The much anticipated rebate checks start going out today. In fact, over the next few weeks $110 billion will be sent out to the American public. This week, only electronic deposits will occur with paper checks being sent out later. There seems to be a contingency of people who believe that this is enough to turn the economy positive and avoid a recession. I’m not sure how that will be the case since our employment situation is precarious at best.

“NEW YORK (CNNMoney.com) — Tax rebates are starting to arrive in bank accounts. But many economists doubt that they will keep the economy from recession.

The stimulus package, passed with overwhelming bipartisan support earlier this year, will give rebates to about 130 million Americans, costing the U.S. Treasury more than $110 billion. Married taxpayers earning $150,000 or less will get up to $1200 while single taxpayers earning $75,000 will receive up to $600.

But since the measure passed Congress, there have been growing signs that the U.S. economy has already fallen into recession.”

Of course given the state of the economy and that we are in an election year, this passed with very little hesitation. Yet the impact of this rebate will hardly do anything since our economy is $13.84 trillion dollars strong. The fact that Americans are spending themselves into the ground will not be stymied by $600 or $1,200. It will feel good no doubt but this is only going to add additional fuel to the already present inflation we are seeing.

The main goal of course from the administration was to get people out there spending since 70 percent of our economy is based on consumption. Yet this may turnout to be a harder goal to achieve:

With the rebate being electronically deposited into taxpayers’ accounts as soon as today, area residents said they are leaning toward saving for a rainy day or paying debt rather than making a big purchase.

“I know what the goal is for the stimulus, but I’m more than likely to invest it and try to make more money that way,” said Pinkie Shuler of Winston-Salem.

Trean Ellis of Denton said that she and her husband are putting their stimulus money toward a down payment for a home they are planning to build in Lexington.

“It may end up being a small part of what we need, but every bit helps in this economy with gas prices being the way they are and both of us commuting to work,” Ellis said. “It would be nice to buy a big-screen TV but we’ve got other priorities now.”

The rebate is part of a $168 billion economic-stimulus plan approved by Congress in February. The amount ranges from $300 to $600 for individuals and from $600 to $1,200 for couples, plus $300 for each child.”

People have larger issues on their mind and will probably use the rebate to pay off debt, save for a rainy day (which given our economy is today), and other priorities. In fact, people are already shifting their purchasing habits to daily necessities. Kroger and Wal-mart are gearing up for incentives to bring in rebate ready buyers to their stores:

“If big retailers have their say, every dime of your tax rebate will be spent. Many retailers are offering incentives to trade in rebate checks.

Grocery chains Albertsons and Kroger and department stores Sears and Kmart are offering consumers an extra 10 percent for every $300 gift certificate they buy.

Home Depot is going green, urging customers to stretch their tax rebate dollars by investing in energy-saving products. Some retailers, like Walmart, are even considering a plan to cash tax rebates checks at no charge.”

So they want you to come in and blow your money on things you’ll already be buying. The only question is, will people respond accordingly. Ironically, the timing couldn’t be worse given the summer driving season and practically dollar for dollar that rebate will be consumed by higher fuel costs:

“Gasoline nationally is in an accelerated upswing, having jumped to $3.58 a gallon from $3.50 in just the past week. In some parts of the country, including New York City and the West Coast, gas is already sporting a price tag above $4 a gallon. There was a pray-in at a Chevron station in San Francisco on Friday led by a minister asking God for cheaper gas, and an Arco gas station in San Mateo, Calif., has already raised its price to a sky-high $4.62.

In Manhattan, at a Mobil gas station at York Avenue and East 61st Street, premium gas is now $4.03 a gallon. Two days ago, it was $3.96. Why such a high price? “Blame the people at STOPEC (he meant OPEC) and the oil companies,” an attendant there told me.”

This is too little too late given the current housing debacle which has already erased $2 trillion in equity. Do people really think that this is going to stop people walking away from mortgage obligations in states like California and Florida where homes have dropped from $100,000 to $200,000 in one year? Enjoy the money in your account but make no mistake that this will do nothing to change the landscape of our economic troubles.

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Yesterday UBS AG said it would write down a staggering $19 billion on assets connected to mortgage assets. The figure is staggering yet the market rallied nearly 400 points on this news. Have we reached a turning point where writedowns simply do not matter? This figure was the largest since the writedowns started last year. Writedowns occur when investment banks mark their assets to market and the value has declined. Commercial banks on the other hand take credit losses or charge offs when the same occurs with their assets should they default or decline in value. It is amazing that we have now reached $231 billion in writedowns and we still have more sub-prime mortgages that will default this year and the battle of the Alt-A and Option ARM mortgages are nowhere on the radar screen. If there was any other proof that investment banks need more regulation let us look at the entire list of writedowns (all numbers below in billions):

What you’ll notice on the list above is losses from investment banks and commercial banks related to their mortgage assets. What is incredible is investment banks are responsible for nearly 90 percent of all the aggregate writedowns. Take a look at a few big commercial banks above and you’ll realize that there is a reason for regulation. For example Wells Fargo and Bank of America have not suffered as deeply as many of the investment banks on the list. The new proposals for regulating investment banks are warranted but what is the use of peering into their books if nothing is going to be enforced? There will be a fierce battle to keep things status quo because looking above, we realize that these investment banks have been gambling for many years and now they have doubled-down on 16.

Another fascinating bit of information is we are well beyond the Fed’s prediction last year that when all was said and done, we would be seeing $50 to $100 billion in total writedowns. We are now double that and places such as Goldman Sachs have predicted writedowns totaling $460 billion. If we are to look at the raw number of loans resetting and sub-prime debt still out there, we may well surpass that $460 billion number. That is why the Fed is giving up on its rate cutting jawboning because what is the point of injecting liquidity when the problem is flat out solvency ala Bear Stearns? They brought a knife to a gun fight. All the new facilities being engaged and down right bailing out of an investment bank show their panic. If anything, it has placated the markets for the time being but that doesn’t change the inevitable. They’ve used nearly all their ammunition and we are not even half way through the correction.

That is why the government is now looking to step in with a $300 billion bail out package that would allow the government to buy poor performing mortgages through government sponsored entities. Given that they will purchase loans at values that are below market, it will shift the risk from the private sector onto the balance sheet of the American public. This will create a moral hazard since any investment bank in the future will realize if things get really bad, they always have the ultimate back stop of the federal government. If we are to enact new regulation and put investment banks in the same category as commercial banks with all the government insurance at their disposal, we need to have complete access and regulating authority over them. Just look at the list above! How well did the market work when they were given free reign?

They were the ultimate sinners in this mess. They clearly do not have the self regulating over sight that will protect the well being of the country. And all those that cry free market when they hear regulation are rolling up to the government corporate welfare line when things get bad. If anything, they are more socialist than they would like to admit. What we have done is created a new gambling casino and its address isn’t in Vegas but falls squarely on Wall Street and other financial hubs around the world. If you look at the list above, it appears that the entire world got caught up in this investment greed. Nothing was created from this. At least with the technology bubble with for example, Global Crossing excess cable was placed around the world that provided massive utility. What of the writedowns above on now defaulting and non-performing mortgages? Nothing is left behind except a large bill for the American tax payer.

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