Stimulus Shtimulus

Let's get real. Even if a stimulus package could get through Congress and signed into law soon, even if directed at lower-income Americans who are far more likely than higher-income to spend any extra money, even if a cash supplement doled out within sixty days rather than a tax rebate or refund that won’t be out until next summer, even if in the range of five hundred dollars a household, which is the most anyone is talking about – even if all these conditions were met, the stimulus would still be too little and too late.

Falling home prices are eating into household wealth far more, and more quickly. Homes are the biggest assets Americans own – their golden gooses for retirement and piggy banks for home equity loans and refinancing. So as home prices fall, people not only feel poorer but are poorer. That means they can’t spend nearly as much, even if the government drops an extra five hundred dollars in their laps. Which in turn almost guarantees a recession or worse, because as consumption lags, companies have to reduce production and cut payrolls.

According to a recent estimate by Merrill-Lynch, the hit to consumer spending this year and next will be three hundred sixty billion dollars. That’s more than double the size of the stimulus package the President or any leading Democrat is talking about.

How much worse can it get? The housing bubble drove home prices up 20 to 40 percent above historic averages relative to earnings and rents, and pushed up new home construction. Now that the bubble is bursting, expect prices to drop by roughly the same amount, and new home construction to contract. It plunged last month to its lowest point in more than sixteen years.

As a practical matter, our only real hope for avoiding a deep recession or worse depends on loans and investments from abroad, combined with export earnings as the dollar continues to weaken. In other words, no stimulus package from Washington will be enough. We need the rest of the world to bail us out.