Get Ready for a Second Obama Economic Stimulus Program

Mort Zuckerman

Three decades ago, banks supplied $3 of every $4 of credit worldwide, according to the New York Times. Because of securitization, that dropped to about $1 of every $3. So, until investors are willing to buy these bundled loans in the form of securities, credit will remain tight even if the banks resume lending.

This credit squeeze has spread to the shadow banking system, reflected in sharply increased redemptions from hedge funds, and it has begun to feed on itself, forcing hedge funds to sell financial assets into a declining market, which accentuates the financial collapse.

Credit is critical for the American economy, and credit deleveraging is collapsing the money multiplier, which is the financial system's ability to generate liquidity several times the value of its reserves, deposits, or assets. What is more, further deleveraging is inevitable, since current debt loads are not sustainable either by incomes, which are declining, or by asset values, which also are falling. The net effect is a credit freeze where today almost no one, almost anywhere, can get the loans that would have once been assured. This enormous meltdown of credit has moved from a financial crisis to having an impact on the Main Street economy in ways that will unfold throughout this year.

Bubbles have burst in housing, in credit, and, most of all, in confidence.

Both the financial world and the consuming public are holding back until they can see that Washington's programs will work. Banks have lost confidence and are hoarding capital out of fear. Consumers are undergoing a major retrenchment in their buying patterns and also hoarding cash in an effort to build back the trillions of dollars in collective wealth lost in homes and financial assets.

The result is that virtually all components of aggregate demand in the United States are in serious decline, a demand destruction that makes fiscal stimulus essential. That stimulus must be dramatic and large enough to change public attitudes and do more than keep the contraction from continuing at a lower rate.

The public believes we have already spent too much money on bailing out the financial system, especially bailing out the people they blame for getting us into this mess. The Republicans are playing on this understandable resentment. But it is an irresponsible exploitation. Without additional capital, these organizations will remain buried under mountains of bad assets. They will continue to hoard capital out of fear: They do not know how extensive are the problematic loans already on their balance sheets, and, thus, they don't know what might hit them next.

In fact, the odds are that the fiscal stimulus program of the Obama administration, far from being too big, is too small to restart the economy. The administration cannot let that happen. It must, here and now—today, not tomorrow— organize a contingency list of infrastructure programs that will be ready for further funding if it seems we are still in the hole. Officials must do the planning and seek the approvals for projects immediately so they can be ready by the time they might be needed. Particular attention should be paid to the repair and maintenance of highways, bridges, and other transportation infrastructure, for those offer the best chance for an immediate start-up. If the first stimulus programs prove to be inadequate, public confidence in the future of the economy will fall dramatically, and so will confidence in the Obama administration's capacity to repair America's financial systems.

America is going to have to come to terms with the new age of government activism. Speed is of the essence. The longer the downward spiral, the more difficult it will be to get us out of it.

• Read more by Mortimer Zuckerman.
• Read more about economic stimulus.