Obama's Latest Stimulus: A Drop in the Liquidity Trap Bucket?

President Obama announced a brand new $50 billion (over six years) infrastructure bill today which is infinitely more than any GOP proposal to fix the economy but still is woefully inadequate. To get a sense of the scale of the problem consider our so-called banks. As is evident from the above, banks are still hoarding unbelievable amounts of capital and continue to starve the economy of credit. The above chart shows that for two solid years now reserves have soared to unprecedented levels, no doubt because the banks still do not trust their balance sheets which are still bloated with toxic assets. And that is literally the tip of the iceberg: corporations are now hoarding capital rather than risking the hazards of a credit strapped economy ($500 billion more than before the meltdown); investors of all stripes have crowded into Treasury bonds causing yields to plunge across all maturities; and, finally, consumers are paying down debt and cutting back on expenditures at a record pace. So at a time when Apple Computer alone sits a top a $50 billion cash hoard, the President kicks-off the midterm election season by announcing a $50 billion infrastructure plan over 6 years--about $8 billion per year. The smallness of the plan boggles the mind, particularly in light of the scale of the problem.

Amazingly, the US real economy seems to absorb blow after blow from the financial sector without falling off the cliff. Although the latest jobs report saw unemployment measures increase and the all-important employment ratio continue to stagnate, the markets actually rallied because they expected worse. Nevertheless, most experts, especially those that have proven right again and again, are not optimistic going forward, largely because the government seems politically paralyzed and unable to muster the political will for decisive action.

The economy and the Obama administration now sit at the edge of an abyss. The economy seems likely to either tip into a double dip recession or stagnate for years to come. Team Obama faces a historic electoral drubbing in November.

Why would Obama go so small under these circumstances?

For reasons that are difficult to comprehend Obama is wedded to the Rubinites--Larry Summers and Timothy Geithner. Rubin opposes any new stimulus. He will only support more tax cuts, which I have long argued will lead only to debt repayments in a deleveraging economy and thus more money for the banks. The 2008 tax cuts for example, initiated to forestall the catastrophe we now face, failed to demonstrably reignite spending and consumption. Instead most of the money went to payoff debt. Notably, President Obama seems poised to announce new tax cuts for businesses--to the tune of $200 billion.

The solution could not be more clear. Instead of trickle down bailouts the Obama Administration needs to pursue bottom up bailouts.

In December of 2008, I called for a massive recapitalization of the middle class, stating: "Trickle-down bailouts are poisonous. . . .Instead of [the] failed trickle down approach, the government must now immediately throw a lifeline to the 99% of Americans who have so far seen only pennies of the trillions the government has expended in its rescue efforts. We need immediate direct stimulus from the government on a scale more massive than ever before."

Later in 2009, in my Dayton Law Review article entitled Subprime Bailouts and the Predator State I argued that empirical evidence from the world of economic science demonstrated that you must terminate bank managers and extend generous debtor relief in order to avert extended economic misery.

What we needed and what we still need today is debt relief in the form of massive loan modifications as advocated by bond expert Bill Gross; a massive jobs bill on the scale of the CCC as advocated by economist Robert Shiller; and massive investment in our economy so that we have the world's best physical and human infrastructure as Paul Krugman has long advocated.

The Administration's first stimulus package probably created or saved 3 million jobs based upon the best economic studies to date. But it will expire before the economic gloom and pain. It is a shame that the Administration has given up on its own success and caved-in once again to the Robert Rubin dominated economic team.