The government’s Stimulus Package, wafting it’s way through the halls of congress, has been received less-than-warmly by the Republican party, and by a number of people, as “too much money, not enough bang”. Even though we’re badly in need of infrastructure spending on, well, EVERYTHING. It’s still an issue of “will it work?!??”

To date, no government stimulus package in history has had an immediate effect on the economy. The idea of trying to turn something akin to a supertanker on a dime, no matter how big the tug boat pushing the change, is insane. The economic situation didn’t happen overnight, there’s no reason to expect it will be solved overnight either.

There’s also the main reason that it’s going on for so long.

The Economic Culprit

There’s lots of blame to go around; Sub-prime mortgage lenders, greedy/stupid/inexperienced mortgagees getting in over their heads, people living FAR beyond their means and having to pay the piper. There’s no end to targets for what’s going on now. But there’s actually only one culprit that is the cause of all this strife.

Fear.

As bad as the subprime meltdown is, it’s only a small percentage of the overall loans in circulation. If the banks/agencies didn’t lose trust in each other and stop inter-bank lending, they would have been able to weather things better. One or two banks going under would have been a certainty, but without the ensuing panic selling by everyone, the markets wouldn’t have dived 40% in just a few short months.

Fear is also the cause for the continuing spate of layoffs going on. We’re in a death-spiral of fear and reaction to that fear.  

As people fear that their jobs are in danger, they scale back their spending, which causes the self-fulfilling prophecy of downsizing.

Businesses have no choice but to lay off people (or in a few cases, scale back on hours for many rather than lay off the few). As businesses lay off workers, a new wave of fear is released into the workforce.

Lather, rinse, repeat.

We end up in a spiral of self-perpetuating fear that only increase in speed as things get worse.

Think of it as an economic tornado – It starts up from a lot of wisps of wind, but combined has the destructive ability akin to a force of nature.

The final fear that is stalling us is the “fear of doing the wrong thing”. When we started down this path, Congress put together a $750 Billion stimulus package to try to forestall the downturn. But the initial actions didn’t (or haven’t seemed to) work. Each legislator after that has their own idea of what will work and what won’t. In reality, this is a situation that no one has encountered before. The fear that they might do the wrong thing causes delays, indecision, and political debate and maneuvering. All things that allow the situation to continue on and get worse.

Deciding to do nothing, even if it’s to stop and debate about the stimulus measures, is still a decision. And waiting for “something” to happen, can lead to that “something” being an undesired drop in the economy.

So, now we know the main culprit. What can we do?

Enter the Economic Militia

Like the Minute Men of the American Revolution, I think it’s time to get the brave souls out there and prepare for economic battle! There’s a small, but growing percentage of the population that has embraced the “live within your means” lifestyle and are weathering the storm. It may not be the best of times, but for them, it’s not the worst of times either.

It’s time for this Economic Militia to step up and start spending.

Just as the American infrastructure needs investment in it, I’m sure lots of American households need investment in them as well. So here’s my plan.

1. Plan - For those starting out in the frugal lifestyle, this may be what you’re in the midst of now. For others that have lived frugally, you’ve already done this step. Find out what your net income is and plan to live at 90% of that amount. Cut back on non-essentials until you have some available income. It won’t necessarily be easy, but we’re in the midst of a crisis here.
2. Invest – Start putting that money into investments (in a responsible way). Start padding your 401k and IRA accounts, Open up 529 Education accounts. Give to charities. Whatever it takes to start getting money circulating again. DO this responsibly, and show the government, the banks, and your neighbors and friends that you have confidence that things are going to come out better.
3. Get Green – As you invest, spend on things that encourage a move towards more responsible stewardship of our planet. Invest in companies that have strict pollution limiting policies, or companies that emphasize renewable resources and green-development. Vote with your greenbacks for a greener planet.
4. SPEND (Responsibly) – We know that you’re a responsible person living within your means. Now it’s time to benefit from that lifestyle. There’s hundreds of different consumer items, all on some kind of sale, that need a good home. Maybe it’s time to replace that car with a more gas-efficient, newer one. Bargain down the car dealer and help both him and the economy by replacing a vehicle. Take a look around the house for things that you’ve been meaning to replace/fix/upgrade, and DO IT. Sales abound, and good bargains are out there to be had for those with some money. Don’t go in debt to get new things, but invest that extra 10% you’ve made into things that both improve your life, and get money into circulation.

The rich are reeling from all the money they’ve lost over the last few months, and the overextended/poor don’t have the ability to get us out of this recession, what with just fighting to survive. It’s time for each and every member of the 5th Brigade of the Fiscally Responsible Economic Militia to grab up their checkbooks, and head out to the battle. With pen in hand, and a careful strategy of only engaging the enemy (fear) on our terms, we can defeat this Recession, and bring the victory of Economic Stability back home.

Are you going to do your part to help resolve the Recession? What do you think it will take? Leave us a comment and let us know.

Unfortunately, the answer is “No”.

That Was Then

Originally, when the markets started free-falling last November (after the government refused to come to the rescue of Lehman Brothers, and allowed them to go under) a wave of panic selling took off, plunging the stock market up and down like some kind of demented roller-coaster. In an effort to stop or at least curtail some of the market jitters, Fed chairman Bernanke and then-Treasury secretary Paulson went begging to congress for enough funds to “buy up” all the “toxic” debt that was causing the banks so much trouble. Those sub-prime mortgages that had fueled the housing bubble had turned into huge packages of debt that were so intertwined, that it was virtually impossible for banks to deal with individual loans. As a group, these ‘packaged’ loans turned out to be financially lethal, as the bad loans couldn’t be separated from the good, dragging them all down.

Bernanke/Paulson wanted funds to take the subprime loans off the bank’s hands, and manage them centrally, until such a time they could be separated, restructured, and sold back to the public (presumably at either break-even or at a profit).

Statements like “catastrophic depression” and “economic meltdown” were standard phrases used throughout the process of securing this money. Congress was in such a panic to do something that they released the money. The allocated $700 billion in funds to the TARP program, basically handing Paulson a huge blank check, to buy up assets as he saw fit.

This is Now

However, it didn’t go quite that smoothly. Along the way, the strategy shifted from buying up the bad assets (and getting them off the bank’s hands) to buying stakes in the banks themselves. Something along the lines of a quasi-nationalization of the major banks. Tens of billions were distributed to many of the top banks, whether they needed/wanted it or not, in hopes of boosting consumer confidence in the banking system as a whole. The overriding idea being if the banks were sufficiently capitalized, they could immediately start making loans to consumers again and get the market back into play, if nothing else.

Didn’t happen.

The banks that received the funds largely sat on them for an extended period of time. No new loans, no consumer help, no NOTHING. Some of the banks (Bank of America in particular) used the funds to ‘buy up’ other failing banks, and make themselves larger. The net effect was that the credit markets came to a halt, all but stopping consumer lending. In a domino effect, many businesses of all sizes saw their lines of credit reduced or eliminated, causing problems with making payroll and buying supplies. This caused yet more problems with closings and layoffs. And the cycle continued, as banks, seeing the closings and layoffs, tightened lending even further.

So How Do We Get Out of This Mess?

There remains an additional $350 Billion in funds to be disbursed. Pres. Obama has received authorization to disburse the funds, but is waiting to formulate a more effective strategy for getting the money to actually help the market get back on it’s feet.

One idea is to go back to the original intention of moving bad debts out of the banks, to a ‘Bad Bank’ owned/operated by the government (similar the Resolution Trust Corporation of the late ’90s) to be centrally managed. This would give the banks leeway to make loans again, and fulfill the original premise of the bailout. There’s no guarantee that even this would work, as the government can’t “force” the banks to lend money. (Yet, that might be written up as part of the requirements for receiving some of the second-half of the bailout money).

As it stands, with half the funds gone, there’s little or no visible effect on the banking system or in the market. It’s time to try something new.

Circuit City started life in 1949 as the Wards Company, founded by Samuel S. Wurtzel. It changed it’s name officially to Circuit City in 1984 and went nationwide with a chain of warehouse-styled stores, selling electronic goodies like computers, televisions, audio/video equipment, and later, large appliances.

In 1999, Circuit City created, and eventually spun off CarMAX as a separate company, along with other subsidiaries (First North American National Bank, created to operate it’s ‘Circuit City’ credit card. First North was later sold to Chase)

Bad Business

Circuit City also tried to introduce a new standard for DVD rentals with the Divx (Digital Video Express) disk. This disk, similar in capacity to regular DVD’s, required a unique player, and a phone line, in order to ‘register’ the user with the main Divx system. Otherwise the Divx disks couldn’t be viewed in any system.

As would be expected, after pushing the technology hard, the standard failed. This left many a Circuit City customer with an unusable system, and a number of ‘dead’ disks.

With the death of Divx, Circuit City suffered an proxy. $114 million dollar loss.

Bad Gift Cards

Now with what might be the final chapter of the Circuit City story playing out, even more customers might be left holding ‘worthless’ merchandise, in the form of unredeemable gift cards.

With a normal Chapter 11 bankruptcy, businesses are usually allowed to continue in business while they re-organize and attempt to become profitable. This isn’t always the case, and there’s more than a little speculation that Circuit City will close all it’s stores before the holidays.

Should that happen, getting your money back from a gift card may be all but impossible. Gift cards, once you strip away all the pretty packaging, the sales glitz, and everything else are nothing more than unsecured loans made to the company. That means, when the courts distribute Circuit City’s assets to it’s creditors, customers that have gift cards are near the end of the payout. If the money runs out before they get to redeeming the cards, they become worthless and the customer loses their money.

What to Do?

Unfortunately there’s not much TO do in this situation. Like the closing of Sharper Image a while back, this Circuit City bankruptcy might just cause your gift cards to be worthless. The best thing to do if you have a gift card is to redeem it as soon as possible. If there’s a Circuit City near you that hasn’t closed yet, you can attempt to use it up and possibly get some of those Christmas presents early.

Otherwise, it’s just another casualty of the bad economy.

We still have a little over two months before he officially becomes president. With that kind of available time, there’s still significant things that can happen before he comes to office.

Second Economic Incentive Program – There are still rumors going around that Pres. Bush will implement a second stimulus package before Pres. Obama comes to office. Since Pres. Obama already supports this initiative, it’s a very real possibility. The stimulus package itself is rumored to focus on national infrastructure improvements, as well as direct support for taxpayers. As time winds down, we’ll see if this package materializes.

The First 100 Days

During his first days in office, it’s likely he’ll be presented with some bills that didn’t pass his predecessor. For example, some variation of the SCHiP (State Children’s Health Insurance Program). Speaker Nancy Pelosi has already stated that she plans to reintroduce legislation for covering children’s healthcare as one of the first bills presented to the new President. This would probably be a small but concrete step towards supporting what Pres. Obama said is one of his primary points (Healthcare Coverage).

I expect that the economy will be a huge focus for the early part of his term. He will need to act decisively while he has the will of the people, and the good will of his own party available to him.

Short Term Initiatives

Moratorium on Foreclosures – It’s highly likely that he will impose a 90 day moratorium on home foreclosures, allowing homeowners to stay in their homes longer. This would be only a temporary measure, but it would allow a further thawing of the credit market, and give the government time to formulate a longer-range solution.

Tax Cuts, and Reversal of Bush Tax Cuts – Another likely action is implementing his planned tax cuts for the middle class. These tax cuts would not raise taxes on anyone making less than $250,000 per year, but would be focused at getting more money back into the hands of the middle class. For those in the top 2% of the earnings brackets, he would be rolling back the Bush Tax Cuts, increasing taxes to their previous levels.

U.S. Auto Industry Loans – Like it or not, there’s a real possibility that the next administration will have to continue the support of some of our ailing industries. The next one that seems to be a target for capital investment is the auto industry. With Chrysler and GM in such a down economy, and losing money at a rate never before seen, there’s not much choice in the matter. It’s either support them until they can re-tool to newer, more gas-efficient vehicles, or take the hit of tens of thousands of jobs being cut. That big a blow to an already reeling economy could throw it into a huge tailspin, taking years to get out of.

Pres. Obama’s Economic Changes

Even these concrete economic steps aren’t going to have an instantaneous effect on the economy. It took years to get into this shape, and it will likely take years to get back out. In the meantime, a fiscally responsible, but supportive policy is what we need to re-invigorate our economy, and by extension, the world economy.

As Pres. Obama has to make harder and harder choices, he’s going to lose some of the goodwill he’s acquired during the campaign. Even in his acceptance speech he noted that it’s going to be a long fight.

“The road ahead will be long. Our climb will be steep. We may not get there in one year or even in one term. But, America, I have never been more hopeful than I am tonight that we will get there.”

From Pres. Elect Obama’s Presidential Acceptance Speech

The road will be long, but at least it sounds like we’re getting off on the right footing.

Do you think Pres.Elect Obama’s plans are going to improve our economy? Leave us a comment and let us know.

Some of my Blogger friends, with comments on the Obama Presidency

• How President Elect Obama’s Administration Will Affect Your Finances - CashMoneyLife
• The Economy and a Barack Obama Presidency. – Yielding Wealth
• Get Over It: 10 Challenges President Elect Obama Faces Going Forward – The Wisdom Journal
• President-Elect Obama’s Approach to the Economy – Consumerism Commentary
• Now That Obama Has Won, What’s Next?. – Bible Money Matters

The recapitalization of the banks should ‘hopefully’ alleviate the fear that these banks have of extending credit to other banks and businesses, and kick-start the industry back into action.

The initial amount of around $250 Billion, will go to the purchase of equity shares in 9 of the larger national banks. This gives the government an ownership interest in the banks, but not a controlling interest.

By taking the more direct route of recapitalizing U.S. banks, the Bush administration is following the lead of British Prime Minister Gordon Brown, who announced similar steps for British banks earlier.

Make Them an Offer They Can’t Refuse

Treasury Secretary Henry Paulson met with the banks earlier (Bank of America, Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, State Street and Wells Fargo.) to ‘convince’ them that this government ownership of stock was a good and necessary thing. With the financial situation the way it was, there wasn’t a whole list of other alternatives for increasing lender confidence.

Each of these banks will be receiving part of the $250 Billion, with the intent that they use the money for making new loans and getting the credit market unfrozen. While the government can’t necessarily force them to do this (as it doesn’t have a controlling interest), it’s likely that they will take this approach simply because they know that ‘big brother is watching’.

We’ll see.