Carmen Reinhart and Vincent Reinhart on the Fiscal Stimulus
Failure can be as useful a teacher as success, so it is important to reflect on the Bush Administration's twin shortcomings in rescuing financial markets last year. First, it did not appreciate the scale and scope of losses on financial institutions' balance sheets. Second, when pressed to act, it did so in an inconsistent manner. This added uncertainty to an already uncertain environment.
New Treasury Secretary Tim Geithner is to be applauded for admitting the extent of our problems and the need for immediate action. But missing from his remarks yesterday was an explicit strategy that could bring closure to this crisis.
The bad news is that this was probably not an oversight. In fact, the administration's plan seems designed to keep its current footprint on the budget as small as possible. That explains the emphasis on the Federal Reserve's balance sheet, which is not subject to the authorization process, and guarantees to encourage private capital to supplement government resources, which will likely imply future outlays to honor those commitments.
Why the evasion? The American public and their representatives in Congress are apparently not yet ready to devote sufficient resources to address the problem -- certainly not involving a sum greater than the price tag of the fiscal stimulus package.
Maneuvers to make the tab seems small, however, do not change the tab. We either pay now or pay later, but we pay. Moreover, sleight of hand to make the package seem smaller sacrifices clarity. Without clarity in the commitment of resources, the public will find it difficult to predict government action and to hold the actors to account. The net effect, as happened last year, will be to leave investors' doubts unaddressed, extending the crisis. Unfortunately, the most robust lesson from the study of financial crises is that the longer they last, the costlier they are ultimately to clean up.
Carmen Reinhart is a professor of economics at the University of Maryland. Vincent Reinhart is a resident scholar at the American Enterprise Institute.