Economic Stimulus Plans and Progress

In threatening economic times, government policy may help to avoid a recession or to reduce the impact of slowing growth.  While markets have focused on Fed policy, the issues are not all within the scope of Fed powers.

Ben Bernanke has been meeting with Administration officials and Congressional leaders.  Tomorrow he will testify before the House Budget Committee.  He is expected to endorse some kind of fiscal stimulus package to accompany the Fed’s interest rate reductions.

It is important that public officials restore confidence in economic leadership.  Otherwise, the worry about a recession could become a self-fulfilling prophecy.  Here is a review of action so far and what else might be on the menu.

The Good

The Fed has attacked the problem in the traditional way, by cutting interest rates.  While many question the pace of the cuts, it has been a pretty rapid series of moves, beginning while data still showed solid growth.  This is earlier action than in past recession threats.

The Fed has also instituted the TAF facility, accepting a wider range of securities as collateral from a broader range of financial institutions.  Both David Merkel and Greg Ip, while observing some eventual risks, note the success of the policy in reducing LIBOR and the TED spread.  In our view the biggest problem with this policy is that many people never really understood it, complaining that the new form of lending did not provide permanent liquidity.  We originally gave the Fed a "B-" on this plan, but the expanded auctions have done the job well.  It is too bad the Fed did not introduce and explain the plan more effectively.  It should have been part of the December rate policy announcement.  The market lost confidence in the Fed at exactly this point.

Finally, Congress and the Administration cooperated in fixing the tax code so that homeowners getting mortgage forgiveness of various sorts would not be taxed on the adjustments.

The Hopeful

There is now plenty of support for some sort of fiscal stimulus package.  There are various plans, but nearly everyone agrees on the need for action.  We think that a compromise will emerge.  An excellent report from the Congressional Budget Office provides a scorecard for considering the impact of various proposals.  The CBO provides non-partisan policy research  for Congress.  It does excellent work, and the report covers a wide range of alternatives.

Among other items, it considers the possible impact of broad proposals like those we cited in our "fantasy State of the Union Address."   These include government purchase of distressed securities to restore the normal market function.

The Dubious

One highly-politicized issue is the role of Fannie and Freddie in restoring normalcy to the mortgage market.  These Government Sponsored Entities (GSE’s) have been a GOP target for years, especially after the accounting issues of a few years ago.  The GSE’s are seen as unfairly competing with private enterprise.

We believe that housing progress requires an increase in the conforming loan limit from the current $417,000.  This would reflect actual pricing in much of the country.  The House has passed such a bill.  A temporary increase has been endorsed by both Bernanke and Treasury Secretary Paulson.  Despite this, a story from the Treasury Department today stated that any increase in the limits must be part of a comprehensive reform package.  This insistence would probably kill the change.  Stocks sold off sharply after this story hit the wires.

How this issue is treated will be a good early indicator of whether bipartisan action is possible.  While we expect and hope for the best, there is the possibility that election-year posturing could scuttle any plan.


Governments are better at using existing tools rather than building new ones.  That is why we expect an expanded role for Fannie Mae (FNM) as part of any solution.  We wrote about this last September, establishing a position at 29 (which we still hold).

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  • Bryan Wendon January 17, 2008  

    Hi Jeff, I thought you were bullish about the possibilities of avoiding a recession? Now I see you’re calling for a Marshall Plan for the US! What gives?
    Nonetheless, I like the different perspective that your blog offers and I can’t argue with campaigning for government intervention to sure up a stock that you own. I’ve got lots of stocks that need that kind of help at the moment.

  • Assissotom January 17, 2008  

    Very good site. Thank you!!!

  • Jeff Miller January 17, 2008  

    Bryan –
    Good question. First, I do not recommend public policy because I have a stock position. I choose stocks that I expect to benefit from what I see happening. In the case of FNM, I could just sell and move on — happily with a profit.
    The economic data, as I have observed, are not in recession ranges, although the dating process — well that is a future article.
    Despite this, there is a danger coming from a crisis of confidence. It comes from a drumbeat of commentary about recession chances, poor understanding by individual investors, and the apparent verification of the stock market.
    It is a classic time for strong leadership. The actual plan I described is more of a scorecard to let us watch with a little perspective.
    Thanks for your comment.

  • Bryan Wendon January 18, 2008  

    Jeff, thank you very much for the reply. You did indeed make an excellent call on FNM and I should have acknowledged that.
    When you have time, it would be great to hear more about applying public policy ideas on agenda setting to the markets. You have mentioned its potential in the past. The work done by people like Frank Baumgartner, Bryan Jones and John Kingdon seems to offer new ways understanding and predicting major changes in markets.

  • Jeff Miller January 18, 2008  

    Bryan –
    I do plan to work more on agenda setting, and I am collecting cases.
    By the way, John Kingdon was one of my favorite professors in grad school and a member of my dissertation committee.
    Thanks for encouraging me on this path.