31 responses to “Stimulus Deal Too Late?”

1. 

   markm

   February 12, 2009 at 8:41 am

   Dunno, that CBO report out last week or the week before predicts that we’ll be on the upswing in the latter part of 2009. If the CBO is correct then we are stimulating post recession, no?. Doesn’t most of the stimulus funds hit in 2010?.
2. 

   Dave Schuler

   February 12, 2009 at 8:59 am

   As you’ll recall, James, that’s the point I made on the show last night. I think it’s actually a bit worse than that. During a recession business and individual demand sags and, consequently, the very definition of a recovery is that it’s when business and individual demand starts to recover. A stimulus package that boosts government demand that acts during the recovery will depress the private component of that recovery because it will compete for scarce resources unless it’s bidding for different resources than business and private demand are.

   BTW, here’s a graph that demonstrates the point I made on the show last night: that at least from an unemployment standpoint the recessions of ’46 and ’58 were worse than that of ’81 as was the recession of ’76.
3. 

   Ironman

   February 12, 2009 at 10:11 am

   Here’s a different version of the information shown in the image featured in the post above: a dynamic table (one that you can sort by category) with actual text one can copy and paste. Plus a bonus discussion on why stimulus bills are almost invariably too late to matter.
4. 

   odograph

   February 12, 2009 at 10:28 am

   LOL, isn’t there are cartoon like this? In each panel a guy standing says a reason to respond to climate change. In each, the guy at the desk says “too soon.” After 10 or so repetitions, the guy gives one more reason, and the guy at the desk says “too late.”
5. 

   odograph

   February 12, 2009 at 10:37 am

   Dave, I’m sure you know the problem with positing a date for recovery, and then basing your expectations of the stimulus on that date … is that no one actually knows the date of recovery.

   It’s a classic choice in the face of uncertainty, and about what you do when you risk losses both ways.

   One can be a stimulus skeptic, and perhaps even an inaction skeptic at the same time.
6. 

   PD Shaw

   February 12, 2009 at 10:47 am

   The problem I see with these comparisons are that AFAIK none of them involve a financial panic. The Panic of 1837 was followed by six years of contraction. The Panic of 2008 began in September and the signs seem to indicate that we’re years from getting our financial house in order.

   The stimulus proponents argue that the banks can’t get healthy until the underlying economy gets healthy. I fear that might be backwards.
7. 

   raoul

   February 12, 2009 at 11:19 am

   One point that is being missed- a large component of the Recovery Act is that it is a jobs bill, and employment is a lagging indicator in recessions. Most economists predict another year of downturn which means unemployment will grow for another two years which represents the period where most of the money from the package will be spent. So the stimulus bill creates jobs when we need them and extends unemployment benefits at the same time. So the spending component of the bill is dead on time wise- I’m not so sure about the tax cut component.
8. 

   sam

   February 12, 2009 at 11:35 am

   A stimulus package that boosts government demand that acts during the recovery will depress the private component of that recovery because it will compete for scarce resources unless it’s bidding for different resources than business and private demand are.

   Isn’t this vitiated by the fact that, as of now, the banks are still not loaning any money? “scarce resources” in this climate means “scarce to the point of nonexistent”. It’s hard to see how private businesses can compete for a resource (money) that’s not available to them through the financial system. If that’s the case, then how do you get a recovery underway except through government pump-priming? How does a recovery get off the ground if no credit is available? Or have I misunderstood the argument?
9. 

   Drew

   February 12, 2009 at 2:21 pm

   Sam –

   Before you declare the end of the lending world (if not the whole world) as we know it, you might want to consider:

   U.S. Banks ARE Lending, An Open Letter to the United States Congress from Treasury Strategies
   Monday February 2, 2009, 10:51 am EST
   CHICAGO–(BUSINESS WIRE)–Banks in the United States ARE lending. In the midst of so much misleading information around lending activities of U.S. banks, as well as banks’ use of the federal bailout money, Treasury Strategies Partners, Anthony J. Carfang and Cathryn R. Gregg, are compelled to set the record straight with the open letter to congress that appears below.

   Dear Legislators:

   The cries in the legislative chambers are growing louder by the day. “We need to force banks to begin lending!” “Bank lending is frozen!” “Banks are sitting on their TARP bailout money.” Major news outlets have covered the current crises with stories on banks’ failure to lend. Congress is planning tighter regulation and supervision aimed at requiring banks to lend.

   Yet Treasury Strategies’ analysis of Federal Reserve data shows the underlying premise that banks are not lending appears to be mistaken. Consider the following:

   Lending by domestic commercial banks, now at nearly $7.2 trillion, grew 5.3% during 2008 and at a 5.5% annualized rate in the fourth quarter.
   Bank lending growth is broad based. Commercial, consumer and real estate loan totals all grew during the fourth quarter and during 2008 as a whole.
   Recent regulatory change has created disincentives to lending, yet lending continues to grow. For example, the Fed’s policy of paying interest on excess bank reserves actually pays banks to NOT lend money to consumers and businesses.
   Businesses and consumers are de-leveraging, thereby decreasing their borrowing demand, yet bank lending continues to grow. Thus bank lending as a share of total lending is increasing.

   Loan Growth

   The Fed’s own statistics show solid loan growth across key economic sectors. Commercial loans grew by 2.4% during the fourth quarter. Consumer loans and real estate loans grew by 3.4% and 3.0% respectively during the quarter. The only category to decline was inter-bank loans/repurchase agreements, which accounts for less than 5% of all lending. Despite numerous anecdotes of borrowers facing difficulty, this evidence clearly shows banks ARE lending to businesses and consumers.

   One key measure of lending activity is the “loan to deposit” ratio. A higher ratio indicates aggressive lending; a lower ratio indicates tight money. At the height of the dot com bubble, this ratio reached a frothy 105%. In 2004, it hit a low of 93.8%. Today, it stands at 98.6%, near the midpoint of its ten-year range. Typically, during an economic downturn, lending decreases, terms become more restrictive, and cyclical business and consumers with inadequate credit capacity have difficulty borrowing at all. The good news is that during this current cycle, aggregate lending is not decreasing.

   In the last week, several Internet and major news outlets have printed stories about bank lending dropping by 1.4% in the fourth quarter. This is a technically correct statistic for the ten banks in the study. However, the third quarter numbers of these banks were inflated by a record $194 billion spike in lending activity that occurred during the final days of September following the collapse of Lehman and AIG. Adjusting for that aberration, the 1.4% drop actually becomes a 1.3% gain. No similar spike occurred at year end. To provide perspective around this lending spike, the largest spike prior September 2008 was $118 billion on September 12, 2001.

   Disincentives to Bank Lending

   Recent regulatory changes in the banking sector have had unintended consequences, some of which create disincentives to bank lending. Yet, in spite of these disincentives, lending continues to grow.

   On October 1, 2008, the Federal Reserve began paying interest on bank reserves. These are deposits that banks keep at the Fed rather than lending out to customers. So in essence, the Fed is paying banks to NOT lend. The net effect is immense. Cash on the balance sheets of US banks, the category which includes reserves, ballooned from roughly $300 billion to $1 trillion during the fourth quarter. Thus, while authorities were pumping money into banks via TARP and publicly exhorting banks to lend the funds out, they were also simultaneously inducing funds to remain on reserve at the banks by paying reserve interest.

   Regulators also redoubled their focus on bank capital during this period. Over the long term, capital is the cushion to tide a bank over during rough spots. In theory, capital is depleted during times of difficulty and replenished as conditions improve. However, this time around, regulators are keen on requiring banks to maintain capital at peak levels rather than allowing them to consume some of their cushion. Banks must either park additional capital in their equity accounts or reduce the size of their balance sheets. Both options constrain lending expansion.

   Mark to market accounting is a third regulatory obstacle impeding loan growth. There is considerable debate about the propriety of requiring banks to use today’s distressed prices as their marks, thereby creating non-cash accounting losses and depleting regulatory capital.

   Yet in the face of these loan-stifling regulations, we see year over year and fourth quarter growth in aggregate commercial bank lending.

   Summary

   The notion that banks are not lending seems to be false. The Federal Reserve’s own data show that lending is robust and growing. With loan growth and loan deposit ratios hovering near historical norms, indications are that current lending levels are prudent. Therefore, additional regulation or legislation around bank lending could be misguided and disruptive at best. At worst, it risks distorting the markets and possibly leads to a round of imprudent lending, thereby prolonging the downturn. With loan demand declining as a result of de-leveraging, there is a serious risk that mandated lending would result in bad loans being made to unqualified borrowers.

   We at Treasury Strategies believe that with respect to commercial banks, regulators would better serve the public interest by remedying the disincentives to lending discussed above.

   Respectfully,

   Anthony J. Carfang, Partner

   Cathryn R. Gregg, Partner
10. 

    sam

    February 12, 2009 at 2:37 pm

    This Federal Reserve Board report is the source for the news story in the link in my first comment:

    Commercial and industrial lending. About 65 percent of domestic banks reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms over the past three months. This percentage was down from the reported tightening in the October survey but still above the previous peaks reported in 1990 and 2001. At about 70 percent, the fraction of domestic respondents that tightened standards on C&I loans to small firms was only slightly lower than that found in the October survey. Significant majorities of domestic respondents indicated that they had further tightened price terms on C&I loans to firms of all sizes over the past three months. Around 90 percent of domestic banks indicated that they had increased spreads of loan rates over their cost of funds for C&I loans to large and middle-market firms and to small firms–fractions slightly lower than those in the October survey. Likewise, very large fractions of banks reported having charged higher premiums on riskier loans and having increased the costs of credit lines to firms of all sizes over the survey period.

    On net, the fractions of banks that reported having tightened nonprice terms on C&I loans to large and middle-market firms over the past three months stayed at an elevated level but declined relative to the October survey. Large fractions of banks again noted that they had reduced both maximum size and the maximum maturity of loans or credit lines to firms of all sizes. In addition, about 70 percent of all domestic respondents reported having tightened covenants on C&I loans to large and middle-market firms and about 60 percent reported having done so on such loans to small firms.

    This, to me, says that credit is still tight.
11. 

    raoul

    February 12, 2009 at 2:48 pm

    From the trenches: I was denied an investment loan to a property with 30% down, having exceptional credit and the assessment exceeding the offer. One of the reasons given? Deteriorating market conditions. Someone I know told me that banks are not giving out loans because the margins are too thin.
12. 

    sam

    February 12, 2009 at 2:55 pm

    There is one thing in the report that I find odd:

    Substantial majorities of the domestic institutions that had experienced weaker demand for C&I loans over the past three months pointed to decreases in their customers’ needs to finance investment in plant and equipment, to finance mergers and acquisitions, to finance inventories, and to finance customer accounts receivable as reasons for the weaker demand. Among the few domestic respondents that saw an increase in loan demand over the past three months, all indicated that business borrowing had shifted to their bank from other bank or nonbank sources because the other sources had become less attractive. In addition, over 30 percent of domestic and foreign institutions, on net, reported that inquiries from potential business borrowers had decreased during the survey period.

    One would think that if the demand for C&I loans has weakened, the banks would, at the least, not tighten their standards so as to make their loans less attractive. Rather the reverse has happened: they’ve tightened their standards. This strikes me as counter-intuitive–if you’ve got a product that you’re having trouble selling, wouldn’t the market solution be to offer it at a lower price (using an expansive definition of ‘price’ to include standards, etc.)?
13. 

    Drew

    February 12, 2009 at 3:21 pm

    That’s pretty sloppy, Sam –

    Your words:
    “the banks are still not loaning any money? “scarce resources” in this climate means “scarce to the point of nonexistent”.”

    This is an awful lot different than tightened lending standards, more restrictive covenants and increased price of credit..

    The credit environment has changed, to be sure, but running around like Henney Penny is foolish.
14. 

    sam

    February 12, 2009 at 3:33 pm

    For many — see Raoul above — the money sought might as well have been nonexistent.

    Now, can you explain to me why, given diminishing demand for loans because of the recession, banks are tightening their standards and making loans more difficult to obtain? I’m still wondering what market forces dictate that in a declining market for your product, you increase the product’s price.
15. 

    Dave Schuler

    February 12, 2009 at 4:25 pm

    Dave, I’m sure you know the problem with positing a date for recovery, and then basing your expectations of the stimulus on that date … is that no one actually knows the date of recovery.

    One can either accept or reject past experience as a basis for arriving at conclusions about the recession. If you accept past experience, the recession is extremely unlikely to continue past the end of 2010. If you reject past experience, I don’t see that one basis for deciding on a course of action is better than any other.
16. 

    odograph

    February 12, 2009 at 4:39 pm

    One can either accept or reject past experience as a basis for arriving at conclusions about the recession.

    It seems very hard for humans to take the 3rd course, and accept the uncertainty.
17. 

    Drew

    February 12, 2009 at 5:22 pm

    Sam and Raoul –

    I am generally hesitant to “pull rank” because it is a bit cheesy to just say “I know because I’ve been there” rather than argue on the merits.

    Here’s the “but.” The past 18 years of my life I have either been a lender (6 years) or a user (12 years) of lending as an integral part of my business, which is private equity. LBO’s.

    As such I understand the ebbs and flows of the credit environment, and why credit is let or not. Currently, credit is more expensive. Covenant packages are tighter, but really only back in line with historical norms, after a period of lax standards. Also, loan to value standards have tightened, but again after a period of lax standards. Further, in relatively tight periods lenders will usually reduce tenor risk. No surprises. And no devastating consequences. The bottom line is that credit is available for creditworthy entities. Credit for uncreditworthy entities is what got us into this mess. So don’t expect the same standards as the last dozen years.

    One of the biggest issues in the lending community right now, and one of the greatest deterrents to credit extension – as a commentator on this boards has correctly noted – is the role of uncertainty. This is a cash flow lending, as opposed to collateral lending, concept. How do you believe, and therefore underwrite, the projections a borrower gives you? The answer is you can’t. Hence, lender’s posture. Skinny down.

    Yes, that tightens the credit environment, but it does not turn it off. Lord knows, I’m prone to hyperbole. But you guys are simply way, way off the mark vis a vis reality.
18. 

    sam

    February 12, 2009 at 6:02 pm

    Drew:

    Hey, pull rank by all means. One reason I read this blog is that I’m outranked by a lot of folks here vis-a-vis a lot of the topics raised. As for hyprebole, ok, I’ll give you that re me. But here’s what I asked originally (with emendation):

    It’s hard to see how private businesses can compete for a resource (money) that’s not available to them through the financial system. [And tightening credit markets imply that, right?] If that’s the case, then how do you get a recovery underway except through government pump-priming? How does a recovery get off the ground if no credit is available the availability of credit is restrained by lenders?

    Is that last an illegimate question?
19. 

    HiItsNino

    February 12, 2009 at 6:07 pm

    “I can’t vouch for the veracity of the end dates or the completeness of the data”

    ’nuff said
20. 

    odograph

    February 12, 2009 at 6:15 pm

    Interesting, I went looking for a “deleveraging” link to show sam, and found this one:

    The Great Deleveraging will take a while

    The kicker is that they article’s dateline is Tuesday, February 19, 2008. A while, indeed. We seem to be in almost the same stage.

    Drew’s comment makes sense, and as he says there might be some fuzzy lines in a deleveraging situation, with yesterday’s good risk being tomorrow’s bad. It really revolves around appropriate leverage (public, private, and individual) … with an entire society and market still trying to figure out what is appropriate.
21. 

    Drew

    February 12, 2009 at 7:21 pm

    Sam –

    “Is that last an illegitimate question?”

    No, not at all. Further, see odo’s remarks.

    Look, we have come off a truly extraordinary period of easy credit. I could go off on a 5 page polemic (which I previously have) but the origins are in the mid to late 90’s, and came to a crescendo in the 2006-2007 time frame. Politics being what it is, so much focus is on the 2000’s so people can blame Bush. Fine, I understand politics. But we should understand origins and reality, so we (I know, I’m naive) can avoid similar mistakes in the future.

    Root causes, seminal events, occurred in the 90’s – we can talk about that separately – and just gained momentum thereafter. And of course there are many facets to the problem that have contributed along the way. Wall Street, Greenspan blah, blah, blah

    So that all said, no one should be surprised that after the blow off credit is more stingy, or more expensive today. But it is simply false that it is unavailable. Restricted, yes, unavailable, no.
22. 

    Joe R.

    February 12, 2009 at 7:25 pm

    One can either accept or reject past experience as a basis for arriving at conclusions about the recession.

    It seems very hard for humans to take the 3rd course, and accept the uncertainty.

    The third course is identical to the second course, which is rejecting past experience.
23. 

    steve s

    February 12, 2009 at 7:54 pm

    That said, while this recession started in December 2007 (as we found out a year later) the expert consensus seems to be that we haven’t hit bottom yet, much less come out of it. I don’t have much confidence at all that the passage of a stimulus package is going to get the job done — much less that this specific stimulus is the right approach — but I’m pretty sure that it won’t come “too late” in the sense of the problem having already solved itself.

    Smartest thing said on OTB lately, and much better than…well. Than some people’s ridiculous economic notions.
24. 

    odograph

    February 12, 2009 at 9:13 pm

    OK, Joe. Maybe.

    What I was thinking is that past events can give us possible shapes of things, without allowing us to know. We can know X is at least possible if X has happened before, but so might Y and Z, which have not yet been recorded. It’s maybe a “history does not repeat but it rhymes” kind of thing.

    An over-reliance on numeric methods results I think from looking too much for that repeat, and not the rhyme.

    One of the ways we try to understand this economic environment is by looking for rhymes in history, but its an uncertain prospect. As soon as we begin we have champions for 1981 vs 1873 vs …

    As an example Steve Balmer picks “1837, 1873, and 1929. (I think Bill Gates said some pessimistic things at TED, so maybe they are on the same page.)

    … but certainly I wouldn’t pick one of those parallels and hang my hat (or my portfolio) on it.
25. 

    Michael

    February 12, 2009 at 10:39 pm

    Okay, someone correct me if I’m wrong, but dates for the end of a recession are when the economy stopped getting worse, not when it got back to where it was at the start of the recession, right? If that’s the case, then how does a chart showing a correlation between legislation and an end to economic decline show that the legislation is too late?

    It’s like that saying, “It’s always in the last place you look”. Only some of you are advocating that we stop looking, because obviously looking is an ineffective way of finding things, because by the time you find it the search is over.
26. 

    sam

    February 13, 2009 at 6:50 am

    I suppose, in the end, we’ll just have to agree with T.S.Eliot:

    Go, go, go, said the bird: human kind
    Cannot bear very much reality.
    Time past and time future
    What might have been and what has been
    Point to one end, which is always present.
27. 

    HiItsNino

    February 13, 2009 at 7:29 am

    It’s like that saying, “It’s always in the last place you look”. Only some of you are advocating that we stop looking, because obviously looking is an ineffective way of finding things, because by the time you find it the search is over

    LOL…thats exactly what they are saying, but I’m still amused at the “can’t vouch for the veracity of the end dates or the completeness of the data”. Thats just blatantly admitting to a straw man, non-factual basis for an argument.
28. 

    James Joyner

    February 13, 2009 at 9:34 am

    Thats just blatantly admitting to a straw man, non-factual basis for an argument.

    Not at all. It’s just an admission that a chart, even one published in a respectable venue (NYT), might not have all the data.

    And the point of the post was that, even if the chart was accurate, it likely didn’t tell us anything about this particular recession.
29. 

    Michael

    February 13, 2009 at 10:29 am

    And the point of the post was that, even if the chart was accurate, it likely didn’t tell us anything about this particular recession.

    Then why even write a post about the chart?
30. 

    James Joyner

    February 13, 2009 at 10:35 am

    Then why even write a post about the chart?

    Because it was the subject of a NYT piece and later picked up at Reason?
31. 

    Michael

    February 13, 2009 at 10:41 am

    Because it was the subject of a NYT piece and later picked up at Reason?

    Two sentences in the NYT piece, Two and a fragment in reason. Neither of which were actually addressed by your post.

    I understand slow news days, but sometimes nothing is better than something.