Recently I took my girlfriend’s son to buy a large screen, flat panel TV so he could play his computer games with life size characters. The deal was if he saved half of the cost his mother and I would make up the other half. If you’re new to this computer game thing, it’s visual crack for these kids.

Off we went to the store where he had scouted out the best price on the unit he wanted. Wow, these things are expensive. As he stared in wonder at this digital behemoth, the sales person dutifully came up to close the deal.

As is always the case, numbers started flying back and forth between the sales person and myself; cables, warranties, delivery costs, you know the drill. The once affordable unit was now a much bigger number.

Glancing at Guy, that’s his name, he had completely glassed over during the rapid exchange. There was literally a haze over his eyes and he had obviously lost the flow of the conversation. The big numbers had done their work on him. It was too much for him to manage. This is how most big-ticket items are sold to the uninitiated.

At that moment, I flashed back to the first time I went with my father to buy my first car. The exact thing happened to me. I clearly remember glassing over and losing all sense of what was happening. I was in over my head. This was new territory and it owned me. I was lost in the particulars and I did not fully grasp all the details. In fact I remember Dad explaining to me what had just happened as we drove home.

Since President -Elect Obama started his push for an economic stimulus package I have had this bad feeling that the glass over affect has kicked in. That’s not unusual. Anytime Washington claims to be fixing anything I get that, “not again” feeling. I entered the work force in the mid 70’s and remember too well the last big push by D.C. to make a bad situation better. Boy, do I remember!

It isn’t that I don’t think an infusion of cash or any investment in infrastructure is a bad idea, I know we need it. There has just been something out of place or not quite right about it. I attributed it to my genetic rejection of anything that comes out of Washington as bad and probably exactly the wrong thing at the wrong time, or worse, just another political payoff with my money.

Then it hit me. Putting cash into a broken banking system is like having a hole in a water bucket. We can’t possibly expect this money to have its maximum affect on the economy if the banks are still broken. How can he be missing this?

Banks must be recapitalized and made healthy first, if any stimulus package is to have any chance of producing the desired affect of shocking the economy back to some degree of normal functioning.

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The ideal situation that would produce the best results is to have the stimulus money pass through many hands on its way through the system, which includes most importantly, the banks. The banks are where the money really starts to grow. This is basic economics.

As things stand now, banks are literally hoarding as many assets as they can just to stay above water. They have been crushed by the collapse of the mortgage market.

It isn’t realistic to expect them to say suddenly, “Oh, this is stimulus money, lets get back to normal lending.” If you know any bankers, you know how much of chance this has of happening.

Credit channels are loosening up. There are signs that the crisis, while not over, is improving. The LIBOR rate is down significantly and mortgage rates have dropped to the point where in some markets houses are selling again and there are signs of a real estate bottom. Granted these are very early signs, but it’s the first sunshine in a very dark year. Let’s enjoy it.

The first infusion of cash into the banks seems to have evaporated. Businesses are still having trouble borrowing for their day-to-day cash flow needs and the average Joe is still being rejected for car and major purchase loans because he doesn’t have perfect credit. Has anyone thought about how injecting more cash into the system will work if the banks hoard it again?

As Obama has stated, and I agree, time is of the essence, but there are just as many people asking for a rationally paced approach to this decision as are pushing for instant action.

If you have read my column before, you know I hold congress responsible for the bulk of this credit mess. When they mandated FNMA and Freddie accept loans from people who would never otherwise qualify for a mortgage, they opened the floodgates and almost destroyed the world economy.

Some of my colleagues at IDE are on the other side of this argument; they hold the banks and Wall Street responsible. From my perspective what congress really did was put piles of money on the street, unguarded, and assumed people wouldn’t steal it. Huh?

This decision, to give away money for mortgages, smacked of not having a full understanding of the mortgage markets.

So, here we are again. Another effort by the government to fix a problem, and a noble effort indeed, and once more they seem to have missed something. Just as they didn’t fully understand the long-term ramifications of making money available to deserving but credit risky buyers, they seem also to have a limited understanding of what needs to happen for a stimulus package to work.

The glass over affect could be kicking in here to some degree. Has Obama really had the time to think through all the implications of this move? I don’t think so, and it’s too much money and there’s too much at stake to have another government decision be almost right.

Action now must be slow, deliberate and right on the money. Let’s hope the system does its usual slowpoke routine and there is time to fine tune it and get the full benefit from this effort.

Source: There’s A Hole In The Bucket