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January 28, 2008 Deja Vu
Recently, the prospect of a recession has put into motion events causing the Federal Reserve to slash interest rates and the government to begin talk of an economic stimulus package centered on tax refunds. But with both the Fed and the federal government desperately trying to boost the economy and stabilize a shaky market you cant help but get a sense of déjà vu.
The bursting of the tech bubble in March of 2001, coupled with the aftermath of 9/11 sent the economy into a similar recession. The government tried to boost the economy by enacting a fiscal stimulus plan in 2001 that also relied on tax refunds. And the Fed aggressively cut interest rates that year. But this did little to bolster the economy or the stock market until late 2002. Additionally, the tax refunds designed to encourage consumers to spend money in order to boost the economy also, for the most part, failed. Most consumers used the majority of the one-time payment to pay down debt and increase savings and consequently the economy only received a little boost. Even if the American consumer did inject the refund into the economy through the purchase of consumer goods, who would really benefit? In fact, most consumers spend their money on foreign imports and any stimulus package relying on US consumers to purchase goods would probably benefit a foreign economy more than our own. While it is obvious the Federal Reserve and the government have many crucial decisions to make in the coming months, consumers need only decide how best to allocate a potential refund and wait to see if seven years later we see a different result.
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