After weeks of increasingly dismal reports from the financial sector, many regular Americans are beginning to worry that the US may be close to or already in recession. While government intervention in the economy is relatively uncommon in US history, since its establishment in the 1930's, the Federal Reserve has been able to manipulate interest rates, giving them the power to make all real estate loans more or less expensive by some degree, which comes with a hefty responsibility: controlling inflation.
While the Fed has cut their rate three times in as many months last quarter, the economy also began to tailspin simultaneously. This puts them up between a rock and a hard place, because if interest rates are too low, inflation can begin to threaten, especially as the dollar continues to depress against other currencies. Fortunately, there is one part of the economy that the government is able to adjust in order to make ordinary American's pockets a bit less bare: taxes.
President Bush has recently begun talks concerning some kind of economic stimulus package, which can be understood to mean some kind of tax break. But with over two million foreclosures predicted to happen over 2008, it seems unlikely that any single factor can stem the tide of sub-prime woe besides some kind of magic undo button or two million real estate mortgage refinances.
This is because most of the economic slowdown is related to the riskiness of these mortgages that were issued in the first place. By virtue of a collective attempt at clever financial trickery, most of the major banks are now forced to write off their sub-prime mortgage debt as bad before it even becomes worthless.
A tax break would have to be nearly immediate in terms of how quickly it is implemented, and have to cover an exceptional cross-section of poorer Americans, in order to have much of an effect. This is because, according to recent surveys, that demographic is most likely to fall into financial trouble over the coming months. As simultaneous pressure on both lower-income Americans and the well-to-do financial sector increases, the middle class will be stuck like a trapped child in the middle seat on a long car trip.
Everyone will be getting a bit uncomfortable unless some action is taken. The only difference between America and the car trip is that no one will have to ask if we're there yet, because whichever course the economy takes, it will take it quickly.
Another possibility is that, even if a tax cut is unable to completely shore up faltering consumer confidence on its own, a concerted strategy of extreme interest rate cuts combined with tax relief and a massive short-term freeze on prime and sub-prime mortgages could have the kind of effects necessary for the American powerhouse to avoid grinding to a halt. Either way, if the spring quarter sees losses on the scale of late 2007, we will be in a classical recession with fewer options than we have right now.
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