Treasury Prepares to Scale Back Stimulus Spending

The U.S. Treasury Department will begin winding down its stimulus spending according to details supplied by Treasury Secretary Timothy Geithner in testimony to the Congressional Oversight Panel in Washington yesterday.

“We are now in a position to evolve our strategy as we move from crisis response to recovery, from rescuing the economy to repairing and rebuilding the foundation for future growth,” noted Geithner.

Geithner explained that the Treasury will cancel several plans that were budgeted for, but never implemented. This includes the Capital Assistance Program intended to provide additional funds to banks unable to acquire funds from other sources. However, programs scheduled to begin later in the year – such as the Public-Private Investment Program (PPIP) which will buy toxic assets in a move to cleanse the balance sheets of financial institutions – is still expected to be rolled-out later this year.

In addition to the cancellation of some programs, Geithner also said that the $750 billion contingency fund recently added to the President’s budget and earmarked to further stabilize the banking industry “is unlikely to be necessary and we have removed it from budget projections, lowering this year’s deficit”. In addition, Geithner noted that of the more than $200 billion the government has invested in individual banks, more than $70 billion has been repaid and another $50 billion is expected in the next year and a half.

Naturally, this announcement comes with plenty of caveats and all bets are off should conditions deteriorate to an intolerable level. Nevertheless, the Treasury pulls no punches when it says that major hurdles still block the country’s path to recovery, acknowledging that unemployment will continue to affect millions, further losses are expected in the financial system, and millions of homeowners still face foreclosure.

Still, I can’t help but think of Nouriel Roubini’s warning of a second-wave of recession – the infamous “double-dip” that Roubini cautions could result if governments cut back too sharply – and too quickly – in the various stimulus spending programs. Roubini agrees that several major economies have experienced growth in the last quarter, but believes that much of this is the direct result of government spending. It is this lack of sustainable growth – together with weak fundamentals – that Roubini identifies as the Achilles Heel of the recovery.

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