Stimulus: Can it work like Roosevelt's New Deal?

There's an old saying by economists that once the Federal Reserve gets short-term interest rates down to zero, it can't "push on a string." In other words, the nation's central bank can't do much more to revive the economy from its present financial and economic slump because it can't lower interest rates further. They are now almost zero.

Paul Kasriel, an economist with the Northern Trust Co., in Chicago, has a different string theory. He figures the Fed has been, in effect, printing so much money, regardless of interest rates, that in combination with a massive fiscal stimulus package, the economy should revive by late this year or in 2010. "It depends on how fast the government can shovel out the [stimulus] money," says Mr. Kasriel.

During the Great Depression, it was similarly a combination of major government spending (the New Deal) and easier money that eventually brought a vigorous recovery.

So today, the Fed must in reality finance much of the $787 billion stimulus package or the stimulus won't work, Kasriel says. Without the Fed's support, the nation's actions could be likened to someone spending stimulus money at a store with one hand and taking money out of the store's cash register with the other (via tax hikes or spending cuts).

Certainly Fed policymakers have been pouring gobs of money into the economy. Last year, bank reserves grew almost 149 percent. That's "an unprecedented increase," Kasriel notes.

"Never underestimate the initial positive impact on aggregate demand of that powerful combination of increased federal government spending, tax cuts, and a central bank running the monetary printing press at a high speed," he adds.

A basic challenge remains the scale of today's economic problem, though it's not nearly as bad as the 25.6 percent unemployment rate of May 1933.

United States household net worth is down 25 percent, or $16 trillion from its peak of nearly $63.6 trillion in the third quarter of 2007, estimates Michael Cosgrove, an economist at the University of Dallas, Irving. Stocks are worth $10 trillion less. Household real estate has crashed $5.5 trillion since 2005.

As a result, Professor Cosgrove argues, consumers feel poorer and are spending less, perhaps as much as $300 billion less. Most homeowners can no longer take huge amounts of money out of their home's equity as they did in the past. These factors point to "a long recession," he says.

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