New $50 Billion "Stimulus"

Back on May 26th, Larry Summers (Senior Economic Advisors to Obama) started to talk about the need for a $200 billion “Second Stimulus”. This package would be specifically designed as a gift to states so that they would not have to go through a massive round of public employee (think unions) layoffs to balance their budgets.

Yesterday –

“President Obama urged reluctant lawmakers Saturday to quickly approve nearly $50 billion in emergency aid to state and local governments, saying the money is needed to avoid "massive layoffs of teachers, police and firefighters" and to support the still-fragile economic recovery.”

http://www.washingtonpost.com/wp-dyn/content/article/2010/06/12/AR2010061204152.html

I am assuming that this will not be a bad thing for Municipal Bonds, but I am wondering if they have already priced this in.

This new money should allow the Unemployment Rate to remain artificially low into the election and help Democrats for the time being. The game of borrow from your kids to maintain your lifestyle of excess continues. Keynes may be dead in Europe, but he is alive and well in Washington…

Here is the chart that best shows what the Fed, the NYFRB and Washington are doing with our money. It shows who borrowed how much new money in Q1 2010 (annualized). You can see that the big borrowing has been done by the Federal Government. They borrowed an extra $1.446 trillion, while the banking sector saw its borrowing shrink by $1.336 trillion.

The Federal Government is stepping into to fill in the whole left as Wall Street deleverages (risk passed from bank shareholder to taxpayer). The two numbers show you that the Government is more concerned about holding the status quo than seeing massive economic expansion. Obama begging for $50 billion to prop up the payrolls of the states is simply a mechanism for maintaining employment, rather than actually creating productive new jobs. Think of this as Corporate Welfare, where Government is the Corporation.

Clearly Obama was terrified by the horrible Employment Report from a few days ago.