Daily Reading: December 18, 2008

Initial jobless claims fell more than expected last week. The headline makes it sound better than it is, 554,000 initial claims is a HUGE number. AP.

Obama is reportedly considering $850 billion of stimulus spending. I have heard many economists argue that fiscal policy will do little to aid recovery. The basic argument is: The government has to borrow the money. As such they are not adding value to the economy. They are simply borrowing from the left pocket and spending in the right. The borrowed money should remain in the private sector where it will be used more efficiently. I absolutely agree that the private sector is more efficient than the public sector. The problem is the private sector is not spending nearly enough because they don't 'feel good' about the economy.

The economists are missing the 'feel-good effect' of fiscal stimulus, which of course is not quantifiable. Let me explain with a bit of history. Herbert Hoover was President when the stock market crashed in 1929. Throughout his presidency, the U.S. economy went from high-flyer to deep depression. And as a result nobody trusted Hoover; he didn't make them 'feel good'. Then, in the 1932 election, along comes FDR. Who promises sweeping fiscal stimulus (New Deal) to grab the economy by the bootstraps and throw it into renewed growth. Whether or not New Deal spending added value to the economy, it did dramatically improve consumer and business sentiment. After 3 1/2 years of despair people felt like they might be turning the corner. They trusted FDR, they felt more secure, and the economy began to improve.

The Obama stimulus plan will almost certainly not have the same quantifiable benefits that private sector spending could achieve. But it will make people 'feel good'. And when they 'feel good', they spend money. Strong consumer spending is one piece of the recovery puzzle.

Here is a good editorial from the National Review. It briefly discusses the good, the bad, and the ugly of our current monetary and fiscal policy.

The New York Times put out an opinion piece worth reading. No, I am not drunk. It discusses the world's perception of the American financial system and growing parallels between America's and China's economic system (they are moving toward capitalism while we are moving toward socialism).

Credit Suisse is going to pay year-end bonuses with illiquid investments. An interesting way of getting CMBS's off the balance sheet. WSJ.

I know Halloween is over, but if you want a good scare watch this 60 minutes interview of Whitney Tilson on YouTube. Tilson manage's a fund called T2 Partners and has set himself out as an expert of the mortgage crisis. He says that the subprime crisis was only the first half of the mortgage meltdown. Next on the docket is Alt-A and Option ARM's. As an aside, I had the pleasure of meeting Mr. Tilson at the 2008 Berkshire Hathaway shareholder meeting.

What is the Bush administration going to do with Detroit? The latest guess is an 'orderly bankruptcy'. NY Times.

Is there any correlation between the criticism the SEC has been getting for being "asleep at the wheel" and the timing of the latest insider-trading bust? Who knows? Who cares? At least they busted the SOB's. It is really irritating that a few jerks like this make all investment professionals look bad. WSJ.