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Will a Stimulus Package Work For the Economy?

Prof. Peter Morici - 10/22/2008

Several reporters and producers have asked for my views on a stimulus package. Here it is. A stimulus package generally takes a quarter or more to implement and then gives the economy a temporary lift. As we saw, the last package gave consumption a lift that slipped back after a few months. That gave GDP growth a sugar high late in the second quarter and helped growth from slipping too much in the third quarter.

The best purpose for another stimulus package would be to get the economy through the first half of next year while the Treasury and Federal Reserve take even more assertive steps to straighten out the banks and address other structural problems such as the trade deficit.

To be effective, two conditions need apply. Congress needs to get it done fast and put the cash in people’s hands--grants to state and municipal governments would likely get into the economy more slowly. The Treasury and Federal Reserve need to take stronger steps to unlock secondary markets for mortgages and business loans.

Regarding credit markets, movements in the overnight lending market are encouraging but the Treasury and Fed really need to jump start the securitization process--reselling regional bank’s mortgages and business loans to fixed income investors to provide regional lenders with adequate loanable funds.

Remember, the over night lending market is not unlocking because banks regard one another as fundamentally more healthy but rather because governments and ultimately the Fed and FDIC (in the U.S. through the discount window and insurance pool and abroad through Fed currency swaps) have pledged to lend dollars as needed to make good on interbank loans.

The Fed needs to reconnect regional banks with the large pools of money available in fixed income markets through securitization--that has yet to emerge and even when it does it will take some months to pull out the housing market and provide completely adequate business credit.

A stimulus package could get the economy through that transition. I favor one that gives money directly to taxpayers to get them through the worst days of the recession, which still lie ahead.