$2 Trillion Bet

In a feeble attempt at staving off what looks to be a pretty solid recession and restart the economy the Federal Government is planning to go on a spending spree. There's just one thing: the government is illiquid!

The prevailing belief in the Obama administration, and backed by the the Democratic controlled House as well as the Senate, is that pumping large amounts of cash into the economy in a myriad of senseless projects will prove to be the magic bullet. Dr. McTeer, previous president of the Dallas Federal Reserve, rightly notes that this current attempt at fixing the economy is akin to going wild hog hunting with a shotgun.

Secretary Geithner said he wants to spend upwards of $2 trillion to stabilize the private sector, mainly the banking sector, while the Senate was passing the Stimulus Act. Unfortunately for us Secretary Geithner is placing too much faith on the forecasting models his department is populating. The question that should be asked, however, is where is the Treasury going to find this money? If his department is forecasting an increase in government expenditure to stimulate the private sector, hence the economy, the money has to come either from the government borrowing, or increase the collection of taxes. Given that investment is hardly stimulated by an increase in taxes, and if the general economic model of supply-demand holds true, government can hardly afford to increase spending to generate growth while either borrowing or increasing taxes.

Additionally, there is no guarantee that the very large amounts of spending can be effective. The government would be falling into the exact same trap the financial services found themselves in. In effect, it would be over-leveraging its self. Ultimately, the taxpayers will be the ones who will suffer most, who unlike corporations, cannot reorganize financially as easily.