- The Washington Times - Monday, February 16, 2009

Wall Street markets have been among the biggest cheerleaders for President Obama’s economic-stimulus bill, but disappointment is setting in that the White House, while vigorously pushing for a “sugar spoonful” of stimulus, is not at the same time administering the much-needed “medicine” of quickly cleaning up the financial system.

Efforts on both of those fronts are needed to spark an economic recovery and, of the two, economists consider the banking cleanup to be the more important for the economy in the long run.

But while enactment of a massive $787 billion stimulus plan is nearing completion, thanks to Mr. Obama’s strenuous efforts to promote it, the Treasury has presented only the outlines of a critical bank cleanup plan that is needed to unclog the financial system of souring loan assets and get credit flowing to consumers and businesses again. Disappointment with the administration’s unfinished plan contributed to a sell-off in the stock market last week that at one point drove the Dow Jones Industrial Average close to a five-year low of about 7,500.

“The passage of the stimulus bill is insufficient to right the economy,” which keeps getting worse and worse each day, said John Spinello, senior vice president at Jefferies & Co.

“The biggest risk is that the massive fiscal-stimulus program … will be stillborn as a result of not dealing upfront with these critical capital-adequacy issues in the financial markets,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight. “Unless that void is filled fairly quickly,” he said, “we will continue to see very tight lending conditions, and the unlocking of the credit markets that is essential for securing a recovery will simply not happen.”

Doubts also are being raised about major elements of the stimulus program that would do little to boost the economy. Rather, they appear designed mainly to cater to Democratic special-interest groups, such as environmentalists and teachers.

The House-Senate compromise plan offers $72 billion for spending on state education programs, for example, an area that has not proven to spur growth substantially in the past, while providing only $46 billion for highway and road projects that IHS and other economic think tanks say have the greatest potential to spur growth and jobs.

One of the largest chunks of the package - $87 billion - goes to spending on Medicaid, although health care and education are the only major sectors of the economy that have continued to grow and create jobs throughout the recession. In a bow to environmentalists, the plan also allots $50 billion for energy efficiency and renewable-energy programs that have little proven ability to make a big impact on economic growth, while House-Senate conferees scaled back by half to $39 billion a homebuyer tax break that economists say would have provided a powerful remedy for arguably the weakest economic sector and the one that led the U.S. into recession - housing.

“The stimulus bill may be well-intended, but until the housing crisis is addressed in full force and until the financial sector is fixed - the two are inextricably linked - the market isn’t inclined to think the government will get a quick bang for its [$787] billion bucks,” said Patrick O’Hare of Briefing.com.

Conferees also scaled back tax breaks for purchasing new cars at a time when car sales are at the lowest level in a generation, and apparently replaced those with a special tax break for General Motors, enabling the car company to use its massive losses to get a $3.2 billion rebate of taxes paid in past years. GM’s monumental problems will return to the center of attention Tuesday, the deadline for the automakers to present the Treasury with their plans for staying solvent.

Rather than ease the way for the ailing banking industry, the legislation would pile on a punitive measure making Mr. Obama’s $500,000 limit on bank executive compensation retroactive to any bank that accepted Treasury bailout funds since the fall. And conferees drastically downsized a broad provision that would have helped all businesses recoup losses during the recession and made it available only to small firms with less than $5 million in revenues.

“Industries that were expecting some relief from the federal government probably will be disappointed,” said Brian Gardner, Washington analyst at Keefe, Bruyette & Woods.

The changes are troubling to Main Street businesses and Wall Street.

“It´s great sport for politicians to attack CEO salaries, so-called corporate boondoggles and outrageous bonuses, but that won´t create a single job or put a single American back to work,” said Thomas J. Donohue, president of the U.S. Chamber of Commerce.

He said Congress should have focused its efforts at nursing critical ailing industries back to health, including carmakers, housing, travel and tourism.

But the chamber successfully lobbied for a tax break facilitating corporate debt reduction and restructuring, and decided to throw its support behind the plan.

Adding to the disappointment on Wall Street is the growing view that the stimulus is too late to have prevented the worst effects of the deep economic downturn - including the loss of more than 2 million jobs since September - while its slow spending provisions will take effect a full year from now - when the economy is expected to be in recovery.

“This plan really isn´t going to deliver a power punch of stimulus until about a year from now,” said Jeffrey Kleintop, chief market strategist at LPL Financial. “It’s a long time until we start to see the tailwinds of the stimulus take effect, so that’s going to keep weighing on the market.”

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