主题：12/17/2009 Market View -- 宁子

Arguments about too much stimulus is somewhat missing the point.

All the way back in October and November I wrote about what Treasury and the Fed were trying to accomplish with TARP, TALF and all of the rate cuts, facilities, guarantees, swaps, etc. put in place. Trillions of dollars worth of actions with one aim: get the credit and financial markets working as they should. Yields surged, spreads widened to Grand Canyon status, and no one could get any money. If credit was not available, the world economies were at a standstill regardless of the money thrown at it.

That is why everyone was on LIBOR, TED spread, corporate bond spread, and commercial paper watch. These markets had to work to fund everyday business. Every day of lock up, world economies were damaged. Unfreezing credit would get the money flowing, but during the freeze damage to the economies was done. Think of it in terms of a drowning victim pulled to the surface. There is plenty of air to breath, but until the victim gets air into the lungs and bloodstream, damage is being done. Once the air starts flowing the victim can breath but other actions need to be taken to rectify any damage done.

That is where stimulus comes in. That is what I was talking about in October and November: after credit started to flow Congress and the lame duck President needed to come up with the right kind of stimulus to repair the damage.

Some are arguing right now that there is enough stimulus in the pipeline with the Fed rate cuts and promised purchases of MBS, etc. That is confusing fixing the credit crisis with providing stimulus to repair the damage. There can be credit aplenty, but if the economy is so damaged and slow that no one wants to borrow, then the credit does no good. After you fix the credit problem, you have to fix a weak economy. That means providing incentives to invest in the US.

History says incentives promoting capital investment in equipment, research and development, and people are the fastest way to recovery Kennedy, Reagan, and the second Bush tax incentives all produced massive investment and stock market rallies almost from the day they passed Congress. We need to invest in America in a way that creates new capital investment, new technologies, and thus new jobs. Thus you pass incentives to invest.

You can go for a green vehicle, greener energy, greener buildings, etc. by providing the right incentives to do so. Obama wants government work programs for buildings, etc. That can work if it also involves promoting private investment in new technologies to make the buildings, vehicles, etc. greener. We can help an already burgeoning green building movement by providing incentives for every American to adopt green technologies at home and in their businesses. You want people to retrofit their homes with geothermal air and heating? Give them some serious tax credits to do so. Add solar panels? Again, tax credits will do the trick. Water conservation (rain barrels, cisterns) give people some credit so to speak.

How about more serious undertakings such as vehicles? Don't require Detroit to meet mileage standards. All that does is cheapen our vehicles as in the 1970's and 1980's when our auto companies lost huge ground to foreign makers under the strain of those standards. They made lighter, cheaper, crappier autos. We get a bunch of Euro-style micro tin cans. Instead provide incentives to produce vehicles that meet our needs: non-polluting, safe, and powerful enough to meet our needs. We like to boat, RV, raise horses. We have to have freight trucks, ranch and farm vehicles. The last thing we want to do is impose the same kind of standards that pushed our auto industry to the rear in innovation and produce terrible cars. Instead provide incentives to produce vehicles with new propulsion systems that meet our diverse needs. Then it doesn't matter what size they are or what amenities they have. We become a world leader in this technology. How do you do it? Provide big tax incentives and more generous patent protection for those coming up with the new systems. If we provide the right incentives we will come up with what we need in five years without spending any public funds or requiring more government agencies to oversee the process. Critically, this kind of stimulus does not produce inflation. It simply pushes money to the areas we want it to go and then lets American ingenuity do the rest. It has worked for over 200 years and made us the strongest country in the world's history. It works. Do it.

In any event, it is important not to confuse actions designed to put the financial markets back into operational mode with actions needed to stimulate the economy to repair the damage done during the freeze up. We have gone this far and since we are here, might as well finish the job.

Credit markets continue improving.

Speaking of the credit freeze, the credit markets continue to improve. Credit swap rates are the lowest since May 2008. Not bad.

LIBOR continues the drop as well. Recall it started to fall after the G7 countries agreed to guarantee interbank loans. It did not plummet as anticipated and hoped, however. And after the TARP funds were diverted from asset purchases to giveaways to financial institutions for important items such as executive bonuses, LIBOR rates jumped back up. Only after the announcement of TALF where $600B in new funds were earmarked for buying mortgages, small business loans, and consumer credit securities did LIBOR start to fall again.

LIBOR is really starting to rock now. It was down again Wednesday. The Overnight rate fell to 0.13% from 0.16% Tuesday. The 1-month plunged to 0.58% from 0.88%. The 2-month broke a logjam and fell to 1.58% from 1.85%. That is the lowest level on this issue since the summer of 2004.

There is real promise in the credit markets. They are recovering. About time given all the trillions and guarantees thrown at them. That does not mean, however, that we should not pursue stimulus now that the credit markets are recovering.