Second Economic Stimulus Plan Gets Bernanke Blessing

Federal Reserve Chairman Ben Bernanke early Monday signaled his support for a second stimulus plan that could inject as much as $150 billion — one percent of the gross domestic product — into the economy.

Bernanke’s support may give momentum to legislation currently in Congress that would stoke the economy as the impact of the February $168 billion plan fades.

Democrats are pushing for the plan to include provisions such as new temporary tax breaks; money for roads, bridges and other infrastructure projects; aid to cash-strapped state governments; and funds for food stamps and unemployment insurance. Last month, the House passed a $61 billion bill with some of these measures, but it died in the Senate.

Bernanke told the House Budget Committee that the country’s dire economic condition could last for a while, and that this was the right time for Congress to consider a new plan.

In prepared testimony, Bernanke told the panel, "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."

This is Bernanke’s second endorsement of a stimulus plan this year, but his first endorsement of a second stimulus.

The White House said Monday that President Bush was willing to consider it.

White House spokeswoman Dana Perino noted that the Bush administration is "open to ideas that would stimulate the economy and help us pull out of this downturn faster." She said that any idea would be eligible for consideration only if it actually stimulated the economy.

Bernanke also said that any new plan should be timely, temporary and targeted.

Suggestions made Bernanke included measures to improve access to credit by consumers, home buyers, businesses and other borrowers. He also suggested that credit could be supported with loan guarantees, tax credits or direct lending.

Brookings Institution Senior Fellow Martin Baily told The Fed that the plan should be doubled, because the possibility of a severe recession was high, with GDP falling four percent yearly for the next two quarters and unemployment not decreasing until 2010.

Even though Bernanke said that stabilization of the housing markets and a second stimulus program will help the economy, the new plan would likely face distrusting businesses and money-strapped consumers; a Catch 22 as businesses are reluctant to hire and boost capital investments and consumers are spending less and watching their finances more.

Any plan agreed upon wouldn’t be enacted until after the Presidential election on November 4.

The Federal Deposit Insurance Corp. is also temporarily guaranteeing new issues of bank debt, in which money is fully protected even if the institution fails.

According to Associated Press, the FDIC said it would provide unlimited deposit insurance for non-interest bearing accounts.

Also the Treasury last week announced it would inject $250 billion in taxpayer funds to private banks for partial ownership (“Financial Markets React to Intervention; U.S. to Take Stakes in Banks,” Oct. 14).

Treasury Secretary Henry Paulson said Monday the capital-injection program has enough funds to support every financial company that qualifies.