OMB on Stimulus

[Surlethe]

Link [pdf]

Posted for your perusal. I find interesting that the stimulus will hit the economy in the following manner (numbers are dollars, in billions):

Rest of FY09: 93
FY10: 225
FY11: 159
FY12: 61
FY13: 34
FY14: 28
FY15: 12
Total, FY09-FY15: 612

So most of it won't hit the economy until next year. This will only really be helpful if the economy stays bad for longer than two years.

[SirNitram]

Given the causes, any recovery early is unlikely and quite possibly undesirable. Sure, we bounced back from the S&L nonsense fast, but it was just setting us up for this, the jumbo version.

[J]

Note the mortgage reset chart below...



That's why the stimulus is spent when it is.

[Questor]

Note the mortgage reset chart below...



That's why the stimulus is spent when it is.

Could you explain this to me? I see the connections based on years, but I don't understand the causation.

[aerius]

Could you explain this to me? I see the connections based on years, but I don't understand the causation.

The main cause of our current recession is bad debts, mainly bad mortgages and various structured finance products & derivatives based on those bad mortgages. The chart tracks the number of mortgage resets, this is when an adjustable rate, interest only, or negative amortization mortgage "resets" and goes to a much higher interest rate which often doubles or triples the monthly payment. When that happens you get a wave of defaults and that makes a bunch of mortgages go bad, and that is absolutely disatrous for all those structured finance products.

The losses on the mortgage defaults alone has been estimated at anywhere from $2-5 trillion, the problem is those structured finance products are highly leveraged which makes a $2 trillion loss in to several dozen trillion dollars, or maybe even a hundred trillion or more. This makes the banks go kaboom, kills lending, and crashes the flow of money. Which deepens the recession and makes things worse for everyone.

So if you're going to do a stimulus package it needs to be spent when & where it'll do the most good. This means a good chunk this year, but most of it next year & the year after.

[Illuminatus Primus]

How do they know that specific forecast will come true?

[aerius]

They don't, not with 100% certainty. But the odds are very good that it'll happen, and we saw what happened last year when all those subprime mortgages reset & defaulted.

[The Original Nex]

Minor nitpick: this is the CBO report, not the OMB. The Congressional Budget Office makes similar reports on every piece of spending legislation.

Finally we have the REAL report instead of the non-existent report the media and the right have been jabbering about for the past few days.

[Col. Crackpot]

They don't, not with 100% certainty. But the odds are very good that it'll happen, and we saw what happened last year when all those subprime mortgages reset & defaulted.

In August the odds were very good that we would be paying $5-6 a gallon on gasoline and home heating oil. That graph is based on speculation on long term trends in LIBOR. That type of speculation was right on the money with oil futures... oh wait.

[Sea Skimmer]

Give how much of the stimulus is going into infrastructure projects it can’t help but be drawn out. Some things you just can’t do faster then a certain speed, and you need planning and bidding unless you want to turn the whole exercise into something worse then the early efforts at rebuilding Iraq in terms of waste. Still six years seems pointlessly excessive, four years would be better.

[aerius]

That graph is based on speculation on long term trends in LIBOR. That type of speculation was right on the money with oil futures... oh wait.

Except it isn't. It's based on the term of the "teaser rates" on the mortgages. When the time is up they reset from the low front end rate to the full amortization rate. It goes from being a pay-option mortgage to a normal mortgage and when that happens the monthly payments go way up, it doesn't matter what LIBOR, the Fed Funds Rate or the 10 year bond happens to be when the resets occur, the borrower gets sodomized.

The only way to avoid it is a mortgage workout where the outstanding principal is written off to ~2.5X-3X annual income and locked in at a fixed rate. This will give a DTI of around 30-35%, which is payable, affordable, and will not default. This puts a floor on housing prices, guarantees the income stream that banks get from mortgage loans, and keeps most of the MBS & structured finance products from imploding, though they will take a hit. But I seriously doubt that would happen since it helps the little people and forces the banks and rich assholes to take a loss.