1. We may be turning the corner on the economy according to some economists.
2. Stabilizing the Financial Institutions, spending on infrastructure that builds future capability and accelerating housing will have more impact on turning this economy around than the approved $800 Billion stimulus that was approved by Congress last month.
3. All those that have insisted on massive spending to fuel the recovery will have a lot to explain if the economy recovers too quickly.

The Facts:

1. Of the almost $800 billion in stimulus, none has hit the economy and it will take four years for the full spending to occur.
2. The Obama Administration continues to use the economy as the lever to pass their broader agenda of health care reform, education and social programs.
3. The economy is beginning to show signs of improvement. 
4. The Banks are making money and there is greater stability of the financial markets.
5. The toxic assets in bank loans, as well as some accounting standards (mark to market), have been dragging down the banks and the economy along with them.
6. Regulation of modern financial instruments may be on the table, but with a year of review before anything is done, it will not provide the near term oversight to provide investor confidence and oversight needed as the economy recovers.
   

Discussion:

We have all heard how the only way out of the current recession is through Government spending with massive deficits.  Depending on which day, and the audience he is speaking to, even the President has said that it will be Government spending that leads us out of this "greatest economic problem since the Great Depression".  But is this really the case?

The current economic downturn is a result of a meltdown of the lending industry and bank assets gone bad (toxic assets or derivatives).  Under the Bush Administration, Treasury undertook a plan (albeit not well managed) to reinstate stability in financial sector (TARP).  The Obama Administration tried to convince President Bush to implement a $400 billion stimulus before he left office.  The Bush Administration was reluctant to add the spending since it was not known if it would really have an impact on the recovery.  The Bush Administration saw the problem as a liquidity problem and not a general industry slowdown.

When President Obama took office, Congress quickly pushed through an economic stimulus package of  approximately $800 billion.  The stimulus' first money will not be released until after April of this year and will be phased in over a four year period.  Clearly, this stimulus is not having an impact on the economy at this time.  However, there are indicators that certain aspects of the economy (excluding employment which tends to be a lagging indicator) are improving.

1. Manufactured durable goods in February increased $5.5 billion or 3.4 percent to $165.6 billion. This increase follows six consecutive monthly decreases
2. Nondefense new orders for capital goods in February increased $3.6 billion or 7.4 percent.
3. Sales of previously owned homes rose unexpectedly in February by 5.1% to an annual rate of 4.72 mln units
4. The Dow Jones Industrial Average bottomed at roughly 6,300 earlier this year and has rebounded to 7776 (approx. 23% from its' low).  This increase is presumably due to the markets reaction to the Treasury bank plan.

So the question is, "how much stimulus is really needed"?  That is obviously a difficult question with many experts taking opposing positions.  Some argue that the Great Depression continued eight years longer than necessary due to Federal Government spending on programs during the FDR years, and we run the risk of doing the same today.  Others point to Japan in the 1990's whose economy remained in recession due to insufficient government spending.  Which leads us to ask, what is the right level of Government spending in these economic conditions.  Underspending may have insufficient impact to bring the economy back and lead to large deficits without the intended results.  Spending too much may lead to massive deficits, inflation and strap our economy for generations to come. 

President Obama and Congress are using the economic downturn to facilitate their agenda of health care reform, education and energy transformation. While these are all good and valuable ideas, each should be dealt with care and consideration rather then just throw money at it saying it is stimulus.

What is needed is more focus.  Cleaning up the financial institutions and "regenerative spending" offer the best hope for a speedy and lasting recovery.  Specifically, a few key moves will have a dramatic impact on the economy and the future.  By trying to do everything at once, we risk missing the target.  I suggest that the following actions will have measurable impact on the recovery.  These include:

Financial Institutions:
1.  Remove the toxic assets from the balance sheets of financial institutions.  While we may not like taxpayers fixing a problem that was originated by the very institutions that created this mess, and the executives who have become wealthy, it has to be done.  Depressing the financial condition of these companies will not release them to help drive the economy going forward.

2.  Remove the accounting of "mark to market".  Assets have become depressed.  The purpose of mark to market is to fairly represent the value of market assets (houses, loans, buildings, warehouses, inventory, etc.) on the books of companies.  However, values go up and down and right now they are down--- way down. Lower asset value impacts the financial ratios of these companies that are so important to the ability of these institutions to borrow and loan money.   Handling market value in financial footnotes would liberate the Balance Sheets while disclosing to investors needed information.

3.  Rapidly address the holes in the regulation of financial institutions and markets while longer term undertake a broader regulatory change.   Trying to do too much (overhaul of the regulatory evnironment for financial institutions and the market) is complicated.  It will take years to get this right.  Moving rapidly on the those things that will bring confidence and security to investors and the public will have the need change and physcological impact needed to move things forward more quickly.

Invest in "Regenerative projects"
1. Fund "shovel ready infrastructure projects".  These are Federal and State projects that have already been approved but lack funding.  They can be started immediately and the funds will enter the economy quickly.

2. Fund 21st century infrastructure projects.  During the campaign, then candidate Obama spoke of rebuilding America's infrastructure for the future.  Clearly, America has not adequately invested in its' infrastructure and as a result has many challenges ahead. Roads, bridges, the electrical grid, second generation internet, etc will all be required to provide a 21st century platform needed by business, citizens and government.  These projects are longer term, therefore no near term impact on stimulating the economy is expected, however, this spending, and the commensurate deficit, will match future enhanced productivity with the cost of the development of these capabilities.