As the economy stumbles, will the Fed and Congress dive in to catch it?

House Speaker Nancy Pelosi and Federal Reserve Chairman Ben Bernanke
REUTERS/Joshua Roberts
House Speaker Nancy Pelosi and Federal Reserve Chairman Ben Bernanke at a meeting about the economy on Capitol Hill earlier this week.

What a week — and it isn’t even over. First we had America’s financial giants turning to far-flung investors — from Singapore to Kuwait — to bail them out of their subprime-lending woes. Then Citigroup reported a record $9.83 billion fourth-quarter loss. By Wednesday, we learned that December’s holiday retail sales declined and that the Federal Reserve survey of businesses — the so-called beige book — showed a slowing of the economy, exacerbating worries of recession.

Then, the Associated Press reported, “Separately on Wednesday, more big banks reported losses and said people were having trouble making payments for everything from credit cards to cars. Stocks were mostly down for the day, the Dow Jones industrial average declining 34.95 points, or 0.28 percent. … Fallout from a meltdown in risky ‘subprime’ mortgages continued to sock financial institutions. JPMorgan Chase & Co. and Wells Fargo Inc. both reported Wednesday that their earnings fell — raising fresh fears of a widespread lending crisis.”

The only respite came in a silver-tinged lining; while the Consumer Price Index showed a big gain — 4.1 percent — in 2007, it mostly was in limited sectors, such as energy and food, not across the board. “Investors believe the Fed will continue to focus on cutting rates and keeping us out of recession, because inflation hasn’t gotten out of hand,” Sam Stovall, chief investment strategist for Standard & Poor’s, told The New York Times.

A gold medal?
Experts are looking to two entities for solutions: the Fed and Congress. Bloomberg.com reported that at a congressional hearing on Wednesday former Treasury Secretary Lawrence Summers suggested “that a stimulus of $50 billion to $75 billion is necessary to forestall a pending recession. ‘At this point, I think the preponderance of probability is on a U.S. recession this year,’ Summers said.

“He said Congress will deserve a gold medal if it passes a stimulus bill in the first quarter,” Bloomberg reported. ” ‘A silver medal for legislation in the second quarter,’ he said, and ‘no medal’ for a bill after that.”

Congressional leaders seemed to be going for the gold. According to Reuters, “An economic stimulus package to help stave off recession is on the fast track in Congress after Democratic and Republican leaders in the House of Representatives on Wednesday reached a rare agreement to quickly pull together a bipartisan plan. House Speaker Nancy Pelosi, a California Democrat, said she hoped a meeting of congressional leaders with President George W. Bush on Tuesday would pave the way for quick passage of an economic stimulus package.”

The Los Angeles Times reported today that “senior congressional Republicans said Wednesday they will put aside demands to make President Bush’s tax cuts permanent if that’s what it takes to get quick action on a stimulus package. Democrats, meantime, signaled they too would consider compromises in the interest of fast action, such as reining in some social spending they might otherwise push for and accepting inclusion of business tax incentives in the bill.

” ‘I think there is a way to come to an agreement,’ House Minority Leader John A. Boehner (R-Ohio) said in an interview. ‘Not having an agreement is a lose-lose.’ “

No. 1 issue
The Times added that the White House “has not addressed the issue in detail, but Bush, who has been traveling in the Middle East, is scheduled to hold a conference call today with congressional leaders. In order to avoid a veto, they hope to get his nod in advance on the outlines of a plan that would probably include a $500 rebate check for taxpayers, extended unemployment benefits for the jobless, and incentives for businesses to expand and create jobs.”

Meanwhile, voters in Michigan indicated in exit polls that the economy is their No. 1 concern as unemployment and rising prices pinch their pocketbooks. So watch the Fed and Congress try to perform a tricky balancing act. As the Times put it, “Economists consider the dual ills of rising inflation and rising unemployment to be the worst situation policymakers can face, because the cure for one — increasing fiscal spending or the money supply to spur job growth — can stimulate further price increases.”

Susan Albright, a former editor of the Star Tribune’s editorial pages, writes about national and foreign developments.

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