Obama's big steps meet tepid response
Despite Obama's three new economic initiatives, world stock markets have slumped and the Dow hit a six-year low.
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But things would be far worse, absent their three-pronged strategy, argue administration officials. The banking rescue will provide the context for the stimulus to begin to work, they say. Keeping people in their homes via foreclosure relief will prevent the business cycle from continuing to accelerate downwards.
“If you’re moving with as much creativity and careful design force as you can, each will be more effective moving together,” said Secretary of the Treasury Timothy Geithner of the strategy’s three aspects at a Feb. 18 briefing on the mortgage plan.
Wall Street, for its part, has worried most about what it sees as the vagueness of the financial rescue effort.
“The key to whether or not [the Obama administration’s ] policies get traction lies in breaking the vicious circle between the credit crunch and the economy,” wrote Morgan Stanley economist Richard Berner in a Feb. 19 analysis.
Until questions are answered about how, exactly, the administration plans to buy up the so-called “toxic assets” of banks that are now clogging the system, and what price they intend to pay for them, even aggressive policy might just spin its wheels, according to Mr. Berner.
Overall, Morgan Stanley sees the US economy returning to positive growth late in 2009, and a moderate, sustainable recovery taking hold in 2010.
“Investors should not rule out the chance that policy initiatives will quickly come together and promote a traditional, vigorous rebound,” writes Berner.
Fed trims outlook
Others aren’t so sanguine. The Federal Reserve sharply reduced its predictions for economic activity this year on Feb. 18.
Overall, the economy will contract between 0.5 and 1.3 percent in 2009, according to the new Fed numbers. Last fall, the Fed forecast a range of 0.2 percent decline, to 1.3 percent expansion.
Economic recovery could begin later this year, but continued strain will mean that it’s dampened into 2010, Fed officials concluded at their policy meeting in late January.
The US might not return to full employment, measured by an unemployment rate of 5 percent, until 2012, said the Fed.
“In examples that resonate with me, personally, the unemployment rate in the small town in South Carolina where I grew up has risen to 14 percent, and I learned the other day that what had once been my family home was recently put through foreclosure,” said Fed chief Ben Bernanke at a Feb. 18 appearance before the National Press Club.