Stimulus Package Was Needed But It Won’t End the Crunch

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Today Ben Bernanke talked about the stimulus package currently being discussed by President-elect Obama and his incoming administration.  He believes it will help, but that it won’t be enough to bring a lasting recovery.  From the International Herald Tribune:

The chairman of the Federal Reserve, Ben Bernanke, said Tuesday that the fiscal stimulus package currently being discussed by the incoming U.S. administration would help revive the economy but would not be enough to bring a lasting recovery.

“Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke said in a speech at the London School of Economics. “A modern economy cannot grow if its financial system is not operating effectively.”

Bernanke said the Federal Reserve still has “powerful tools” at its disposal to stem the financial crisis even after lowering its benchmark interest rate virtually to zero in December.

The economic outlook has continued to worsen even after the Treasury’s injection of about $250 billion into the banking sector, and Bernanke said that more capital injections and guarantees might become necessary.

He also outlined several options to help financial institutions with their troubled and hard-to-value assets, which continue to be a barrier to improving private investment flows.

Among the options, he mentioned the public purchase of troubled assets, providing asset guarantees and the creation of a so-called bad bank.

Bernanke reiterated the need for “stronger supervisory and regulatory systems,” while being careful not to introduce rules that would “forfeit economic benefits of financial innovation and market discipline.”

Is it just me or do these guys all sound like they’re really not sure what to do to turn things around?  Are they just trying a bit of this, and a bit of that – hoping that something will stick? That’s the feeling I’m getting.

On Monday, In his final news conference before leaving office, President Bush defended the stimulus package as necessary:

President Bush stood by his decision to support the U.S. Treasury Department’s injection of billions of dollars into the economy to unfreeze the financial markets.

Asked by a reporter whether he would ask for the remaining $350 billion in economic stimulus money before President-elect Barack Obama steps in, Bush said he had spoken with Obama and told him he would ask for the money if Obama asks for Bush’s help in making the request before leaving office.

Bush defended the government’s injection of money into the economy, telling the White House press corps that the policies employed were aggressive but needed to correct what he was told would be a financial crunch that would spark fears similar to those experienced during the Great Depression.

The TARP fund is a huge amount of money, but I’m not sure it’s done what they were hoping it would.  There was no real accountability about how it was being spent, and now that they want to release the second 350 billion, some in congress are saying that they won’t permit that unless conditions are met:

Senate Banking Committee Chairman Christopher Dodd is setting out the conditions necessary for Congress to approve releasing the second $350 billion of the roughly $700 billion federal rescue plan.

Dodd said that in order to win authorization of such additional spending, the government will have to do a much better job of accounting to the taxpayers for where money already spent has gone.

The Treasury Department has spent about half of the $700 billion that make up the Troubled Assets Relief Program (TARP) approved last Fall; Congress must approve a release of the remaining $350 billion. In addition, President-elect Barack Obama is asking Congress to ready an ADDITIONAL economic stimulus package, of between $750 and $800 billion, as a combination of infrastructure spending, renewable energy projects, and tax relief for businesses and individuals.

Given the criticisms about how the administration has spent TARP funds, with little to no accountability or proof that the money has fulfilled its intended purpose, lawmakers are evincing qualms about approving a release of the remaining $350 billion – and then adding an additional $800 billion on top of that.

So what will individuals be getting out of this stimulus package?  Tax cuts!:

The package features aid to cash-strapped state governments, $500 to $1,000 tax cuts for most workers and working couples, a huge spending package blending old-fashioned public works projects with aid to the poor and unemployed, and a variety of other initiatives.

Advocates for using tax cuts to promote alternative energy won concessions and the Obama team promised to make a $3,000 job creation tax credit – which has attracted considerable criticism – more workable.

Will the “tax cuts” go to everyone, or just those who pay taxes?  That remains to be seen.

The one thing I do know is that I’m skeptical that the remaining 350 billion in TARP funds and the new 800 billion stimulus package will be spent as we’re told it will be.  Accountability will most likely be put by the wayside again, and the funds will just disappear into the accounts of big banks, local governments and companies – never to be seen again.

What do you think?  Will the stimulus have a  positive effect?  Will everyone get tax cuts?  Will there be more accountability?

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Last Edited: 16th January 2009

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  1. says

    if we continue thinking the government will come in and save us from this mess, we may never get out. You can’t solve a problem using the same thinking that got you in it.

    We, the people, should get together and help each other. I found this idea on the change.org that i recommend you to check:

    http://www.change.org/ideas/view/solving_the_credit_crisis_from_the_bottom_up

    If you vote for it, it may get presented to Obama’s administration on inauguration day.

  2. says

    Well, given that Bernanke’s grand plan was to give a ton of money to banks and then, several months later, decide to make them actually track where the money is going… I don’t place a lot of faith in his estimation of what will work. This is the same guy who said we had to pump tons of money into banks so they’d loosen up on loan restrictions. They took the money and STILL clamped down.

    I have no doubt that he’s an excellent economist. But economic theory and reality are proving to be very disparate these days.

    As for whether the tax cuts will be for everyone or just those who pay taxes… Pretty much every worker pays taxes, so I’m not sure what you’re asking. In fact, most of the lower-earners still have taxes taken out so they can get a lump-sum back at the end of the year. (Terrible idea — 0% loan to the government.) That said, tax cuts are, as ever, only for the people who file. If you pay taxes and file, you’ll owe less in taxes, which means potentially more money back. Perhaps Obama will also increase the Earned Income Credit, which can give even people who paid little to no taxes some money back.

    I’m wondering about the efficacy of the tax cut. A lot depends on how they implement it. If it’s a tax CREDIT, then it will go directly against the amount of tax you owe, meaning an extra $500 back, if you paid sufficient taxes. (Otherwise, it will mean $500 less that you owe.)

    If it’s just a tax cut, it will affect how the government figures out what you owe for taxes. That is much harder to predict the end-result for. Either way, it works out to just a few dollars per paycheck extra — or a result that doesn’t occur until April 2010 for most folks.

    As for whether the stimulus package is enough overall… Probably not. Obama isn’t planning on resting solely on this, I think. But most historians will tell you that FDR’s reforms only made the Great Depression slightly better. Real recovery didn’t start until WWII. I just hope we can avoid resorting to a war to perk up our economy.

    Abigails last blog post..Another sale of interest

  3. says

    Trickle down hasn’t worked for more than 20 years and it won’t work now. If we’re going to throw money at the problem (and we will), it might as be at individuals. Give every household a tax-free stimulus of between $10,000 and $100,000. Same cost, but it might actually achieve the objective our leaders have: Kick-start consumer spending. Of course this solution isn’t really a long-term fix. But no one seems willing to do the long-term thing. So if we’re really serious about economic stimulus through consumer spending, give the money to the consumers to spend. They can get out of foreclosure, clear off their credit cards so they can start again, and a few of us will invest judiciously and save.

    Tax cuts aren’t the answer: What happens in a few years when we have to pay for today’s spending? We’ll have to raise taxes. Cutting taxes and increasing spending make a recipe for even bigger disaster.

    Mirandas last blog post..Full Time Jobs Devolving Into Part Time Jobs

  4. David Dzidzikashvili says

    Obama’s stimulus plan should also envision changing regulations & economic policies to have short-term & long-term effects on unemployment, middle-class and the market stability. Strengthening the middle class and creating more job opportunities should be the primary objective of the package, rather than handing the blank check to the Wall Street and failed big corporations.

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