JANUARY 18, 2008

Top News
By Michael Mandel

Mandel: Not Much of a Pop

The tax rebates in Bush's stimulus plan would likely be used to pay off existing debt, not to fund new purchases

Let us be blunt: The fiscal stimulus plan proposed by President George W. Bush is like throwing paper on a fire. The tax rebates—the number being bandied around right now is $800 per taxpayer—do not deal with the real nature of the current downturn, and will do very little to fix the underlying problem. What's going on is simple: The 25-year consumer spending bubble is finally deflating. Not because Americans no longer want to spend, but because financial institutions increasingly no longer want to lend.

Until very recently, bank executives believed that credit cards, auto loans, and residential mortgages were low-risk moneymakers for them. You know the old saying, "No one ever went broke underestimating the intelligence of the American people." Well, bankers and investors behaved as if no one ever lost money by lending to American consumers.

Credit Cards Could Be Canceled But now everyone realizes that lending to consumers can lead to big losses. And quite rationally, that means there will be a lot less lending. It will be harder to get mortgages and auto loans, and credit cards will have lower limits. In fact, it wouldn't be surprising to see card issuers start canceling cards.

In that sort of environment, those tax rebate checks are more likely to be used to pay off existing debts, rather than on new purchases. In the long term, that's probably a good thing. But in the short term, Bush's stimulus plan won't give much of a pop to the economy.

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