April 2009

As President Barack Obama warned the nation in a recent press conference, the recession wasn‘t created overnight. Solving it won‘t happen overnight either. “It will take many months and many different solutions to lead us out,” the president said. It also will take a global effort to solve what has become a global problem.

Stabilizing banks crucial first step
Globally, governments in Europe, Asia and North America have put into place more than $2 trillion in economic stimulus efforts. Some efforts, like the targeted injections of cash into a number of large banks and financial institutions by the U.S., Dutch and U.K. governments, kept these firms alive and avoided a repeat of the problems caused by the collapse of Lehman Brothers in September last year.

“Stabilizing the banks is the key to increasing investor confidence,” explains Jim McDonald, chief investment strategist for Northern Trust. “The stimulus plan is unlikely to generate a sustained recovery if it doesn‘t restore the flow of credit to the economy.” The U.S. Treasury is working to stabilize the banks through a variety of plans, including a public-private partnership to remove toxic assets from banks‘ books.

Creating jobs also key
Because we‘ve never been faced with a financial crisis quite like this before, lawmakers are forced to try many different solutions to stimulate job creation. Some of those solutions, contained in the $789 billion stimulus package passed by Congress in February, may soon begin to bear fruit. Others may take longer to come to fruition.

The package equals about 5% of the U.S. economy, as measured by gross domestic product. A breakdown of the bill shows that 38% of the plan targeted aid, such as an increase in Medicaid funding and an extension of jobless benefits; 38% was devoted to tax cuts, including payroll tax credits and tax credits for first-time homebuyers; and the remaining 24% went toward infrastructure and modernization programs.

“The infrastructure and modernization programs should lead directly to job creation,” McDonald says. “With these initiatives, you‘re hiring people and spending money, which should then lead to hiring in other sectors of the economy as those workers start spending money.”

Global stimulus needed
Despite the variety and scope of the many stimulus packages, more needs to be done, says McDonald. “While the United States is not alone in passing a government economic stimulus package, its plan is by far the world‘s largest. We need an expansion of the global efforts to truly stimulate a recovery. Most other countries have not taken nearly as aggressive an approach as the United States.”

McDonald, however, is guardedly optimistic. “I think that the eventual weight of all the different programs the government is putting into place will finally get us to a tipping point where credit creation starts to improve measurably. And credit creation is the key to getting the economy moving again,” McDonald says. “We just have to get to the point where the mass of all the programs results in some self-sustained improvement.”