Stimulus Strategy

The United States Senate approved a $838 billion stimulus bill on the same day US Treasury Secretary Timothy Geithner unveiled another $2 trillion plan to shore up US banks.

Instead of a relief rally, the global financial markets fell on scepticism the Secretary Geithner’s plan would work. Just like the earlier $700 billion Troubled Asset Relief Programme, of which only $350 billion was spent, the new bank rescue plan is awfully 
short on details on how the banking system
 will be resurrected.

The size and scope of his plan, however, does raise the question of solvency of many American banks. Thus far, the US government together with the Federal Reserve has pledged over $8 trillion to prevent the economy spiralling into depression, almost all of it on strengthening the balance sheet of financial institutions saddled with toxic debt. All attempts at this stage have failed to re-start the credit system.

The US is caught in a vicious cycle. With raising unemployment and home foreclosures, the banks are bracing for more loan defaults and hence are unwilling to lend. The resultant credit freeze has forced many businesses into retrenching employees or shutting down. It might take even more money and time to break this cycle and get the banks functioning again. The new administration has tough choices ahead, especially on the financial front. Perhaps the administration should simply let go the weak banks and start afresh with healthy ones. Throwing trillions of dollars into the financial black hole and hoping for a miracle to occur might not be the best option. After all, this strategy has been used on for almost two years now. The world is getting increasingly weary, too.

The willingness shown by the Congressional leaders from both sides to quickly reconcile the differences between the Senate bill and the $819 billion House version is a welcome step. As most of the money would be spent on building public infrastructure such as roads and schools, it is bound to have a powerful impact on stabilising local communities by generating employment. This will prop up the sagging real economic activity. And bring back some consumer 
confidence as Americans start feeling secure about their jobs.