Monday, February 11, 2008
Short-Term Gain Could Yet Yield Long-Term Pain - WSJ
--Policy makers these days are fixated on stimulating a sleepy economy. But repairing its underlying problems doesn't look like the kind of fast or easy job many have in mind. --Think about the road tripper who pounds an energy drink to stay awake on a long-haul drive: He gets a short-term jolt, and then gets even sleepier. Similarly, the economy is about to start chugging the Red Bull of interest-rate cuts and tax rebates, which could briefly lift it from its doldrums. --Many still think the economy and earnings will roar back in the second half -- perhaps remembering the brief and mild recessions of the recent past. --But this cycle looks different. Home prices haven't fallen this broadly or deeply before. And the banking system is sorting out an overhang of broken debt securities it has little experience fixing. --True, tax rebates might inspire people who live from hand-to-mouth to spend a little more in the short term, usually six months to one year after their check arrives in the mail, according to a handful of studies. To the extent they buy American-made products, then that will increase U.S. gross domestic product. But it may just shift some spending forward, in effect "stealing" growth from the future. --The credit crunch also seems likely to take time to unwind. The savings-and-loan crisis, to which this one is often compared, took about a decade to mop up. Lenders won't soon revisit the days when the ability to fog a mirror was enough reason to give you a loan. --As long as banks are cleaning up their balance sheets and investors are no longer eager to buy packages of debt sliced into tranches of indiscernible risk, credit will be harder to come by. That could curtail consumer spending and business investment even as interest rates go lower. --All this will drag on corporate profits and stock prices well after the stimuli have faded.