Economy & Trade, Financial Crisis, Headlines, North America

ECONOMY-US: Congress Gives a Nod to Anxious “Main Street”

Adrianne Appel

BOSTON, Oct 31 2008 (IPS) - U.S. consumers are in no mood to spend, and that calls for action, Congress and the George W. Bush administration said this week.

Economic indicators released Thursday show that the economy, as measured by the Gross Domestic Product, slowed to a crawl during the summer, largely because people and businesses did not spend. The GDP grew at .3 percent July through September, far less than that of a robust economy and the worst in seven years.

This is to be expected, said Nouriel Roubini, economics professor at New York University, appearing before the congressional Joint Economic Committee.

“The condition of the U.S. consumer is very strained,” he said. People are worried about losing their jobs and are paying high mortgage rates.

“The lack of debt relief to distressed households is the reason why this financial crisis is becoming more severe and the economic recession worsening,” he said.

Roubini believes the U.S. has been in a recession since January 2008, and will remain in one for another 18-24 months.

“When it quacks and walks like a recession duck it is a recession,” Roubini said. “This is likely to be the most severe recession the United States has experienced in a number of decades.”

Jobless claims for this past week were 479,000, according to the Bureau of Labour Statistics, indicating higher than normal average unemployment nationwide.

The Federal Reserve cut its interest rate to 1 percent on Wednesday, the interest it charges to central banks to borrow.

Though business is slow for many companies, Exxon Mobil announced that its profits during the summer months rose 58 percent.

Ed Lazear, chair of the Bush administration’s Council of Economic Advisors, said the administration stands by its decision to spend 700 billion dollars on banks and financial institutions as a way to boost the economy.

“Our feeling is with 700 billion dollars, that is a significant sum of money. It will do the job but it will take some time. We don’t think we should be reacting to every minor problem that comes along,” Lazear said. “We’re confident we’re doing things to move us in the right direction.”

The Bush administration is reportedly considering using 50 billion of the U.S. Treasury’s 700-billion-dollar bailout fund to help slow home foreclosures. The government would guarantee certain mortgages if the lender agrees to lower interest rates. The government would pay the banks for any mortgages that do end up in default, according to press reports.

Sheila Bair, chair of the U.S. Federal Deposit Insurance Corporation, made the proposal to Bush. Her agency has provided no details.

“We have millions in danger of losing their homes, good people with jobs, who pay their taxes and look after their kids. They want to stay in their homes. There is a direct link between these people and the global crisis,” Bair said. “They can’t make their mortgage payments.”

“Everyone in Washington now agrees more needs to be done for homeowners. A new programme would provide incentives to lenders to modify loans,” she said.

White House press secretary Dana Perino declined Thursday to speak about the proposal. She told reporters that the 700 billion dollars, so far directed at the nation’s largest banks and financial institutions, is designed to help consumers and small businesses.

“We’re not in a position to announce anything imminent. We’re in the middle of analysing different proposals,” she said.

Both the Senate and the House, meanwhile, have held numerous hearings in the past couple of weeks focused on the need for new spending that would be directed to job creation and social programmes. The House passed such a plan Sep. 26 but it failed in the Senate, due to a lack of Republican support.

House Speaker Nancy Pelosi,a Democrat, is calling on Republicans to reconsider the plan in the Senate.

“The legislation creates and saves jobs by rebuilding our nation’s infrastructure for long-term economic growth, extends unemployment benefits, expands food assistance to ensure American families who are struggling have access to nutritious meals, and helps states struggling with budget shortfalls meet the health care and education needs of millions of Americans,” Pelosi said.

However, it will likely take more than Pelosi to convince Senate Republicans to pass a plan with billions in new spending. If passed, Bush must sign it, another uncertainty.

At the Joint Economic Committee hearing Thursday, Republican Rep. Kevin Brady was sceptical of the Democrats’ idea to spend billions.

“I question whether overspending our budget by 650 billion dollars is good for our economy,” Brady said. His Senate colleague, Sam Brownback, also has been staunchly opposed to new spending.

Richard Vedder, an economist and visiting Scholar at the neoconservative American Enterprise Institute, expanded on the concerns of some Republicans on the panel, and argued that tax cuts would do more to jumpstart the economy.

“I’m concerned that an overzealous Congress will make the situation worse,” he said. “Fiscal stimulus doesn’t promote economic recovery.”

Vedder said that using federal funds to begin roads and bridge construction is not an effective way to stimulate the economy in the short term. On average, it takes four years or more for such projects to get underway, he said.

Vedder said he didn’t agree that the economy was in a recession. But, “The economy must be in trouble for the Joint Economic Committee to have a hearing one week before the election,” he joked.

Roubini recommended the Congress authorise 400 billion in dollars spending on roads, alternative energy, food stamps and other programmes.

“It needs to be done right away. Three months from now the collapse in spending will be so sharp, it will be too severe to help,” Roubini said.

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