A government stimulus must ensure that financial institutions are recapitalized and remain “healthy,” said Frederic Mishkin, former Federal Reserve Board governor and Columbia University economics professor.
“If you don’t get the private sector running properly, no matter how much the government spends, it’s not going to do the trick," he told CNBC's "Squawk Box." "If things are done with half measures that could then leave us in a more vulnerable position where another shoe could drop," he said.
Tax cuts and rebates are not as effective as spending on infrastructure to boost the economy, said Mishkin.
"Tax cuts by themselves just don’t have enough bang for their buck,” he said. “It makes a lot of sense to spend on infrastructure, particularly if the infrastructure really is needed it can have very high payoffs in terms of high investment returns.”
An investment tax credit could be an important part of a stimulus package, said Mishkin, though he cautioned against anti-business legislation.
“The bottom line is you’ve got to get spending going,” he said.
The government also needs to rescue the housing sector by lowering mortgage rates or increasing demand for real estate, he said.
"The likely scenario is improvements in the financial markets, but in fact, an economy that still has unemployment rising," Mishkin said. "That's really baked into the cake and there's nothing really that we can do about it."
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