SUBPRIME - USA

Let the stimulus begin

Tuesday 29 April 2008

If you’re one of millions of Americans squeezed by the credit crunch, the US government has a hopefully reassuring message: the check is in the mail. Or rather, make that 2.4 million checks.

They represent the first batch of cash rebates being sent out by the Internal Revenue Service to American taxpayers as part of George W. Bush’s $168 billion fiscal stimulus plan.
 
The initial dispatch is in the form of direct deposits to bank accounts for those who opted for that type of payment.
 
Checks of the paper variety are to follow shortly.
 
Ultimately, more than 100 million Americans will be privy to a fiscal fillip from the government – with eligible individuals receiving about $600 (or $1200 a couple), and an additional $300 per child under 17.
 
The American consumer is paramount in the world’s largest economy, accounting for two-thirds of its growth.
 
The stimulus plan, approved by Congress amid much ballyhoo back in February, is aimed at kick-starting a US machine that has shown signs of rolling into reverse.
 
The hope is that cash-starved Americans will use the windfall to do something that high food and energy costs, coupled with scarce credit, have discouraged them from doing in recent months: open their wallets, and shop.
 
But whether those hopes will pan out is unclear.
 
According to a recent survey from Goldman Sachs, shoppers are likely to spend some 25 to 30 percent of their rebate cash in short course. But about 60 percent of the cash will go to paying down debt.
 
Skeptics point out that the stimulus is a relative drop in the bucket given the magnitude of the US problems – more than 2 million Americans at risk of losing their homes over the next year, and others grappling with mortgages that cost more than the value of their homes. Falling average incomes and growing ranks of jobseekers are adding to the sense of malaise.
 
Many Democrats were keen to beef up the rebate plan – but acquiesced in order not to be branded as fiscal-stimulus spoilers by Republican opponents. If they have their druthers, a second stimulus plan will be forthcoming – one that includes an extension of jobless benefits, plus more cash for food stamps and infrastructure projects, according to The Wall Street Journal.
 
Proponents of the plan argue that it should be evaluated alongside the rate-slashing activism of the Federal Reserve in recent months. That policy has seen rates plummet by 3% in seven months to a current level of 2.25%.
 
Economists expect the Fed’s governing committee to take borrowing costs down a final notch – to 2% - at the conclusion of their two-day session that begins Tuesday. After that, the expectation is for a rate pause – while the Fed assesses the impact.
 
It generally takes several months for lower rates to percolate down into the real economy. By contrast, extra cash from rebates can be spent immediately – if the recipient so desires.
 
But neither the fiscal stimulus nor the Fed rate cuts take into account broader problems in the American economy that could sabotage any recovery. These include a ballooning national debt and an unpopular war that could cost the economy up to 3 trillion dollars.