Yesterday, US President Obama signed into law the "1,400 pages that nobody reads" - the US$787 billion(Bt27.7trillion) economic stimulus bill called "The American Recovery and Reinvestment Act" (ARRA), the largest financial package since the Great Depression. On the same day, the Dow Jones industrial index dropped almost 300 points or 3 per cent, closing near the worst level since the "Hamburger" crisis of November of last year. Standard and Poor's 500-stock index fell more than 4 per cent, dipping below 800, which analysts said was a significant trading benchmark. Markets in Europe plunged sharply. Even crude oil fell another $2.58 to $34.93, although we in Thailand would not know it; our pump prices have been bucking the trend and edging up steadily.
Things go from bad to worse when it comes to the American industrial sector. The Empire State Manufacturing Survey, the leading industrial output indicator, fell to below minus 34.7 this month, from minus 22.2 in January. Orders for American products dwindled as domestic and foreign consumers face more uncertainty and cut back on consumption.
While it is true that countries around the world realise that this financial pandemic is too big, wide and deep for any single country to tackle and reverse, all eyes are on the US and its ability to lead the world out of the slump. But such hopes might be in vain. The US is in deeper trouble than it thinks, and the mess is broad-based. There is too much debt and too few assets not only in the banking sector but also in the private sector as a whole. Unfortunately, problems with US banks are much more severe than in the rest of the system.
In normal circumstances, if one has too much debt, the right thing to do is sell off assets to pay what is owed. However, the conundrum of massive debt deflation is that if everybody is doing the right thing at the same time (selling assets to pay debts), it induces the spiralling deterioration of asset prices that will result in runaway deflation.
President Obama's economic adviser Lawrence Summers indicates he is aware of this problem and says the US needs to "contain" such an unintended outcome. To address this knotty question, Treasury Secretary Timothy Geithner on February 10 attempted to spell out the administration's four pillars of the banking sector's recovery programme that could cost as much as $2trillion.
They comprise: (1) massive new capital injection into troubled banks that are incapable of surviving, after they undergo a "stress test" by regulators; (2) aggressive expansion of lending by the Federal Reserve with the goal of easing the flow of credits for consumers and small businesses; (3) incentives for the new public-private sector venture to buy "toxic" assets from banks' balance sheets; and (4) incentives to lending institutions that give a haircut on mortgage principle to minimise the threat of foreclosures to homeowners.
After he spoke, the Dow plunged.
The much-awaited financial recovery plan was extremely vague in its practical details and left everyone trying to figure out where the administration is really going. It prompted some critics to opine that the imprecision was intentional, as Geithner himself must have known the plan was unworkable.
Obama's ARRA, on the other hand, has a little bit of everything for everyone and contains much of what he promised during the campaign and in his public pronouncements leading up to the passage of the bill. Among other things, it provides for income tax credit, waivers for tax, health insurance that employees can keep for 18 months after losing their jobs, a refundable tax credit for social security, auto tax deduction, increased grants for low-income students, and first-time home-buyer credit. It also contains a massive public works programme a la John Maynard Keynes.
But the programme is so laden with special interest pork barrel that would make Keynes turn over in his grave. After all, he said there were good stimulus investments, and there were bad ones. He contended that the good ones are capable of booting the economy out of the debt trap; the bad ones will be a waste.
Sure, $787 billion sounds like a huge sum, but at the end of the day it is hardly adequate. The Congressional Budget Office predicts that over the next three years the gap between what the economy can produce and what it will actually produce will be in the neighbourhood of $ 2.9 trillion - hardly a hole that can be filled. To put things in further perspective, the US already has spent over $ 1 trillion in Iraq and counting.
In addition to the economic challenge, the Obama administration is also faced with an enormous political hurdle. The stimulus package was voted along party lines and is considered a Democrat undertaking rather than bipartisan legislation. As such, the success or failure of the package will rest squarely on the shoulders of the administration and, by extension, the party.
Everybody seems to concur that there is no silver bullet to end this crisis and the "D" word (as in the "Great Depression" is popping up here and there. It is unrealistic and unwise to expect America to pull the world, let alone itself, out of the deep end in a speedy, effective and efficient manner. Americans, as well as everyone else, seem to be at their wits' end.
If this reality does not jolt all the back-biting parties here at home out of their usual destructive ways, it will be dreadful to imagine our collective future.