The new Obama administration has unveiled an extra package of some $2trillion with the aim of saving the US banking system from total collapse. The Treasury Secretary (Timothy Geithner) set out the dire position in very plain language:
"The US was in the midst of its worst economic crisis in generations with a challenge more complex than any our financial system has faced".
Such a pessimistic view has inevitably spooked the financial markets with the Dow Jones falling sharply as a result. Indeed the index fell 200 points during the 30 minutes of the speech! This can be hardly the response he was hoping to see.
The need for such a comprehensive package of measures was re-enforced by the latest US employment figures which were released last Friday. They showed that almost 600,000 jobs had been lost in January 2009. This resulted in the unemployment rate hitting 7.6% which is the highest in 17 years. (if you want to see the significance of this data see Article 17, page 118 of my book).
The Obama package includes:
1) Plans to buy from the US banks billions of dollars worth of their so caled "toxic" assets. These are the mortgage backed securities and other high risk derivatives.
2) Extra resources will be used to try to keep homeowners in their properties.
3) The US Treasury will use $1trillion to guarantee loans from high street financial institutions to help finance cars, mortgages and various other projects.
The reaction to the Obama package has been mixed. Some feel that the latest bail out plans are too little too late. Indeed it has been estimated that even with this extra effort we could see up to 1000 US banks fail over the next 3-5 years. These are indeed worrying times!
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4 comments:
thanks kevinfor an informative article.but one thing i would like to plz know from you is that if these stimulus packages wouldnt work then what could happen.secondly is there any historic evidence when crisis like these are avoided through these packages.
It would be very easy to speculate on the dire consequences of the latest fiscal package failing to work. In short the US economy would be heading into a deep recession with millions more people losing their jobs. We just have to hope that this does not happen. There can be no historical evidence on the impact of such packages as the scale of the Obama spending plans has never been tried before. We are living in very unusual times
thanks kevin
President Obama himself cautioned that the stimulus package itself is not a magic pill. For the package to work and stimulate the economy, it needs to get peoples confidence.
The tax cuts in the package would result in immediate benefits for middle income earners. Other measures to improve healthcare, education and infrastructure will result in saving and creating millions of jobs. This hopefully would result in them gaining confidence and start spending more again. This means more aggregate demand and more employment creating a multiplier effect in the economy.
The question however is again, would the stimulus package work? The markets are still falling and no one knows what is going to happen next.
Injecting billions of dollars into the economy, can it be the real solution for the problem? are there no other ways to encourage consumers to increase their spending? Couldn't the government have ways to encourage businesses (such as reducing tax paid by them) to hire more and discourage firing them which will result in less unemployment?
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