Bernstein: Economic Stimulus And Financial Stability ‘Extremely Complementary’

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Bernstein: Economic Stimulus And Financial Stability ‘Extremely Complementary’

Today, Jared Bernstein, Chief Economist for Vice-President Joe Biden, held a conference call with progressive bloggers to discuss the economic stimulus package. During the call, he made an interesting argument about the intersection of the stimulus package with the financial stability program outlined by Treasury Secretary Timothy Geithner yesterday.

Bernstein likened the effects of the economic stimulus package to a “chain”; a stimulus dollar will be spent by a consumer, helping the business it is spent at, in turn helping that business’ suppliers (when more stock is purchased), and onward and upward. This chain is less effective when banks aren’t lending:

I view the economic stimulus package and the financial stability plan as extremely complementary…That chain won’t be able to function to its full effect if the credit lines are frozen.

The theory is that, as long as banks are sitting on their money, economic recovery will be more difficult, because businesses and individuals won’t have access to loans with which to make larger purchases. To this end, Geithner announced the Consumer & Business Lending Initiative, a $1 trillion program aimed at revitalizing lending:

When banks making loans for small businesses, commercial real estate or autos are able to bundle and sell those loans into a vibrant and liquid secondary market, it instantly recycles money back to financial institutions to make additional loans to other worthy borrowers…Unable to sell loans into secondary markets, lenders freeze up, leading those seeking credit like car loans to face exorbitant rates.

The plan, then, is to support these secondary markets, “by providing the financing to private investors.” The money will come from the Federal Reserve, not from any of the other already designated TARP funds. But the take-away message from Bernstein is that these two plans — stimulus and stability — really can’t function to their full extent without each other.