Track the Stimulus looks to provide clarity on the economic stimulus plans launched by federal and local governments to re-ignite the economy. While in 2008 most government efforts were directed towards regaining a modicum of stability in the financial markets, in 2009 the Obama administration implemented programs directed towards stimulating demand and creating (preventing the elimination) of jobs in the broader economy. For 2010 the challenge was to keep the economy growing and find a way to reduce the unemployment rate; while the economy did rebound strongly, the labor markets were still week. The economy is picking up steam in 2011, and finally the number of jobs created is outpacing the number of those lost and those needed to incorporate the new entrants to the labor force. The housing market, however, has yet to see a meaningful recovery. Stimulus spending is in the process of running out, but several programs established over the last couple of years to help homeowners and low income population groups continue. In addition, tax cuts have been extended, and payroll taxes have been cut for the next two years.
Track the Stimulus details where government investments have been and are made, what jobs are being created and where, and attempts to measure whether these programs are achieving what they sought to achieve whether it is creating jobs, lowering the cost of borrowing to banks and corporations, etc.
The
Making Home Affordable Plan
Housing has been at the
epicenter of the crisis, and as such providing a resolution to the
problems faced by homeowners is paramount if the economic stimulus plans
put forward are to be successful. The Homeowner Affordability and
Stability Plan intends to tackle this important dimension of the
crisis. Its goal is to help homeowners keep their homes and lower their
mortgage payments, and by doing so help stabilize the housing sector.
The plan has several elements, among them:
Finally, the government has injected funds to Fannie Mae
and Freddie Mac, and the Treasury and Federal Reserve have been the
biggest buyers of mortgages in the market in an effort (largely
successful) to
keep mortgage rates low. The Federal Reserve stopped purchases of
mortgage securities on March 31, 2010.
The America Recovery and Reinvestment Act (ARRA)
The H.R. 1, American Recovery and Reinvestment Act of 2009, the Obama plan for some, is one of the key pillars of the economic stimulus plan - the President signed the bill into law on February 17, 2009, and implementation started soon after that. The $787.2 billion economic stimulus plan is the largest fiscal injection into an ailing economy in history. It calls for $226 billion in discretionary spending, $288 billion in tax credits and incentives for individuals and $273 billion in direct aid to states, unemployed and for the adoption of health care IT.
Through a combination of tax cuts, direct investments in a variety of sectors including infrastructure, energy, science and education and help to the unemployed and to the states, the economic stimulus plan has been an important contributor to bringing the economy back to life. While the economy started growing in the second half of 2009 (and the recession officially ended in June 2009), the labor market have lagged in the recovery, but they finally show some signs of meaningful life. Since January 2010, 1.9 million jobs have been created, of which close to 1 million were created over the last 4 months. Total job creation is not nearly enough to replace the 8.4 million jobs that were lost by the end of 2009, but it jobs are making a meaningful comeback. While the unemployment rate is still very high at 8.8%, it is significantly better than the 10.1% experienced at the end of 2009; importantly economist expect the labor markets to continue healing.
As of July 15, 2011:- $653 billion (82% of the $787 billion total) have already been paid out, and $721 billion (92% of the total) have already been allocated:
- $260 billion (90% of $288 billion total) in tax rebates/relief to individuals and corporations have been paid out;
- $216 billion (79%of $275 billion total) in discretionary grants, contracts and loans; and
- $187 billion (83% of $224 billion) in entitlement programs (e.g. unemployment benefits, food stamps, and other aid to individuals and states)
This spending is estimated to have helped create or save between 1.3 and 3.5 million jobs (according to the Congressional Budget Office estimates) and increase real GDP between 1.1 and 3.5 percentage points in the fourth quarter of 2010. If these estimates are accurate, it means that the ARRA was instrumental in getting the economy out of the recession, and it continues providing support to the labor markets, without it the current 8.8% unemployment rate would be much higher.
The Troubled Assets Purchase Plan (TARP)The TARP officially ended on September 30, 2010. The credit crunch that started in July 2007 and became progressively worse to culminate in mid September 2008 into a full blown liquidity crisis caused a sharp contraction in economic activity. In early October, 2008 at the request of the Treasury, Congress passed the TARP to provide liquidity to the banking system and avoid a full blown meltdown of the credit markets. As one of the pillars of the
economic stimulus plans put forward by the Obama team, the TARP, and concurrent efforts by the Fed, have been successful at stabilizing the financial markets and thawing the credit markets (though capital availability for small businesses is still in short supply). By the end of the program of the $700 billion authorized by congress, the Treasury allocated $475 billion to its different components, of which $388 billion have already been spent. TARP funds were allocated across a variety of different programs:
- The "Capital Assistance Program (CAP)": the government's most direct tool to restore liquidity to the financial markets. The Treasury department invested $245 billion capitalizing financial institutions (over 700 of them). In addition, it mandated that the 19 largest financial institutions undergo stress tests; those that were found to be capital
deficient had to secure new equity capital. Most banks (at least all the large ones) were successful at procuring the needed capital. At the end of September 2010, 78% of the funds have been repaid, including the total repayment by most large banks. Tax-payers are expected to make a profit under CAP.
- Investments in AIG, GM and Chrysler. One of the most controversial aspects of the TARP was the government's direct funding of these three institutions. AIG received $48 billion under the program (the total government's exposure included non-TARP investments by the Fed). The two automakers and GM's former financing arm (GMAC, now Ally Bank) received $80 billion. While the Treasury expects to recover most of its investment in AIG, it expects a loss in its investment in the auto industry (Chrysler in particular);
- A Public-Private Investment Partnership (PPIP) to acquire the toxic assets (mostly mortgage
related) that are at the center of the crisis through financing provided
by the TARP, the FDIC and the Fed - this element of the plan has been plagued by problems and it was scaled back significantly. Slightly more than $22 billion have been allocated to the program, and about $14 billion have been spent. A significant issue with the PPIP has been the reluctance of institutions to sell their "toxic" assets, rather choosing to keep them at their own rather discretionary valuations;
- A "Homeowner Affordability
and Stability Plan" that provides a mechanism to help "responsible"
homeowners facing difficulties do to the financial crisis and the
reduction in home prices (discussed earlier). $45.6 billion have been allocated under TARP for this program;
- A "Consumer and Business Lending
Initiative", grounded on the TALF; it provided for lending to reignite the asset-backed
securities markets for consumer, and business loans. The Fed estimated
that these markets provided about 25% of the overall lending in the
credit markets prior to their shuttering in October 2008. While it was originally anticipated that the government will invest up to $200 billion on TALF, the credit markets responded much better than anticipated - only $4.3 billion were invested to back $43 billion in loans. The program has already ended as the private securitization markets are again functioning normally.
While there are still many headwinds and credit is still very restricted for small businesses, the financial markets have improved significantly, and the risk of a depression has largely evaporated, leaving us instead with a deep recession, which officially ended in the second half of 2009 - though the 9.6% that are unemployed and the 7.5% that are underemployed probably do not feel like the recession is over for them. Through a combination of direct capital assistance to financial (and
some non-financial) institutions and the Federal Reserve's policy of
maintaining an effective 0% interest rate for lending to banks and
primary dealers, and a relaxation of regulatory mandates for valuing
loans and securities on their books, the largest financial institutions
were able to rapidly generate profits and repay TARP. The securitized markets are coming back to life after being on life support - Fed and Treasury provided some needed liquidity to those markets through the
TALF, and the program is now being faced out as the Fed expects the private markets to once again provide their own liquidity.
By lowering its benchmark interest rate close to 0%, the Federal Reserve has provided an immense amount of liquidity to the economy (and a great source of easy profits for banks). In addition, the Fed has displayed a great amount of innovation while fighting to keep credit markets from seizing up. A whole alphabet soup of programs was introduced to help struggling financial institutions keep lending. These programs for the most part provided liquidity to depository institutions and primary dealers facing difficulties and short-term liquidity strains to continue operating normally and providing lending to consumers and businesses. Perhaps the most far reaching of those was the "Term Asset-Backed Securities Loan Facility" (TALF), which was targeted to provide liquidity into the markets for consumer and small business lending, and which opens the Fed's window to most kinds of financial institutions including hedge funds and provides them with a cheap source of capital to fund high-quality consumer lending. The TALF was been largely successful and is the Fed ended the program earlier in the year.
In early 2008, Congress and then President Bush passed a $168 billion tax reimbursement to stimulate spending - it did not work out quite as expected as many people decided to keep the money they received, rather than spend it. In the face of deteriorating economic conditions, several initiatives were introduced by Congress, states the FDIC, and other government agencies to extend unemployment benefits, facilitate workouts of existing mortgages, etc.