The Treasury Department announced over the weekend that it would infuse $250 billion directly into the banking system, starting with approximately $125 billion targeted at nine major institutions including Goldman Sachs and Citigroup.
Combined with the coordinated efforts of central banks around the world, the announcement appears to have successfully staunched the record erosion of equity prices over the past two weeks. Interest rates and other indicators are moving in a positive direction as well, indicating that the credit markets may finally loosen up.
If you are keeping track, the latest move by Treasury is just the last in a remarkable and unprecedented list of actions by Treasury and the Fed to respond to the ongoing credit crisis. These actions include:
- $250 billion to recapitalized banks;
- $40 billion per month to purchase troubled assets;
- FDIC insurance raised to $250,000;
- Coordinated rate cuts around world;
- Inter-bank loan guarantees;
- $100 billion Fed intervention in repurchase agreement markets;
- Fed pays interest on balances;
- $300 billion to insure mortgages;
- Mark-to-market accounting changes; and
- Fiscal stimulus.
All told, it is about $2 trillion worth of liquidity, capital, and insurance backstops for the markets! Assuming it works and restores function to the credit markets — and we certainly hope it does — how all this will unwind is wholly unclear. It took a year for the Treasury and the Fed to reach this level of intervention. It will likely take several times that to get back to square one.
Another Stimulus Package Considered
There is more talk of a potential stimulus package. The most recent NFIB survey released today signals continued recession levels in America’s small business community. Meanwhile, today’s Politico outlines the possible response for Congress when they return November 17th:
A post-election session of Congress seems all but certain next month with House Democrats beginning to focus on more permanent tax breaks for middle- and working-class families, along with shorter-term spending proposals to stimulate the economy.
Treasury’s action this weekend reaffirmed what economists have been saying for months — the economy suffers from a lack of capital. Banks and businesses alike have seen their capital reserves dwindle in the past year to the point where investors worried about their solvency.
It is not $700 billion, but changing the rules governing the Built-in Gains tax would free up billions in locked up capital that could be used to build new plants, buy new equipment, and hire new workers — exactly what the economy needs right now. As S Corporation Association Chairman Richard Roderick wrote back in May:
According to government statistics, hundreds of thousands of S corporations nationwide may be sitting on “locked-up” capital that they cannot access or redeploy due to the prohibitive tax implications of BIG. This “ lock-in effect” is widespread and results in these businesses unable to access billions of dollars in assets that could be used to grow the business and hire new employees.
If Congress does take up another stimulus package in November, we will be in there pushing for BIG reforms.