Stimulus Plan, Rate Cuts May Be Too Little, Too Late
When it comes to looming Fed rate cuts and a potential economic stimulus package from Congress, Wall Street is sending a clear message: Too little, too late.
In testimony before Congress, Fed Chairman Ben Bernanke came out in favor of an economic stimulus plan and repeated he was ready to cut rates further. President Bush and Congress, meanwhile, began talks on what would go into a possible stimulus package. Bush is scheduled to talk about the plan on Friday.
But investors weren't buying it. As soon as Bernanke began speaking Thursday morning, the major indexes started falling--and kept falling.
"The market's probably tired of a lot of talk, no action," said Chris Mayer, managing editor at Capital & Crisis. "The last time the Fed cut rates like this was from 2001 to 2003, when the market fell 45 percent. Rate cuts aren't necessarily a cure-all."
Bernanke has come under fire for not grasping the depth of the problems that have confronted Wall Street and the economy as a whole.
His speech before Congress Thursday morning did little to assuage his detractors.
"It's too little, too late, number one," said Larry Edelson, senior analyst at Money and Markets. "I don't know where Bernanke's been for the last six or nine months, what planet he's been on, but he certainly missed the boat on this one."
As for Congress, the sentiment is little better.
Legislators on Capitol Hill are working with the Bush administration to fashion a package they hope will inject money into the economy. Their proposal, which likely will cost as much as $150 billion, could entail a one-time cash payment to taxpayers, as well as an extension of unemployment benefits and other measures.
But that too has raised doubts as to whether government injections can rescue an economy that suffers under a complex variety of ailments brought on primarily by the collapse of the subprime mortgage industry and the resulting credit crunch.
"They're going to pump and pump and pump liquidity into the system through interest rate cuts and money creation and they're going to try to inflate their way out of this mess," Edelson said. "Will it work? Yes and no. The economy will survive this recession, but with substantially higher inflation."
The continued weakness in housing is likely to undercut the base of economy, analysts say, making any short-term actions less likely to have any sustainable effects.
"Going forward I think we'll see this thing slowly unravel. It's like an extended dynamite explosion," Mayer said. "I don't see how the economy can sustain all these hits to housing, which has become such a big part of the economy. ... This really affects the core of the financial system."