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January 23, 2008

A Solution In Search Of A Problem?

As Congress and the White House continue to work together on a bipartisan stimulus plan to avoid a predicted recession, the Congressional Budget Office claims that the problem won't exist anyway. The CBO predicts that 2008 will not have a recession, and that left to its own devices, the economy will recover from the housing bubble and the credit crunch:

The slowing U.S. economy is unlikely to sink into an election-year recession and an economic rebound could begin as early as next year as housing and financial market turmoil fades, the Congressional Budget Office forecast on Wednesday.

In the meantime, the U.S. budget deficit will grow to $219 billion this year, up from the $163 billion registered last year, according to a CBO report submitted to Congress.

But that forecast by Congress' nonpartisan budget analyst does not include the cost of an economic stimulus measure that is quickly moving through Congress and could cost around $150 billion or more. The deficit projection for fiscal 2008, which ends September 30, also does not include more money Congress is likely to approve this year for the war in Iraq.

While CBO noted an elevated risk of recession, its outlook was weighted more toward the United States working through its current economic problems and escaping a full-blown recession.

Meanwhile, Wall Street apparently also came to its senses today:

Blue chips rallied Wednesday afternoon, with the Dow bouncing back from a more than 300-point loss earlier in the session, while the Nasdaq erased losses sparked by Apple's profit warning.

The Dow Jones industrial added almost 300 points, after having fallen more than 300 points earlier in the session. The Standard & Poor's 500 (SPX) index rose 2.1 percent.

Where did the boost originate? The banking sector added across the board, with JP Morgan Chase up 11% and a number of others up 5% or better. Even BofA, which showed a huge hit on profits earlier this week, rose on today's trading.

Obviously the Fed's rate cut helped out the bankers. Now one has to ask whether the $145 billion stimulus package will do more damage than it repairs. It will push the deficit higher and only give a short-term boost to an economy unlikely to slide backwards. It appears to address political concerns rather than economic need, and the only beneficiaries in the long run will be the politicians who buy a momentary uptick in their approval ratings.


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