From Senator Charles Schumer’s (D-NY) 1-16-08 Opening Statement to the Joint Economic Committee:

• [Ominous Subtitle:] “What Should the Federal Government Do to Avoid a Recession?”
• [Economic Fear-mongering:] The discussion of economic stimulus is no longer an academic exercise. In fact, real economic stimulus measures, enacted quickly, could be the last thing between us and a deep or protracted recession.”
• [Endorsement from Non-Endorsement:]On Monday I called Chairman Bernanke personally to get his thoughts on the economy. And he said that fiscal stimulus is certainly needed and he would be generally supportive of the Congress and the President enacting such a stimulus. He said that while he wasn’t going to endorse a specific plan, if an economic stimulus package was properly designed and enacted so that it enters the economy quickly, it could have a very positive effect on the economy.
• [Obligatory In-Hindsight Partisan Jab:] Because of presidential inaction to mitigate the effect of the subprime mortgage meltdown, the economy is now on the edge of recession.
• [Government > Free Markets:] An effective stimulus package, which includes both expenditures and tax cuts in combination with monetary policy, is the best way to avert a recession.
• [The Most Opaque Way to Say Deficit Spending:] On the question of pay-go – […] paying for stimulus now would take away from the economic boost we are seeking to create. The stimulus, by definition, must have a net of spending over income.
• [”Non-Partisan” Now Equals “Authoritatively Correct”:] Fortunately, because of the important work of economists across the ideological spectrum and most recently yesterday by the non-partisan Congressional Budget Office, we know what works and what doesn’t when it comes to economic stimulus.
• [I Simply Don’t Believe This Is True:] We know that extending unemployment insurance is one of the most effective stimulus proposals because we’ve deployed it successfully in the past and it gets a lot of “bang for the buck.”
• [Drawing the Line in the Sand:] Renewing the Bush tax cuts, which don’t expire until the end of 2010, should be off the table, because they will thwart any chance of passing a stimulus package.

And a somewhat more rationed take (though the first quote sounds like a joke) from the JEC testimony of Bill Beach, director of the conservative Heritage Founadation’s Center for Data Analysis:

• [If That’s What Congress Does “Best”… :] Congress should take this moment of slow growth to do what it does best: set broad economic policy.
• [I Thought Everyone Agreed About a Congressional Stimulus:] I am convinced the Congress is not the best policy making body for addressing the short run challenges of the economy. That role is better played by the Federal Reserve System.
• [Stepping Across Schumer’s Line in the Sand:] The decision makers in business and investment are watching Washington closely to discern the direction Congress will take in responding to this crisis. If that direction includes tax increases, then investors will find more favorable economies to support and business owners will, as much as they can, locate their expanded activities in places with more favorable tax regimes. […] For my part, I urge the Congress to make permanent the key provisions of the 2001 and 2003 tax law changes.

I’m guessing this will all work out to a compromised stimulus package that both extends Bush tax cuts and provides temporary subsidies for unemployment-extension/home-heating/food-stamps/state-aid. That would be a firm step in the opposite directions of both smaller and bigger government.  Perfect.  Good thing everyone likes to buy American Debt and US Dollars…

All this reminds me of the old adage about taxes: “Defer, Deny, Delay.” (ordering?)  The same goes for recessions, too.

Came across this little nugget from the US Dept of Treasury yesterday (though it was announced in early December 2007):

The annual limitation on purchases of United States Savings Bonds will be set at $5,000 per Social Security Number, effective January 1, 2008.

The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.

[There’s more about this here.  The process of limiting the purchases is especially onerous and comical: to reach the max you will have to buy both online and in person, in some cases buying at face value, others at half, though the limitation is the same.  This is admittedly the same as the previous policy to meet the max … but still: WTF?]

So I feel like I’m going all conspiracy-theory … but this announcement comes right when investors are fleeing anything affected by subprime (which is everything) causing a big credit crunch and hurting lots of stocks; only federal debt seems to be trusted.  While even slightly-advanced investors can still easily buy-up other forms of federal debt above the new $20,000 Savings Bonds limit, Savings Bonds are the most accessible instrument for novice investors. If When we hit a recession and the populace jumps out of the stock market, I would assume US Savings Bonds will be one of the first places to go?  Well, now the Treasury only lets you move $20,000 (and only $10,000 from the comfort of you computer), perhaps in an effort to prop up the stock market by limiting your alternatives?

A question/answer to help to dismiss/bolster my conspiracy theory:

Q. How much is annually purchased in US Savings Bonds?  Is there a big %-change during market drops?

A. Here’s the US Savings Bonds purchasing data for the last ten years, with the %-change over the previous year next to it.  (courtesy of the SF Gate’s recent article and some quick excel).  Take a look:

2007 $3.4 Billion (-60%)
2006 8.3B (+31%)
2005 6.3B (-20%)
2004 7.9B (-33%)
2003 11.8B (+20%)
2002 9.8B (+48%)
2001 6.6B (+26%)
2000 5.2B (+10%)
1999 4.7B (-2%)
1998 4.8B

The brief tech-bubble recession caused a pretty big market drop … “Nasdaq peaked at $6.7 trillion in March 2000 then plummeted to $1.6 trillion by October 2002.” (Source) … and 2002 saw the largest positive %-change in Savings Bonds purchases.  Coincidence?  Maybe.  One might also attribute the drop in Savings Bonds purchases since 2003 to the good returns in the recovering stock market?  (I don’t know what the deal with the 2007 number is … a really frothy economy? Or (more probably) just a partial number for the not-yet-done 2007?)

So while the flight-to-Savings-Bonds during a market fall may hold some water … my conspiracy theory about the new limits being put inplace to help keep the stock market up doesn’t seem right when you consider that the total issuance of US Savings Bonds is only in the single-digit billions.  The new US Savings Bonds limits really won’t make much difference in keeping money in the stock market.

And on an even more pragmatic note, I must say that it’s really not that hard to buy Treasury Bills/Notes/Bonds whose purchasing limits are much more generous $5M (per security type).  The Treasury Direct website - the same one you would use to buy Savings Bonds - has a ‘non-competitive’ auction bid process (it’s not ‘competitive’ because you agree to buy at whatever rate the auction determines rather than being able to set a stop/limit) that is right there for anyone interested.  So even with the Savings Bonds limits, there’s still lots of ways to buy lots of federal debt.

Update: I changed ‘recession’ to ‘market fall’ throughout the original post … although they’re correlated, I should’ve been clearer in my word choice.

The Wall Street Journal published “Insurer Woes Put Munis in Bargin Bin” today, echoing almost exactly what I said on 12-2 and 12-8 (and continuing the Journal’s own coverage on 12-8).  The article starts:

Bad news about bond insurers in recent days sent mutual-fund managers racing into the market - scooping up insured municipal bonds at a steal.

Just as predicted, more bond insurers are getting caught in the ’subprime’ mess and the prices of the munis they backed are dropping.   However, since munis rarely default, the lack of background insurance is battering their prices more than is likely justified.

I was excited - but ultimately disappointed - with the last section of the article entitled “Insurance Even Needed?” The WSJ could’ve made the case much more strongly that the insurance is redundant/unnecessary … but of course this is an article, not an editorial.

I’m still not jumping into the market until I feel bottom … and we’re not there yet.  None of the returns -at least for Massachusetts municipal bonds - look very appealing right now.  Of course some states are better;  maybe I should move to Maine or Wyoming or some other less affluent place without a well-off middle-upper class chasing tax-exempt interest on the same local bonds?  [That’s for another post…]

and fwiw: that my investment acumen was this accurate probably scares me more than it does you.