My New Blog

Washington, taking a page out of Hollywood, looks set to release Stimulus 2, the sequel.

And unhappy, tapped-out taxpayers—aka voters—may get a sneak preview of the second fiscal package as soon as next week if lawmakers return to Washington for a lame-duck session under the eye of a newly elected President.  

Critics and supporters alike, however, should hope that the next fiscal stimulus package is more of a commercial success than its predecessor, lest another big-budget flop be tacked on to the ever-growing federal debt.

For the Investor:

• Quick! Rush Back to Stocks
• Five Stocks to Fight Recession
• Cramer: Stop Hating Infrastructure
• Stock Picker: Look For Cash — Lots Of It
• What Buffett Does Is 'Simple, But Not Easy'
• Pros Say: Credit Cards May Be a Problem
• Finally Time to Buy Airline Stocks

“It has to be done in a way where you get a good rate of return,” says Tom Schatz, president of Taxpayers Against Government Waste. “What can we do that will work, not how much can we spend and where can we spend it?”

The hastily conceived $168-billion stimulus package quickly signed into law last February was built around tax breaks for business and tax rebates for consumers, whose impact on the economy was fleeting, at best.

This time around—with recession a reality not a perception and consumer confidence at a record low—the package may be bigger and broader. But that doesn’t mean it will be any wiser or more likely to leave a lasting impression on the nation’s economy or psyche of consumers.

If anything, it may be the mother of all stimulus packages.

“There's a political element, Wall Street got its bailout now everyone needs to get something,” says Robert Bixby, executive director of the Concord Coalition, which advocates fiscal responsibility.

In its recent nine-point prescription for sound fiscal policy, the coalition joined a growing chorus of groups calling for a balancing of short-term stimulus and long-term discipline, noting that spending patterns are already unsustainable and new revenue will needed

Thus far, Congress seems to be heeding another call: reaction, not action.

“It’s a pretty dangerous process the way its been approached so far," says Brandon Arnold, who follows public policy for the Cato Institute. Members of Congress, he adds, seem to “setting a figure before considering what is needed.”

The original price tag was about $60 billion package, but it wasn’t long before it was $150 billion, then $300 billion was thrown around.

Given the current state of the economy, $300 billion would be equal to about 2 percent of GDP. Though that’s a relatively small sum compared to the federal government’s extraordinarily expensive efforts to  shore up the financial sector, its larger than most recent stimulus packages.

In 2001, the tax rebate portion of Bush Administraion's long-term tax-cut legislation totaled just $38 billion.

President Clinton’s unsuccessful $30 billion plan in 1993—proposed, it later turns out, after the recession had ended but while joblessness continued to rise—was rejected by Congress.

Economist Steve Hanke, a professor at Johns Hopkins University and a fellow at Cato, says that—in the context of the federal government’s “serial spending spree” of bailouts and stimulus packages—“$300 billion sounds like chicken feed."

The high likelihood of more money this time also increases the possibility of a bigger shopping list.

“There doesn't seem to be as much consensus about its makeup as there as there was for the one they did in January,” says Bixby.

That makes it even more vulnerable to political horse-

trading and lobbyists.

"There is such a populist mentality out there,” says Arnold “The need to give something back to the people. It’s much easier to cobble something together by adding more things.”

Arnold says lobbyists are already lining up with their suggestions.

“They need to see what's worked in the past and not turn it into pork-laden legislation,” agrees Schatz.

Demand for U.S. mortgage applications climbed last week from a nearly eight-year low, while borrowing costs dipped, a trade group said on Wednesday.

The Mortgage Bankers Association's seasonally adjusted mortgage applications index, which includes both purchase and refinance loans, increased 16.8 percent to 476.7 in the week ended Oct. 24, reversing the prior week's 16.6 percent slump to the lowest reading since December 2000.

Requests for applications to buy homes as well as refinance mortgages increased last week after posting similar declines the previous week.

AP

The trade group's seasonally adjusted purchase index rose 8.5 percent to 303.1 after falling 10.9 percent the prior week, while its refinancing applications gauge jumped 28.5 percent to 1,489.4 following a 23.5 percent downturn.

Average 30-year mortgage rates dipped 0.02 percentage point last week to 6.26 percent. The rate has risen as high as 6.59 percent during the summer but was as low as 5.49 percent in January, according to the Mortgage Bankers Association.

The upturn in demand for applications comes amid mostly disheartening signs about the health of the U.S. economy and housing.

ome prices in August were nearly 22 percent below their peak in June 2006, according to a Standard & Poor's/Case-Shiller Home Price Index reported on Tuesday.

The worsening global financial crisis intensified anxiety about employment and pessimism about the future, meantime, sent U.S. consumer confidence plummeting to a record low this month, the Conference Board said on Tuesday.

A deep recession would mean prolonged housing weakness, analysts contend. House prices are generally seen sliding another 10 percent.

WASHINGTON – An impatient White House prodded banks and other financial companies Tuesday to quit hoarding billions of dollars flowing into their vaults from Washington and start making more loans. Wall Street soared nearly 900 points on bargain-hunting and hopes of a hefty interest rate cut by the Federal Reserve.

The stock market's amazing climb, with its second-largest point gain ever, was a welcome burst of good news for a nation suffering big job losses and seemingly tumbling into a painful recession.

Consumer pessimism reached record levels in October amid rising unemployment, plunging home prices and shrinking retirement and investment accounts. The Conference Board, a private research group, said consumer confidence fell to its lowest point since it began tracking consumer sentiment in 1967.

Hoping to thaw the credit freeze that has chilled the economy, the Bush administration sent banks an unmistakable message to put aside fears and open up loan windows for cash-starved businesses and consumers who have pulled back on spending.

"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said. While there are limits to Washington's power to affect banks' behavior, the White House decided it was time to use its bully pulpit.

"They (regulators) will be watching very closely, and they're working with the banks," Perino said.

Washington has pumped money and confidence-building measures into the system over recent weeks to get lending, the lifeblood of the credit-dependent American economy, flowing freely again and to combat the worst financial crisis since the 1930s. So far, though, it has not worked. While the crucial and much-watched short-term lending rate called the London Interbank Offered Rate, or Libor, has come down, it remains at elevated levels.

On Wednesday, the Federal Reserve is expected to announce a cut in its fed funds rate — and Wall Street is looking for a drop in the key interest rate by half a point to 1 percent.

At the center of the administration's efforts to thaw credit is the $700 billion financial bailout plan approved by Congress and signed by President Bush earlier this month. Under that law's authority, the administration is doling out $250 billion to banks in return for partial ownership.

The Treasury Department, which is overseeing the massive capital injection program along with the rest of the bailout, will pour $125 billion into nine of the country's largest banks, which account for 50 percent of all U.S. deposits. Anthony Ryan, Treasury's acting undersecretary for domestic finance, said the first payments went out Tuesday. An additional $125 billion will start flowing to other banks within days, he said.

"As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the U.S. economy," Ryan told the annual meeting of the Securities Industry and Financial Markets Association. "It is in a strengthened institution's best financial interest to increase lending once it has received government funding."

Rep. Henry Waxman, D-Calif., chairman of the House Oversight Committee, asked the banks getting the $125 billion to detail what they are paying their executives and employees, including bonuses.

"I question the appropriateness of depleting the capital that taxpayers just injected into the bank through the payment of billions of dollars in bonuses, especially after one of the financial industry's worst years on record," Waxman said.

The infusion of federal money is to rebuild banks' battered capital reserves so the institutions would feel comfortable resuming more normal lending practices. But that confidence was undercut somewhat when reports surfaced that bankers might use the money to buy other banks. Indeed, the government approved PNC Financial Services Group Inc. to receive $7.7 billion in return for company stock on Friday and, at the same time, PNC said it was acquiring National City Corp. for $5.58 billion.

There is little federal officials can do about it. There is no language in the bailout bill that specifically obligates banks receiving money to increase their loans. Officials had argued that attaching strings to the capital-infusion program would discourage financial institutions from participating.

"The way that banks make money is by lending money," Perino said. "And so they have every incentive to move forward and start using this money."

Other credit-loosening efforts have included:

A Federal Reserve program, begun Monday, to purchase the short-term debt of businesses, known as commercial paper.

Temporary guarantees by the Federal Deposit Insurance Corp. of new issues of bank debt fully protecting the money, for a fee, even if the institution fails.

Emergency loans from the Fed for financial institutions and even other types of companies. The Fed has been repeatedly tapping this Depression-era authority to be a lender of last resort.

New temporary federal guarantees to assets held in money market mutual funds as of Sept. 19 but not since then.

A temporary increase in the cap on deposit insurance from $100,000 to $250,000 on interest-bearing accounts, and unlimited deposit insurance for non-interest bearing accounts, which small businesses often use to cover payrolls and other expenses and which frequently exceed $250,000.

The Fed's half-point reduction in its target interest rate on Oct. 8, done in conjunction with rate cuts by other central banks around the world.

Meanwhile, layoffs continue. Whirlpool Corp. said Tuesday it will cut 5,000 jobs. That's on top of other recent layoffs of thousands of workers by Xerox Corp., drugmaker Merck & Co. Inc. and financial services firm National City Corp.

Ten tips to avoid repossession