus dollars. So much for a new laptop or stylish clothes from the Gap. Is anyone up for a trip to Amish country?

More on The Economic Stimulus Plan That Isn't

Things are starting to shake out with the $150 billion economic package cobbled together by the President and members of Congress late last week. As is usually the case with compromised policy the devil is in the details. My previous post envisioned a potential flow of funds that would result from the economic plan. After reading some critiques of the plan on the web my analysis may need some revising. It looks like the plan may be less conducive to create immediate spending and more on pushing through tax cuts to upper wage earners.

According to Professor Krugman's latest column and his continuous blog updates the plan doesn't get enough in the hands of those who will spend it quickly. He faults the acquiescence of Pelosi and Company in allowing those benefits to be cast aside in the final compromise with President Bush. The resulting plan directs nearly 60% of the benefits to the upper two quintiles of income earners according to the Tax Policy Center. These upper wage earners are more apt to save the rebate dollars and not spend them immediately. With the low end stuff out of the plan the tax-cutter-in-chief can continue boasting about the cure all power of tax cuts that make up the rest of the package. No welfare queens getting rich off of this stimulus plan .

It's too bad the aid to State and local governments was weeded out in the negotiations. With Governor Strickland warning of looming budget deficits and local governments already feeling fiscal strain, an economic boost would be nice. This provision and some of the others may become a point of contention when the economic plan is debated in the U.S Senate. According to a story on Politico numerous Senators of both parties are already jockeying to get things put in the final version. How this will effect the outcome is hard to day. Could we see another GOP filibuster if attempts are made to include aid to local governments and increases in unemployment benefits?

Plan Announced to Stimulate China's Economy

The economy goes sour because of what Chairman Greenspan referred to as “froth in thehousing market”and things get surreal. Suddenly an administration that has embraced Friedmanite market principles has gotten all Keynesian on us. Today's compromise (someone caved) between the the Prez and Democratic leaders in Congress calls for pumping $150 billion of stimulus (that's hot) into the economy. The hope is that this action in the form of tax rebates for average Joes and tax incentives for business will prevent the economy from taking a recessionary nose dive this year.

The good news is that all operations in Iraq will be suspended for one year to pay for the economic bailout. Okay that's actually not the case. Per the Washington Post story the plan would require increased borrowing and will increase the deficit by that $150 billion amount proposed.

Here is the proposed flow of funds from the plan:

1. Government borrows $150 billion from creditors like China.
2. Government spends money on rebates and tax incentives.
3. Businesses use tax incentives to buy equipment to manufacture goods in their Chinese factories.
4. Citizens go to Walmart and spend money on crap made in Chinese factories.
5. Feds pay creditors like China increasing interest on borrowings as value of dollar declines
6. Policy makers in D.C declare important election year victory.

The Prez has already mentioned that often repeated theme of Bushonomics, the miracle of unending tax cuts in his speech today

Importantly, this package recognizes that lowering taxes is a powerful and efficient way to help consumers and businesses. I've always believed that allowing people to keep more of their own money and to use it as they see fit is the best way to help our economy grow.

I'm still waiting for Ron Paul's response to this stuff. For more coverage on the plan check out Paul Krugman's Blog.