President, Fed Head Back Plans to Perk Up the Economy

Breaking news: Both President Bush and Federal Reserve Chairman Ben Bernanke today gave support for an economic stimulus plan to prevent the U.S. from sliding into a recession, MSNBC reports.

Embarrassingly old news: The country desperately needs an economic injection–and has for quite some time.

It looks like we’ll be getting it–through a rate cut that seems to be almost a done deal and a to-be-determined governmental package. Bernanke "again pledged to aggressively slash a key interest rate as needed to bolster an economy that is weakening under the strains of a severe housing slump and credit crisis," according to MSNBC.

The cut–which will be voted on at the Fed’s Jan. 30 meeting–might be a half-percentage point, which is huge. And yet, Bernanke acknowledged today that rate cuts alone just aren’t going to do the job. (Agreed.)

A lot of ambiguity surrounds the rate cut and today’s announcements–but here’s what we do know:

  • From Bernanke: Testifying to the House Budget Committee, Bernanke said that although he still doesn’t think we’re headed for a recession, the plan should get cash to citizens–especially those with low and moderate incomes–fast.

Yes, But Wait: Bernanke feels encouraging spending will help but was firm about the length of the program, suggesting we keep it short and do it soon. Bernanke said packages in the neighborhood of $50 billion to billion to $150 billion were reasonable; and it’s important that the government keeps the big picture in mind. Running up the federal government’s budget deficits to give spending a temporary rise may not be worth the cost.

  • From Bush: White House spokesman Tony Fratto said today that “The president does believe that over the short term, that to deal with this softening in the economy, that some boost is necessary.” Fratto wouldn’t give any details, but confirmed that the issue would likely be discussed Friday during a conference call between the president and congressional leaders. Many economists expect the package will include rebates like the $300 to $600 payouts the government provided in 2001.

Yes, But Wait: Rebates seem like a great way to boost consumer spending–hey, it’s free money, right?–but will that necessarily lift the overall economy? Consumer spending is a huge economic influencer– it makes up 70 percent of the economy–but it may not have declined as drastically as many expected it to. December’s numbers were low, but as The New York Times reported, many economists felt that was just a fluke.

Sure, consumer debt has increased–The Fed said in December that overall consumer credit rose to hit a new high of $2.49 trillion in October.

But giving people a few hundred dollars may just mean they’ll pay down their debt a bit–or won’t, in which case one wonders if that cash injection would really be healing the economy. That debt will still be there, growing, after the rebate buys a cash-strapped homeowner a few new outfits. So what permanent help did the money provide?

Housing is still struggling; unemployment has been spotty and spending remains questionable. Bernanke and the president today acknowledged the country needs help.

What that help will be is still being determined. We know that in the past, the current administration felt distributing money would boost the economy; some sources say that practice may even become permanent.

Will it work? Maybe, maybe not. If a rebate isn’t the answer to the currently slowing economy, what is? Tell us what you think.