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Bush, Bernanke give nod to new stimulus

October 20, 2008 3:05:37 PM PDT
Momentum increased Monday for a new economic stimulus package to help cash-strapped Americans as President Bush and Federal Reserve Chairman Ben Bernanke threw their weight behind an idea they earlier opposed.Press secretary Dana Perino told reporters on Air Force One as the president flew to Louisiana on Monday for an economic event that the White House will have to see what kind of package Congress crafts. Perino says the administration has concerns that what has been put forward so far by Democratic leaders in Congress would not actually stimulate the economy.

Earlier Monday, Bernanke told the House Budget Committee the country's economic weakness could last for a while and it was the right time for Congress to consider a new package. Earlier this year, most individuals and couples received tax rebate checks of $600-$1,200 through the $168 billion stimulus package enacted in February.

"With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," Bernanke said in prepared testimony tll for a sixth straight day Monday.

The London interbank offered rate, or Libor, for three-month dollar loans fell 0.36 percent to 4.06 percent, the biggest daily drop since January.

Bernanke said the package also should include provisions that would help break through the stubborn credit clog that is playing a major role in the economy's slowdown.

"If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers," Bernanke said. "Such actions might be particularly effective at promoting economic growth and job creation," he added.

The Fed and the world's other major central banks recently joined forces to slice interest rates, the first coordinated action of that kind in the Fed's history. The central bank meets next on Oct. 28-29 and many economists believe Fed policymakers will again lower its key rate - now at 1.50 percent - to brace the wobbly economy.

Over time, "stimulus provided by monetary policy" along with the eventual stabilization in housing markets and improvements in credit markets will help the economy get back on firm footing, Bernanke said.

Dropping rates might induce consumers and businesses to boost their spending, an important ingredient to energize overall economic activity.

So far, though, a string of drastic actions by the Fed and the Bush administration has yet to turn around a bunker mentality.

Banks fear lending money to each other and to their customers.

Businesses are reluctant to hire and boost capital investments.

Consumers have hunkered down. All the economy's problems are feeding off each other, creating a vicious cycle that Washington policymakers are finding difficult to break.

One-third of Americans are worried about losing their jobs, half fret they will be unable to keep up with mortgage and credit card payments, and seven in 10 are anxious that their stocks and retirement investments are losing value, according to an Associated Press-Yahoo News poll of likely voters released Monday.

Unemployment could hit 7.5 percent or higher by next year. Many analysts predict the economy will shrink later this year and early next year, meeting the classic definition of a recession. Some believe the economy already jolted into reverse during the July-to-September quarter.

Last week, the Treasury Department announced it would inject up to $250 billion in U.S. banks in return for partial ownership, something that hasn't been done since the Great Depression. The government hopes banks will use the capital infusions to rebuild their reserves and bolster lending to customers.

Treasury Secretary Henry Paulson said Monday that government purchases of stock in banks represent an investment that should eventually make money for the taxpayer.

So far this year, 15 banks have failed, including the largest U.S. bank failure in history, compared with three last year. And Wall Street's five biggest investment firms were swallowed by other companies, filed bankruptcy or converted themselves into commercial banks to weather the financial storm.

In other efforts to stem the crisis, the Federal Deposit Insurance Corp. is temporarily guaranteeing new issues of bank debt - fully protecting the money even if the institution fails.

The FDIC also said it would provide unlimited deposit insurance for non-interest bearing accounts, which small businesses often use to cover payrolls and other expenses. Frequently, these accounts exceed the current $250,000 insurance limit, so the expanded insurance should discourage nervous companies from pulling their money out.

The United States and other top economic powers also have adopted a five-point action plan and pledge to do all they can to provide relief.


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