Stimulating at a recession near you…

As a tax professional I am constantly being questioned by many of my colleagues, peers, and friends concerning this stimulus package everyone keeps talking about.  As many may already know, the bill was made law this past week  and a lot of people have no clue what it does or how it affects us.  Fear not, I have the perfect explanation, courtesy of an email my dad sent me earlier today.

Shortly after class, an economics student approaches his economics professor and says, “I don’t understand this stimulus bill. Can you explain it to me?”

The professor replied, “I don’t have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I’ll be glad to explain it to you.” The student agreed.

At the agreed-upon time, the student showed up at the professor’s house. The professor stated that the weekend project involved his backyard pool.

They both went out back to the pool, and the professor handed the student a bucket. Demonstrating with his own bucket, the professor said, “First, go over to the deep end, and fill your bucket with as much water as you can.” The student did as he was instructed.

The professor then continued, “Follow me over to the shallow end, and then dump all the water from your bucket into it.” The student was naturally confused, but did as he was told.

The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.

The confused student asked, “Excuse me, but why are we doing this?” The professor matter-of-factly stated that he was trying to make the shallow end much deeper.

The student didn’t think the economics professor was serious, but figured that he would find out the real story soon enough.

However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad. The student finally replied, “All we’re doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you’ll really have accomplished is the destruction of what could have been truly productive action!”

The professor put down his bucket and replied with a smile, “Congratulations. You now understand the stimulus bill.”

So as you can see from the explanation it makes no sense.  It is like a picture I once saw of Darth Vader using a water purifier to make sea water drinkable, it makes no sense…Darth Vader can’t drink water, and you cant pay debt by being in more debt…sorry all who read this previously, when I pasted the story, it was a bit mixed…

Debt + Debt x Debt x 45 = 0

So for a while now we have all been hearing about this whole government bailout for financial institutions.  Well, the dust has settled and the Obama administration has left its mark on history.  While no disrespect is intended, Obama sure has provided some “change.”

For starters, he changed the record for most money involved in a bill passed by the United States.  He will change the way some companies books look.  He will change the value of our dollar by freely throwing another $800 billion into our economy.  Sounds fun doesn’t it?

Recently a friend of mine put together a blog concerning the plans many politicians have with how to go about taking care of this financial crisis.  I will tell you right now, the worst way to reduce debt is by creating more of it, and at an exponential rate might I add.

One of the speculations of what will be done with all this money is the re-purchase of some bad assets, bad debts, bad securities, and liabilities.  This sounds great to the average person, however, such transactions can have very negative affects on a companies financial statements.  What is more is that these money hungry institutions are the reason why our economy is in the toilet.  That and our fun-loving consumers who think making $30,000 a year and spending $120,000 is a way of living.

My only concern with this idea of giving banks funds for bad assets as well as buying liabilities/securities that have gone bad is the balance sheet effects these transactions would have. What will most likely happen to most of these banks is a large extraordinary loss will be reported on their income statements due to the fact that their is no way in hell that the government will be willing to give them anywhere near the adjusted basis of most of those assets, which is what translates into a negative result for company’s balance sheets and income statements.

To explain what was said above, say ABC Bank has an asset on their books in which the adjusted basis (book value after depreciation) is $2 million.  Then say the government looks at this asset and says, “$500,000”, well now what happens to this $1.5 million difference?  See my point?  Let’s not forget what effects this will have on the stock market, granted, their is no logic that can explain that psycho ward, but say we were actually using logic to explain the stock market, this loss would be a bad thing.

The plus to that is with the new stimulus bill, these institutions would be allowed to transfer NOLs to all the way back to 2005.  NOL is the acronym for Net Operating Loss.  This refers to any net loss from a business for a specific year of business.  Usually, NOLs can be carried back two years and forwards 20 years, the beauty of this is you can use a loss from this year, to amend a prior year’s income, reduce it, and receive the tax benefit of a refund on the amount of your NOL.  Granted, the amount of the benefit is dependent on the tax bracket in which the company in, however, something is something.  Obama’s bill allows companies to take 2008 and 2009 losses back to 2005.

With most companies reporting in the red last year and this year, this may all turn out to be good on paper, however, all this does is further reduce government revenue and force us to rely more on debt as a means for financing our stimulus bills and really expensive inaugurations.