What Washington should (and shouldn't) do

The government has done a lot to try and get the economy back on track. But some think more needs to be done.

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By Paul R. La Monica, CNNMoney.com editor at large

What progress is the Obama administration making toward ending the recession?
  • It's succeeding
  • The recovery is too slow
  • It's not helping at all

NEW YORK (CNNMoney.com) -- This week is all about the "Road to Rescue" on CNNMoney.com and throughout CNN.

Reporters from the entire newsgathering operation will be focusing on the economic downturn, with a particular emphasis on how to survive this recession and what it will take for the economy to recover.

With that in mind, I've decided to focus today's column on two key questions that I think are on most people's minds.

Is there anything the U.S. government should be doing to help the economy that it hasn't yet tried? And when will this painful recession finally be over?

Grading the government's response

Though several economists think the government has taken appropriate actions, many economists point to some notable flaws in the rescue efforts to date.

Chris Probyn, chief economist with State Street Global Advisors in Boston, said he thinks the $787 billion stimulus package passed by Congress (with virtually no Republican support) was too small to make a major dent.

"I would have preferred that the stimulus package was larger. I'd rather the government run the risk of doing too much rather than too little," he said.

Zach Pandl, an economist with Nomura Securities International in New York, added that a "simpler" stimulus plan that relied on more permanent tax cuts might have been a better way to provide a bigger, and longer-term, jolt to the economy.

"Stimulus is not likely to provide as strong a boost to the economy as its supporters might have hoped," he said. "There could have been changes on the tax side that would have been more potent."

Economists also said that other tactics are probably needed.

Tom Higgins, chief economist with Payden & Rygel, a Los Angeles-based money management firm, said that he believes one way the Fed could help get credit flowing is if it started to buy longer-term Treasury bonds.

The Fed has already said it is prepared to do so but Higgins thinks it's time for action. He argues that such purchases could help reduce interest rates or at the very least keep them from rising. That is key since many types of debt, such as mortgages, car loans, credit cards and corporate bonds are tied to longer-term rates.

"I don't see the point in keeping your powder dry. Throw everything you can at the wall at this point and see what sticks," Higgins said.

Probyn added that more needs to be done to help the nation's banks. He thinks the Treasury Department's current plan to create a partnership with private investors that would buy up so-called toxic mortgage assets is a bad idea.

That's because, according to what little is known about the plan, the government is likely to guarantee a certain degree of losses for private investors -- but allow these investors to take part in nearly all the potential upside.

Probyn thinks that this public/private partnership is another example of how taxpayers could lose out. If done right, Probyn said the creation of a government-controlled "bad bank" to purchase soured assets could actually help the economy since taxpayers would reap all the benefits.

"This is a situation where we are privatizing all the potential profit and socializing most of the potential losses. That doesn't make a lot of sense. A system that puts taxpayers on the hook ought to provide them some potential gain," he said.

When will this end?

Fixing the banking system is key to ending the downturn. Fed chairman Ben Bernanke said as much during his interview with CBS' "60 Minutes" Sunday night. He said the recession could be over later this year and that a real recovery could begin next year if the financial system is "stabilized and working normally."

That's obviously a big if. As such, several economists said that an end to the recession in 2009 is plausible -- but a lot has to go right. And even if all the cards fall into place, the economy could be sluggish for some time.

"If stability is the first step to recovery, there could be signs of that later this year," said Stuart Hoffman, chief economist of PNC Financial Services in Pittsburgh. "When a patient is this sick, you don't get of bed the day after you immediately stop feeling worse. There is a recovering and healing time."

Probyn said that it is crucial for housing prices to stop falling before the economy can truly bounce back. He thinks unemployment is likely to keep rising for the foreseeable future but that consumers could still feel more confident if they sense some light at the end of tunnel in other areas of the economy. So far, that light is dim at best.

"All we've seen so far are tentative signs that the intensity of the drop, the pace of the decline, is beginning to wane slightly," Probyn said.

In addition, Pandl notes that the eventual rebound could take longer to materialize -- and not be as robust as those following prior recessions -- simply because consumers' spending behavior may be permanently changing as a result of the credit bubble.

"The consumer is likely to go through a long period of adjusting to lower borrowing and higher savings. So we do not see a rigorous recovery," he said..

If Pandl's right, the bad news is that the recovery could be delayed. But the good news is that if people are actually more fiscally responsible, there's a better chance that we can avoid a similarly nasty recession in the future.

So with all that in mind, Hoffman thinks that the government needs to be even more blunt and honest with the public about the daunting tasks the nation faces.

"The national psyche is so fragile. Leaders need to be vocal. They shouldn't sugarcoat things but need to talk about the challenges and reassure people that the government will be able to meet them," he said.

And that means it may be a little premature to wonder how far the economy has traveled on the Road to Rescue.

"I can see the road out there ahead but we haven't turned on to it yet," Hoffman said.

Shameless plug alert: Before I started writing The Buzz, I covered the media business for several years at CNNMoney.com. Some of this reporting is the basis of a book I've written about News Corp. CEO Rupert Murdoch called Inside Rupert's Brain, which will be published on March 19 by Portfolio, an imprint of Penguin Group (USA).  To top of page

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