The important point is to keep this funding for bank recapitalization separate from the fiscal stimulus. We can continue to debate the size and nature of the stimulus, of course, but roughly $800bn seems right and the mix of spending and tax cuts currently proposed also makes sense. (On the point of whether the tax cuts would be “wasted” in any sense, remember that consumers have damaged balance sheets and that tax cuts should help on that dimension.)
Bank recapitalization should therefore be seen as complementary to the fiscal stimulus, rather than as any kind of substitute. We need both to be big and bold (and of course we also need a serious housing refinance program that would directly reduce foreclosures).
Originally published at the Baseline Scenario and reproduced here with the author’s permission.