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Will U.S. Inject Public Fund?

Posted January. 24, 2008 08:52,   


As sell-off has shown signs of easing across global stock markets in the wake of a rate cut by the Federal Reserve Board, much attention has been paid to the effect of the United States’ economic stimulus package on its economy.

○ Stimulus Package and Approval Prospects

U.S. President George W. Bush invited Congress leaders including House Speaker Nancy Pelosi to the White House Tuesday and asked their cooperation to boost the economy. Both of the Republican Party and Democratic Party will release their own economic stimulus package by mid February at the latest.

However, the two parties have already begun bickering over the beneficiaries of the stimulus package. Republicans argue that the benefits should be given to only those who pay federal personal income tax, while Democrats claim low-income brackets should be also benefited.

In a debate held on Monday, Senator Hillary Clinton, one of the major candidates for the Democratic presidential nomination, criticized Bush’s plan, saying “President Bush’s economic stimulus package is designed to benefit only the rich.”

Even after the two parties reach an agreement, it will take 12 weeks for the Internal Revenue Service to choose beneficiaries and deliver tax refund checks. That’s why some predicts that consumers will get the money at the end of this year, at the earliest.

Against this backdrop, the economic stimulus package is not likely to make a large contribution to boosting the economy. Nonetheless, the two parties are expected to reach an agreement soon since they will be put under serious political burden if they fail to find common ground amid negative economic conditions.

○ Consumers Urge to Lower Mortgage Loan Rate

After releasing the news of FRB’s rate cut Tuesday, news broadcaster CNBC was flooded with calls from home owners, asking “I heard that the FRB cut the interest rate. Then, why don’t banks lower mortgage loan rate which I have to pay every month?”

FRB’s cut in the federal fund rate does not immediately lead to a cut in mortgage loan rate since the latter is generally coupled with a long-term interest rate. It takes some time for long-term interest rates to fall.

The rich-get-richer and the poor-get-poorer principle can be also applied here. According to the New York Times, those with sound credit ratings can lower their rates through discussion with lenders but sub-prime mortgage borrowers with low credit ratings are not likely to successfully reduce their mortgage loan rates.

Against this background, some experts project that the United States will need to inject an enormous amount of public fund, as Korea did in order to save struggling banks after the financial crisis.

○ Global Economy Still Driven by U.S.

Not too long ago, many experts supported the decoupling theory which says the U.S. economic slowdown will not influence Europe and Asia since China has grown dramatically.

However, the theory has lost power after worries over the U.S. economic slowdown has sent a shockwave through global equity markets.

Quing Dao, head of global economic team of People’s Bank of China, recently expressed his concerns in a forum, saying “U.S. consumption slowdown will significantly affect China’s exports.” A series of forecasts show that the slowing consumption in the United States will negatively affect China’s economic growth this year.

It seems that the global economy has no choice but to depend on U.S. consumers for a considerable amount of time.