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In Katrina's Wake, a Wave of Greenbacks

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Sunday, September 18, 2005

As floodwaters continued to be pumped out of New Orleans, a flood of dollars began to flow in, as President Bush vowed to rebuild a stronger city less divided by race and class.

"As we clear away the debris of a hurricane, let us also clear away the legacy of inequality," he said at a prayer service Friday in Washington.

The night before, in a televised speech from the city's French Quarter, Bush sketched the outlines of an unprecedented federal relief and rebuilding effort. The biggest expenses will include extended unemployment insurance and Medicaid coverage for those who lost jobs, temporary homes and housing vouchers for those who have no place to live, and school vouchers for displaced students. Billions more will be used to clear debris and toxic residue and rebuild roads, schools, utilities and other public infrastructure.

The president will ask Congress to declare the entire Gulf Coast region one big enterprise zone, qualifying for subsidized loans and tax breaks for investment and hiring. And in addition to dispatching legions of its own workers to process the paperwork, oversee the massive rebuilding effort and ensure that the billions are well spent, the government will contract thousands of private-sector workers to help them out. An estimated $200 billion in federal spending could be augmented by $60 billion in insurance payments and tens of billions of investment by individuals and firms.

With so much money to be spent in such a short period of time -- and so much of it borrowed from overseas -- Wall Street didn't know exactly how to react. Stock and commodity prices rose on the promise of economic stimulus, but bond prices fell sharply out of concern over inflation, driving interest rates on the benchmark 10-year Treasury bond up a quarter of a percentage point in the past two weeks. Gold, a hedge against inflation and a declining dollar, hit a 17-year high.

Confronted with this massive fiscal stimulus, two more years of record federal deficits and another energy price spike forecast for this coming winter heating season, the Federal Reserve is expected to reaffirm its inflation-fighting stance by raising short-term interest rates another notch at its policy meeting Tuesday. At the same time, the Fed is likely to take note of the risk of slower economic growth if consumers nationwide respond to rising energy prices, higher interest rates and the emotional shock of Katrina by cutting back on spending -- a risk highlighted by a report on weak August retail sales and a sharp drop in consumer sentiment in early September.

Stay tuned. This is about to get interesting.


© 2005 The Washington Post Company

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