What's left in Uncle Sam's economic tool kit? The commitment of $700 billion didn't impress markets here and around the world. Neither did fresh interest-rate cuts. The government still has some unused options, but they are dwindling and generally involve partly taking over private companies, an idea that's anathema to a number of Americans.
SAN FRANCISCO — Could it be just a year ago that jubilant investors were celebrating record highs in the stock market?
It almost seems inconceivable now as both Wall Street and Main Street stare into a seemingly bottomless pit of despair that has swallowed up $8.3 trillion in shareholder wealth during the past 366 days.
The quarterly 401(k) statements that are starting to arrive in the mail will only serve as another grim reminder of the carnage. And it has gotten worse since the quarter ended in September, with the Dow Jones industrial average tumbling every day so far this month.
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“We aren’t dealing with a fundamental economic issue any longer,” said James Paulsen, chief investment strategist for Wells Capital Management. “We are dealing with fear. And that doesn’t respond to economic medicine.”
That hasn’t stopped the U.S. government from trying to find a remedy.
But what’s left in Uncle Sam’s economic tool kit?
The commitment of $700 billion didn’t impress markets here and around the world. Neither did fresh interest-rate cuts.
The government still has some options — like buying up foreclosed properties and making direct loans to homeowners — that might ease the credit and housing crises and brighten the economic outlook.
But the options are dwindling and generally involve partly taking over private companies, an idea that’s anathema to a number of Americans.
The Fed’s primary tools are lowering interest rates and flooding the system with money. It’s already done plenty of both.
It could further lower interest rates — and probably will if the downturn continues. But after this week’s half-percentage-point cut, coordinated with other nations’ central banks, there isn’t a whole lot lower to go.
Since September 2007, the Federal Reserve has pushed its benchmark short-term rate down to 1.5 percent from 5.25 percent.
The Fed presided over by Alan Greenspan kept interest rates at 1 percent for a full year earlier in the decade — but Japan’s holding rates near zero for years did little to help a deeply troubled economy.
The Fed could inject more money. But it has already flooded the financial system with hundreds of billions of dollars.
And bold action can have unintended consequences, signaling to investors that things may be worse than they thought, contributing to the downward spiral in markets.
Apart from the Fed, Congress last week enacted a bailout package backed by up to $700 billion in taxpayer money, on top of a $300 billion housing package passed in the summer.
Treasury Secretary Henry Paulson says it will be weeks before the government starts using the bailout money to buy up soured mortgage-based securities.
His department is considering using some of the money to take part ownership in certain U.S. banks. But that could put the government in the uncomfortable position of regulating banks in which it is also an investor.
Many economists say that actions so far do little to address what is at the heart of the spreading financial contagion: falling housing prices and rising foreclosures.
Former Bush administration economist Glenn Hubbard proposes that the government refinance every U.S. mortgage held by Fannie Mae and Freddie Mac into 30-year loans fixed at 5.25 percent.
Hubbard, now dean of the Columbia University Graduate School of Business, also suggests that putting in place a cleanup agency modeled on the Resolution Trust Corp. (RTC) of the late 1980s and early 1990s could help.
The RTC was created to deal with the savings and loan crisis. The government took over more than a thousand failed S&Ls, and all their assets. It wound up owning foreclosed homes and other property, eventually reselling them.
It took six years to clean up that mess. The total cost to taxpayers: about $125 billion.
Economist Rob Shapiro, of NDN, a think tank formerly known as the New Democratic Network, said that so far the Fed is “putting as many fingers as it can in the dike” without stemming the flood. He said the government should consider direct government loans to homeowners facing foreclosure.
“There are a range of proposals out there. The focus of the administration and Congress on Wall Street to the exclusion of homeowners is very economically and politically myopic,” said Shapiro, a former economic adviser to President Clinton.
World Bank President Robert Zoellick suggested greater coordination with other major economies. For starters, he says, the Group of Seven club should be expanded.
In addition to the current members — the United States, Japan, Germany, Britain, France, Italy and Canada — membership might include Brazil, China, India, Mexico, Russia, Saudi Arabia and South Africa, Zoellick said.
Asked what tools the government has left, White House press secretary Dana Perino said, “They have a whole range of new tools from … all sorts of technical terms that I do not know.
“But they’re working very hard. And Neel Kashkari will be in charge of that. He’s setting up shop and trying to hire as many people as possible.”
Kashkari is the interim head of the program that will oversee the $700 billion bailout.