Two internationally known economists converged Tuesday on a common point regarding the link between stimulus and the U.S. economy's recovery -- but from different vantage points. U.S. Federal Reserve Chairman Ben Bernanke, in a speech before the London School of Economics, said fiscal stimulus won't be enough to create a lasting recovery, unless it is accompanied by strong measures to stabilize the financial system.
Meanwhile, New York Times economist Paul Krugman underscored the need for both a large fiscal stimulus capable of providing an immediate boost to the economy and providing stimulus 18 and 24 months out.
In a CNBC interview Tuesday, Krugman underscored the need for a large fiscal stimulus -- a critical mass of fiscal stimulus, if you will -- to counteract the massive amount of stimulus taken out of the economy from declines in consumer spending, business investment, home price depreciation, constrained credit by banks, and stock market declines.
Krugman added that the $700-850 billion proposed fiscal stimulus package is too small. Earlier, in his column in The Times, Krugman said both shovel-ready and longer-term infrastructure projects were required to keep a lid on rising unemployment for the next two years.
Also, Bernanke Tuesday provided his strongest hint to-date that the Fed's injections into the banking system and related interventions to loosen credit markets will be ongoing.
Bernanke said the likely fiscal stimulus package could provide a "significant boost" to the economy, but government may need to inject more capital into banks. He underscored that fiscal actions are unlikely to promote lasting recovery unless accompanied by strong measures to strengthen the financial system.
Bernanke said the next step would involve getting troubled assets out of the financial system, and he outlined three approaches: 1) buying the assets, 2) having the government absorb (for warrants or a fee) part of the losses, or 3) setting up so-called 'bad banks,' which would purchase assets in exchange for cash or equity in the bad banks.
Economic Analysis: Bernanke's comments signal additional interventions and asset purchases by the U.S. Government, most likely by the Fed; Krugman's comments speak to the need for large, infrastructure project-dominant fiscal stimulus, both immediate and longer-term. Each is needed: the current slump is a twin storm -- lending-leery banks combined with a demand reduction by consumers and businesses. Hence, look for the Fed to increase its balance sheet through 2009, and for two fiscal stimulus packages from Congress, one this year and one in 2010.
Bernanke's comments could also be interpreted as trying to re-focus the second-half of the $350 billion in TARP funds back toward asset purchases -- the new Congress has proposed uses other than that; still, the view from here argues the Fed chair was trying to send a signal about future Fed actions, rather than make a statement about TARP.
Bernanke said the likely fiscal stimulus package could provide a "significant boost" to the economy, but government may need to inject more capital into banks. He underscored that fiscal actions are unlikely to promote lasting recovery unless accompanied by strong measures to strengthen the financial system.
Bernanke said the next step would involve getting troubled assets out of the financial system, and he outlined three approaches: 1) buying the assets, 2) having the government absorb (for warrants or a fee) part of the losses, or 3) setting up so-called 'bad banks,' which would purchase assets in exchange for cash or equity in the bad banks.
Economic Analysis: Bernanke's comments signal additional interventions and asset purchases by the U.S. Government, most likely by the Fed; Krugman's comments speak to the need for large, infrastructure project-dominant fiscal stimulus, both immediate and longer-term. Each is needed: the current slump is a twin storm -- lending-leery banks combined with a demand reduction by consumers and businesses. Hence, look for the Fed to increase its balance sheet through 2009, and for two fiscal stimulus packages from Congress, one this year and one in 2010.
Bernanke's comments could also be interpreted as trying to re-focus the second-half of the $350 billion in TARP funds back toward asset purchases -- the new Congress has proposed uses other than that; still, the view from here argues the Fed chair was trying to send a signal about future Fed actions, rather than make a statement about TARP.
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Reader Comments (Page 1 of 1)
1-28-2009 @ 8:53AM
BHarrison said...
A basic problem is that the CEOs are too "fat" financially from their previous ill gotten gains. And while their organizations are being proped up by the Federal "bailout" progam, these CEOs have no REAL INCENTIVE to do what needs to be done.
These CEOs and their institutions are merely "holding their on", trying to "game the bailout efforts" . . . they are not willing to do their part in the recovery efforts by making loans to small businesses and individuals.
Many of these CEOs should be indicted and removed from their management positions for having orchestrated and perpetuated the FRAUDS that created the economic melt downs.
Yesterday it was announced that 9 out of 10 CEOs who presided over the demise of their corporations are STILL running the corporations (and STILL earning exorbitant salaries, etc.) The "more for the banks" should begin with the prospect their "survival" ONLY if they do their part in the recovery efforts. The "motivation" should be that if they do not do their part, they will not be 'assisted" with bailout monies; and will be confronted by the loss of their jobs . . . that is the only way to get their attentin and assistance in these matters.
If these banks cannot "survive on their own, then they should go into bankruptcy for reorganization or to be dissolved and tehir assets sold off.
It time to quite handling these "crooks" with kidd gloves . . . it is time for a lot of "tough 'love'" for these CORRUPT CEOs and upper management types. And the CORRUPT CEOs and others should be removed from their positions, indicted, and prosecuted for FRAUD and malfeasance . . . and required to return SUBSTANTIAL PORTIONS of their previous ill gottn gains.
The American people need to pressure their Congressmen to accomplish getting tese CRIMINALS out of our corporations.
"We the people" will get no more than we demand from our government.