The U.S.'s first fiscal stimulus package 'of size' since the recession's start has passed - - albeit in a modified form that decreased spending by about $140 billion over the original outline.Further, the young President Barack Obama, like the young President John F. Kennedy, has learned that presidential honeymoons can be short inside the beltway, particularly if you have to trade policy to obtain votes both inside your party and among the loyal opposition.
Meanwhile, investors and the financial community more broader await the specifics pertaining to Obama administration's revised plan to stabilize the banking system, with the declining Dow discounting that even a successful plan will require months of systemic adjustment, and, of course, more public funds.
A pertinent question on investors' lips concerns where does the U.S. economy go from here? Practitioners of economics, the dismal science, will quickly respond, in Yogi Berra-like fashion, that 'Where we go from here, depends on what happens next.'
With the above as background, here are four scenarios, based on yours truly's discussions with a few in-the-know professionals: economists David H. Wang, Richard Felson, Peter Dawson, Marc Chandler, and public policy professional M. Keith Losak.
- No further action. Under this scenario, if actions to-date are inadequate, economic and social conditions would worsen.
- Muddle through. A stalemate occurs in Washington between Democrats and Republicans regarding the need for additional stimulus and related reforms to the economic system. Most bills stall or die in Congress, and the two sides agree to pass only a modest second stimulus package that helps the economy somewhat, although it's hard for investors and typical citizens to feel the improvement.
- Innovation/adaptation. The great American 'safety valve' - - the system's elasticity - - kicks-in. The broad freedoms we all enjoy (and too often take for granted) inspire innovation and adaptation, and spur a slow, but steady recovery.
- Additional fiscal stimulus. President Obama and congressional Democrats and Republicans agree on a second stimulus plan, and pass a package totaling $500 billion, comprised primarily of infrastructure projects and assistance to the states. The second package generates additional demand, and the recovery is well underway by Q4 2008.
Still, there are other scenarios where innovation and adaptation do not come to the foreground, in which recovery does not appear soon. Hence, a good question for investors and policy makers alike is, at this juncture, does the nation want to or feel comfortable taking that risk?
- -
Financial Editor Joseph Lazzaro is based in New York.
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
Deere up on Q4 earnings performance
Reid Hoffman: LinkedIn will go public (at some point)
