If Bush were earnest he can save Christmas

The McClellanitis of Paulson not withstanding - he asked for the Bazooka
and now he says he is unwilling to fire it??!! - Bush can still produce a final
hurrah before he leaves office after 8 controversial years of good intention
but bad execution. And it is not that he will leave without humility or
a sense of not living up to the expectations set for the "Compassionate
Conservative". He has been humbled by the events of the last 8 years.

That said, it is his final chance. And the answer lies in sending to Congress
a stimulus bill that includes a Social Security Tax Holiday for the final two
months(not Medicare though) - fully included this would be 12.2%
and could pull together the kind of turnaround that will make Paulson's
buddies in Goldman Sachs who have predicted a deep recession cringe.

Yesterday, I thought Suze Ormon was going to cry on camera. It was the kind
of question that would have caused her to cringe, "Should I max out my credit
cards (or my emergency fund) to give my children a good Christmas?" and
she was quick to recover to say, "Give them your happiness". While the
American middle class is told that its auto-industry must be saved, even
though the CEOs came in a private jet to get their tax dollars, it is important
to ensure that the economy does not deteriorate into a Japan style deflationary
spiral replete with 9% unemployment(or 8.5% as Nouriel Roubini would have it)
and let the future of the middle class be forever damaged.

Bush should be aiming this stimulus squarely with the aim of reducing the impact
retail faces. You might ask why Social Security needs to bail out the economy -
well, it is Social security that would get the most back from it - the Social Security
system has the most invested in a robust economy with a rapid return to full
employment. Saving retail would strongly ameliorate the situation and bring to
bear the chance that the economy might return. Add to this a common sense
tough love bail out of the Auto industry and Bush could leave the White House
like his father once did and honestly say, "I kept the faith".

As a demand sider, I would find that the supply siders including Larry Kudlow
would agree that this is a good mustard seed. As the Obama administration
mulls its demand side actions, it should not be after much disruption in the
economy has occurred. Presently, deficit spending is necessary. The states are
maxed out, the Consumer is under tremendous pressure. Social Security offers
the most sensible bastion of hope.

If Bush and the Democrats could only agree....

Construction, Auto Industry, Banks and 9/11

In the post 9/11 easing, the Fed, faced with the likely implosion of the economy used
Autos and housing and construction to keep economic activity. With a wave of liquid
credit Greenspan and Bush chose to fight the implosion and sure enough they succeeded.
Fast Forward to 9/15/2008 and we have the "credit tsunami" begin to engulf(or the lack
of it) start to hit the exact same sectors. Some would say that it was long coming and the
effect of this was sure to be felt sometime, the lack of thereof of any recognition by the Fed
and the Treasury is perhaps as appalling. The Auto industry too given its addiction to debt
should have been more circumspect. That said, the question of bailing out the Auto industry
must also be seen in the context of the next big tsunami which is the retirement pension
plan issue. A credit based bear market built within a specter of an oil shock is a tripple whammy
for the US auto industry. There are several related factors
(1) Credit crisis - implies there is no lending for the purchase of autos - further people are
afraid to lend to auto companies and they have to pay more to make anything
(2) recession - fear of job loss causes people to postpone large sized purchases
(3) oil shock - the cars they make are not suitable for $200 oil which could easily be the
situation in 2011
(4) bear market implies that the pension plans that are starting to come due are even more
fragile and will need additional funding
In that sense, Autos and finance (along with retail and healthcare) are the big employers in
the economy.

The Obama treasury needs to squarely understand the interrelationships and implications
of all this. There is no free walk away - only a postponement. Paulson has mainly chased
after (1). But in the context of autos, we are not really seeing the effects of his measures -
implying that without fiscal stimulus, we are not likely to see any increases in vehicle sales.
The Obama treasury could offer either a tax cut - or a targeted tax credit for a fuel efficient auto purchase.
This would be one way to attack (2).
But Obama also needs to worry about (3) as it was a campaign promise and an important
reason behind the Obama election.

But just as important is the negotiations over PBGC and (4). A permanent settlement with
the UAW must be on the cards as the Obama admin takes office and it should be on the agenda
in the first 100 days.
This is a difficult industry to salvage. It will require a lot of sacrifice from the UAW workers
and a can-do attitude from the auto industry mgmt and Congress to bring about a permanent
turnaround that can work without a large bailout.

Banks and construction require quick action too. Most notably, the ability to prime up the
falling demand due to foreclosure. My prior columns outline some proposals. In the long run,
the coming of new workers and the ability of the US economy to create more jobs can be
the panacea, but in the interim, a revival of fortunes for the US economy is important.

I must add here that I own small amounts of GM and Goodyear in my personal portfolio.

Advise for President Elect Obama

While it is troubling to hear Meredith Whitney speak of double digit
unemployment and the need for a second bailout in 9 months for the
financial industry, it is clear that Obama has been tossed into the
deep end of the pool(well, so was George Bush but he had a 9 month
honeymoon).
There are a series of actions that he needs to take and here are a
few ideas.

(1) Start work on a stimulus bill that is targeted at immediate relief -
notably towards holiday retail sales. A retroactive tax cut for 2008
and carrying over to 2009 that is trickle up - implying that is aimed
completely at people making $100,000 or less.

(2) Stop foreclosure on primary homes upto a 2 month period - while this is on,
look at three different proposals
(1) Hire a small army of financial/realty workers who can go and meet with
the people being foreclosed and the banks and servicers and do one
of the following -
(A) Decide that the home is not appropriate for this owner - if not, then
see if the owner can own a less expensive home and downsize the owner
(B) If the home is appropriate for the owner, then look to move the owner
to a different mortgage - example an FHA loan or a new adjustable term
mortgage(where the payment is fixed and the term adjusts with the rates)
(C) offer mortgage insurance to the homeowners

(2) For homeowners who have been foreclosed on, look to find an appropriate
home and a mortgage and place them there.

(3) Pursue new securitization with these mortgages through overcollateralization -
the Govt could be the equity tranche or z-tranche and offer the buffer needed
by the loans

The broad principle is that a more efficient system is a more conservative one which
thinks for both the consumer and the end borrower - the govt acts briefly as a
catcher in the rye and puts the children back in play. Also the whole value chain for
securitization is broken and it needs to be put back into place. By fixing this value
chain, and steadying the mortgage market the govt puts in place a system that can
work. Eventually the private sector can get back into this. The question today is
that the banks forgot not just about "Value at Risk" or VAR but also that their
Values were at Risk and ofcourse today their Valuations are all at Risk(well if you
do not agree you should listen to Meredith Whitney).

But the point here is "Yes we can". It takes a can do attitude to restore trust and faith
and a willingness to be forgiving. So many mistakes have been made, and if one can
forgive Maurice Greenberg and Dick Fuld, one can also forgive the homeowner who
bought a second home hoping for an eventual profit who is about to lose his primary
home. The housing market will eventually correct itself and recover sufficiently.

It is important to stage a Govt Investment bill such that communities facing severe
local recessions are the first to receive projects. Investment tax credits can also help.

Fixing the problem for the middle class and those who were not so fortunate but who
did aspire and believed in the "Ownership society" is an extremely important value
today. The homes are there and people want to succeed.

The world economy will quickly recover as the elimination of American uncertainity
will have a contagion effect. But quickly act, Obama must.