Deteriorating economic conditions have policymakers in Washington, D.C. running around like Chicken Little. As a result of the perceived falling of the sky, these same policymakers are scrambling to come up with a fiscal stimulus plan which, coupled with aggressive monetary policy action by the Fed, is intended to stave off a recession and calm jittery financial markets. Whilst these initiatives are well-intentioned, these efforts are an exercise in futility. There is little, if anything, that can be done to stop the economic downturn that is in progress and that is coming.

There is little doubt the current economic downturn was caused by the deflating of the real estate bubble and the mortgage crisis. This caused the banking system to clam up and become more restrictive in lending. This began a chain reaction which sent a systemic shock throughout the economy, causing a credit crisis last summer that was particularly disruptive to financial institutions whose lending reluctance retarded liquidity and prompted some degree of panic in equity markets and in corporate boardrooms.

The Fed's actions in cutting the federal funds rate fifty basis points along with other policy actions in August was intended to build confidence and liquidity in the banking system and, perhaps, shore up struggling equity markets with a comforting "Bernanke put." Successive cuts along with the seventy-five basis point cut on January 22, 2008 were aimed at shoring up markets amid mounting turmoil and uncertainty over the magnitude and depth of the impact the housing contraction and mortgage crisis would ultimately have on the broader economy. Alas, the Fed's actions cannot possibly solve the banking crisis. This was a situation created by the banks that would only begin to be relieved by massive write-downs and massive capital infusions by foreign investors, namely Asians and Arabs, totaling in excess of $21 billion. To be sure, there is much more bloodletting to come at financial institutions who provided too much credit when interest rates were low with little apparent regard to attending risk of borrowers. The Fed shares a part of the blame for keeping rates much too low for much too long and in the process allowing the real estate bubble to inflate precipitously. The magnitude of this may ultimately be over $100 billion as derivatives are revalued in the process to reflect current fundamentals and counterparty risks are reassessed. And there is more revaluation to come in the real estate markets as prices adjust to reflect true fundamentals. This is all a painful process that cannot be avoided forever.

In addition to monetary policy action, policymakers now want to give taxpayers rebate cheques ranging from $300 to $1600 in hopes that these rebates will prompt consumers to continue spending and, thus, in the process revive the lagging economy. There is a problem with this. The federal government does not have this money to give away right now; we simply can't afford it. This will likely be funded through debt issuance. In all likelihood, either Asian or Arab investors will purchase this debt. Now we are in even more hock to these nations. And assuming consumers spend the money on goods produced in these foreign countries, the investors get their original money back! This hardly makes good sense. In addition, this fiscal stimulus does not address the mortgage crisis or rising consumer debt levels. More attention should be placed on financial responsibility and sound economic and financial decision-making by the government and individuals. To be sure, fiscal stimulus is good—but only at the right time. Throwing money at a problem, hoping it goes away, without addressing the fundamentals of the problem is wasteful and counterproductive.

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