President Barack Obama, walking a fine line between optimism and caution, said Friday that there were “glimmers of hope” for the economy but warned that substantial, potentially difficult government action is still necessary to assure a healthy recovery.
“We are starting to see progress,” Obama said after huddling with senior members of his economic team. And he said the country must not “flinch” at the difficult steps yet to come.
Behind the president’s words was a growing consensus among economists in and out of government that — even though the economy is no longer in free fall — major new government aid is still needed if the nation is to avoid a long period of economic anemia.
As the rescue effort stretches to include banks, auto companies and insurance companies, it will require many billions of dollars more in bailout funds, especially for the financial system, these experts say, funds that Congress and an angry public now seem to be in no mood to approve.
Public resistance may have been bolstered Friday when the Treasury Department said lower tax revenues and higher jobless benefits had driven the federal deficit close to $1 trillion for the first six months of this fiscal year.
Still, many economists say banks and other financial institutions need more than just enough to survive. They must have enough funds to play a robust role in extending credit. Otherwise, the economy may just putter along.
And to have strong capital reserves, the government may need to pump in more money, these analysts say.
Anil Kashyap, an economist and banking expert at the University of Chicago’s Booth School of Business, said the government can’t afford to lapse into half measures just because the economy and the stock market are showing signs of life. And that means calling on Congress to approve a big new infusion of federal aid.
In his meeting Friday, Obama got a progress report on the “stress tests” being conducted on the nation’s 19 largest banks, an effort the administration has said is a key first step in determining how much more money the ongoing bailout will require to help banks survive.
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Officials have yet to say what the results of the tests are, but there have been some indications that they believe the capital shortfall may not be quite as large as had once been feared.
That’s good news, economists say, but maybe not good enough. The fear is that the government will force the banks to raise only enough capital to stay afloat — but not enough to return the industry to a level of health robust enough to encourage large-scale lending.
Mark Zandi, chief economist of Moody’s Economy.com, estimates that if the government is to live up to its pledge to support the 19 banks undergoing stress tests no matter what, it will take another $750 billion in taxpayer money. But he acknowledged that Congress may be reluctant to fund that kind of request.
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Swampy politics
The Tribune’s Washington bureau blogs on national politics and the Obamas at chicagotribune.com/swamp