Which candidate, Obama or McCain, will favor $500 billion in fiscal stimulus, if needed?


With a home near the capital of the world, decades ago the parents of yours truly were able to locate and purchase the best and most effective books for their children during their grade school development years.

Dad usually chose books that emphasized cognitive development, while Mom emphasized books and exercises that stimulated creativity, and that had happy endings.

To be sure, Morgan Stanley economist Stephen Roach's macroeconomic reports would not have met Mom's requirement for happy endings.

Roach's post-bubble world

Roach, who now also serves as Morgan Stanley's (NYSE: MS) Asia Chairman, takes the pulse of the U.S. and global economies, the housing slump, the credit crisis, and the financial system, in his most recent report. (pdf)

And, consistent with Roach's reputation for sobering analysis, his economic forecast for the quarters and years ahead is not pleasant, and it differs markedly from the current consensus in financial circles.

That current consensus argues that the U.S. Federal Reserve's recently-established liquidity facilities, combined with the U.S. Treasury's back-up measures, will enable banks and others with bad mortgages and bad mortgage-backed bonds to muddle-through, slowly working-off these debts as revenues increase as the U.S. economy recovers. Likewise, the U.S. housing sector and consumer demand also will recover, as home prices stabilize and consumption returns to more-normal levels as U.S. GDP increases. It's a sort of 'end to the banking and housing crises by a growing U.S. economy better-able to service those bad debts' argument.

A plausible scenario, but not one Roach agrees with. Roach's scenario? A stagnant or very-slow-growth U.S. economy. No sustained, private sector growth catalyst. Rising unemployment. Roach says what's needed is a comprehensive - - not a reactive -- approach by Washington: more public investment in people and infrastructure, as well as a higher personal savings rate. An energy policy. An end to undisciplined risk and the start of more-prudent regulation of the financial system. Those are the keys to sustainable growth, Roach says.

Economic Analysis: Under the muddle-through scenario, only minor changes and modest fiscal stimulus are needed to get the U.S. economy moving again. Under Roach's scenario major changes and a larger fiscal stimulus are needed, not to mention a new energy policy. Which begs the question: if $400-500 billion in fiscal stimulus is needed to point the U.S. economy toward sustainable growth, which presidential candidate is more likely to lobby Congress for it? U.S. Sen. Barack Obama, D-Illinois? Or U.S. Sen. John McCain, R-Arizona?


**

What's your opinion? Which candidate, Barack Obama or John McCain, will support more fiscal stimulus, if it's needed?

Or do you think it's just 'more big government' and it would be a mistake for the federal government to become more involved?

Let us know what you think.

Reader Comments (Page 1 of 1)

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