I have been talking about the non-stimulus of tax rebate checks for a while. My latest were Stimulus Checks Already Spent and Economic Stimulus Not a Silver Bullet.

Professor Kevin Depew added yet another reason today why there will be no stimulus from stimulus checks. Please consider Point number 1 of Thursday’s “Five Things“.

1. Where Your Tax Rebate Is Really Going

Economic “stimulus” the form of tax rebate checks is on the way, and in some cases may have already arrived in a few mailboxes. But economists remain divided on, a) how much of those rebate checks will be spent to boost the economy, b) how much will be socked away in the bank and saved, or c) how much will be used to pay down debt. The reality is it may be none of the above.

The Financial Times this morning had an interesting piece on what looks like it will be a first wave of a multi-wave event: California state legislators are considering radical revenue-raising measures including a new services levy and a temporary tax on high earners to address a budget crisis that has spiraled into a $20 billion deficit.

As one of the states hardest hit by the real estate bubble collapse, California is struggling. Yesterday Vallejo, a city in in northern California, voted to file for bankruptcy protection after running out of money.

But make no mistake, California is no orphan sitting at the stoop of the budget shortfall poorhouse. States across the country are facing deteriorating budgets. Alabama, Arizona, Florida and Nevada face budget shortfalls of more than 10%, according to the National Conference of State Legislatures.

These state budget shortfalls are crimping spending on everything from basic services, fire and police, to education. And guess what, as those tax rebate checks come rolling in, they will soon very likely go rolling right back out in the form of tax increases at the state and local level.

It’s a game of smoke and mirrors; tax money that would have gone to the federal government, instead goes back into our pockets so that it can pay a portion of the tax increases that will soon accumulate at the state and local level. There is no free lunch, not where taxes are concerned.

No free lunch is correct.

And that is important to keep in mind as the city of Vallejo is struggling in bankruptcy because it made too many promises it simply cannot keep. Please see Hardball In Vallejo, No Balls In D.C. for more on Vallejo and what may be facing scores of cities as the recession worsens.

By the way, the concept of no free lunch applies equally well to the myriad of proposals supposedly designed to bail out homeowners and/or stimulate the economy. All these programs will do is rob Peter to pay Paul, when Paul was a spendthrift buying more house than he could afford, with financing provided by lenders that should have known better.

Foreclosure Prevention Madness

Bloomberg is reporting U.S. Senators Agree on Foreclosure-Prevention Bill.

U.S. Senate leaders agreed on legislation aimed at curbing home foreclosures, dropping a provision that would have allowed judges to alter mortgages for borrowers in bankruptcy proceedings.

The plan includes funds for foreclosure-prevention counseling, tax credits for people who buy foreclosed homes and clearer loan disclosures for consumers buying a home, according to an outline of the proposal released today by Senate Banking Committee Chairman Christopher Dodd and the panel’s top Republican, Richard Shelby.

Dodd said the senators couldn’t agree on how to handle the bankruptcy provision. Senate Republicans have blocked previous efforts to advance the idea, saying the bankruptcy changes would have forced lenders to recoup court losses by raising interest rates on other borrowers.

Dodd and Shelby’s plan would offer a $7,000 tax credit for people who buy homes in foreclosure to be claimed over two years, $10 billion in federal tax-exempt, private-activity bonds for refinancing subprime loans, and $100 million for housing counseling to help homeowners avoid foreclosure.

Bush Threatens Veto

President Bush has threatened to veto this bill. Please call and/or email the White House to voice your support of a presidential veto of any housing bailout bill:

Phone: 202-456-1414 or 202-456-1111

Just say, “I am calling to ask you to veto any housing bailout that comes out of Congress.”

Click Here To Email President Bush: comments@whitehouse.gov

Economic Stimulus Nonsense

The entire concept of a ‘stimulus plan’ is complete nonsense. The government cannot, and does not, create additional resources. It can only take money from ‘A’ and shift it to ‘B’ , either via confiscation (taxes), borrowing, or printing.

In the first two instances, money goes from one pocket into another, in the latter case, the entire money stock loses value to the extent that additional money is printed. Not one of these cases results in an economic gain. On the contrary, this artificial redistribution hampers the flow of scarce resources to where they are needed most, and thus delays economic recovery.

Mike “Mish” Shedlock
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