In further proof that the government is trying to spend it’s way out of the current financial crisis, the federal reserve chief – Ben Bernanke – signaled his support for a second round of fiscal stimulus’. The usual fear mongering lines of “dire consequences”, “grave doubts of our future” and “protracted slowdown” were used to justify his position. Given support for this type of proposal from the Democratic led congress and (probable) incoming democratic president, it is likely that the additional spending measures will get approved.
This stimulus package is to be targeted at infrastructure spending, aid to states, food stamps and jobless benefits. However, no specifics have been decided and it is up to congress to determine the structure of fiscal stimulus actions (the Fed is responsible for monetary policy). The only one that I agree could provide a real long term economic boost/return is infrastructure spending. But it could take years for that to take effect. Politically and for a short term boost, state aid and money in the hand of consumers is the most likely form of stimulus that will be provided. So expect to see a nice Christmas bonus from Uncle Sam, which you will be encouraged to spend at your nearest mall.
I am a supporter of fiscal stimulus to drive growth, but the government has got so many initiatives on hand with a seemingly myopic view that I question how many of these programs will actually work. For example an earlier direct to consumer $50 billion stimulus package, provided a lift to consumer spending of 0.4 percent in May, but dried up after that. Similarly the 2008 housing relief bill did not save the housing market or GSE’s – Freddie and Fannie. Despite being politically popular, both examples of fiscal action failed miserably. With the floodgates of government spending opened, it is likely that our financial chiefs and lawmakers will keep on coming back for more. We are essentially spending away our futures to save the political and financial backsides of those people who got us into this mess in the first place. We keep printing money and adding to our national deficit at such an alarming rate, that we are setting ourselves up for hyper-inflation in the years to come. Oh yes, we also have an impending recession to look forward to.