“Capital Insights” with Jack Kern: Has The Treasury Department Failed?

Governor Le Petomane: ” …We’ve got to protect our phony baloney jobs, gentlemen. We must do something about this, immediately, immediately, immediately!”

Blazing Saddles, nominated for an Oscar in 1975
(c) Mel Brooks, Warner Bros. Pictures 1974

The World According to TARP, as it’s now known, has been fraught with an overwhelming sense of failure. One of the key distinctions between how economic stimulus is supposed to work and the reality of its effect is becoming more evident every day. Remembering our earlier example, in the far reaching poppy fields of OZ, Dorothy and her cohorts (ever notice how much the Lion looks like Dick Cheney?) are just waking up from the roadside to discover new subdivisions built all over the place, the Yellow Brick Road is now a 4 lane divided highway, (TARP funds no doubt) but an eerily quiet pervades the landscape. Few of the houses are now occupied, the OZ Medical Center is mostly empty and lots of munchkins have been layed off from their jobs. (OZ was a major exporter of flowers and children’s clothes). Even the witches castle is now a converted Denny’s but business is slow. Crime is up, and now the town council is hoping that TARP II, return of the Phantom Finance is coming soon.

The Treasury Department, under Henry, “What me worry?” Paulson has squandered what could have been a major opportunity to make a difference and now about half of the funds Congress voted for TARP are mis-spent to such an extend that the Inspector General is reporting the deals made were terribly unfair to taxpayers. President Obama is now planning to unleash the next phase of TARP, probably followed up by additional spending in the future. By some estimates, if you add up all of the funds spent on stimulus so far, from all Federal sources, the real number, based on every initiative apparently exceeds $7 trillion.

So why isn’t it working?.

There is little doubt that this economic recession is severe enough to warrant taking some action, but there are concerns here that seem to be missed by the economic reporters in the press, save for Steve Liesman, of CNBC who gets it, but doesn’t get enough time on camera.

This is a global recession, one that won’t simply respond to a U.S. based stimulus package. There isn’t enough finance in our capitalistic system to make the major nations change their ways or recover any faster. China is a risk, because their own stimulus packages are failing and that nation may become destabilized to such an extent that a rising rural populace, upset about the few in coastal areas with adequate housing and food may revolt. A revolution is China, despite our ideological differences is not a good thing right now, but it is a real possibility. Riots have already broken out over closed factories and food shortages.

The European Union is suffering under not only the crushing weight of some freak snowstorms, but also under the cold reality of an economy that has slowed dramatically across almost all nations, and even little Norway, Sweden and Finland find their banking systems at risk.

TARP may help somewhat, but it isn’t the solution, and don’t count on our trading partners to be in any better shape, to buy our goods or invest here. Levels of foreign direct investment and trade finance will continue to decline over the foreseeable future.

The economic stimulus programs offered up by the new economic counselors to the Prez have many elements that are long on traditional solutions, monetary re-balancing, deleveraging of asset classes, reinforcing confidence in banks, but short on what is sorely needed; direct benefits to taxpayers. While restoring some 3 million jobs is the plan, and the ancillary benefits and the multiplier effect on other sectors is unquestionably sound, individuals need to  have confidence restored and a willingness to start spending again. One current proposal, which I support, is to allow for Federally insured 4% mortgages, which would help alleviate the housing crisis and move the inventory of foreclosed and real estate owned houses off the balance sheets of banks. That might be a funny thing to approve of for a die-hard apartment guy, but we have to face the reality of how this housing market is impacting rentals and support the absorption of these unsold units or we’ll face even more rental competition.

Like Governor Petomane, in Blazing Saddles, the phony baloney jobs that Treasury officials hold need to be turned into effective stewards of our tax dollars, or the next GDP report will show even larger losses and job cuts will start to approach 4 million, instead of settling down over the 3 million mark so far. As TARP II makes it way through the Congress, the likely benefit of the diversity of spending in the bill should have the immediate impact of starting spending again. Issues with pork style projects abound, but at least something will finally begin in earnest.

(Jack Kern is the Managing Director of Kern Investment Research and can be reached at 301-601-1900 or [email protected].)