US President Barack Obama has launched a $787 billion economic stimulus as 'the beginning' of what needs to be done to create jobs for at least 3.5 million Americans and lay the foundation for long-term growth.

Obama has kept his promise to make this his first major act before completing his first month in office. But he faces stupendous problems in tackling the roots of the economic crisis requiring a range of approaches. Recession has thrown millions out of jobs. And to put the $14 trillion economy back on rails within a year or two, the Federal government has to firstly get banks to revive lending to businesses and consumers, and secondly, stabilise the housing market loaded with trillions of dollars of mortgage debt to save homeowners, whose asset values have crashed, from preventable foreclosures.

Spending as never before...

The stimulus package - the largest single programme in the Federal history - taken together with the earlier $700 billion financial sector rescue plan under the Bush administration in October 2008, signals Federal spending as never before. Even nationalisation, as a temporary solution, has gained acceptance for banks which are effectively insolvent. (UK has also nationalised in part a few banks and other European governments have bailed out leading banks and extended guarantees for their bad assets taking over the levers of economic power.)

The economic recovery plan provides for tax cuts ($212 billion) which would benefit over 90 per cent of American middle class families and public spending ($575 billion), to save or create three to four million jobs through investments in infrastructure (energy, transportation, etc), education and health care. Cash-strapped states get substantial assistance for infrastructure and maintenance of basic services otherwise facing spending cuts.

Salvaging the housing sector

To address the housing crisis, Obama followed up with a $275 billion plan to help some nine million homeowners to refinance their mortgages or avert foreclosures. Of this, $75 billion would be in direct spending from the balance of $350 billion out of the earlier approved $700 billion financial rescue plan and $200 billion is additional financial backing for the two government-sponsored mortgage giants which own or have guaranteed loans.

There are no quick fixes for any of the challenges that the new President is confronting in the broader economy or in the financial sector. His efforts for bipartisanship have been rebuffed by Republicans and the stimulus package was barely approved, thanks to two Republican women senators making up the requisite 60 votes for passage.

The wave of home foreclosures is not abating and consumer spending has been falling for six months, a problem accentuated by all-round job losses in key industries, retail services and the technology sector. Some 3.6 million jobs have been lost in the 12 months since the start of recession in December 2007 and unemployment rate has risen to 7.6 per cent. The Federal Reserve has warned that the recovery would be 'unusually gradual and prolonged' and that the unemployment rate could rise up to 8.8 per cent and remain high for three years. The Fed also expects the economy to shrink by 1.3 per cent this year.

But America, the epicentre of the global financial crisis, has to take the lead, as the world's largest economic power, to stabilise its financial system to facilitate global recovery. Altogether, the US Federal Reserve and Treasury loans and guarantees for the financial system added up to about $8 trillion since the beginning of 2008. Federal bailouts have been extended to the automobile industry and some of the major European countries are doing likewise for their domestic firms.

Response to the package

After the financial crisis deepened in September 2008 with the collapse of leading investment firms, Central banks have been intervening with massive liquidity support to shore up the system. Some $300 billion was invested by the Federal government in major banks and smaller financial institutions under the $700 billion financial rescue plan voted by the Congress last October.

Initial estimates for the plan are over $2 trillion, half of which would be a previously announced Fed programme to support the market for student auto, credit card and business loans, and the other half would be earmarked for a public-private fund which would buy the troubled assets from banks to help clean up their balance sheets. It would be weeks before this plan is finalised as private investors' participation has to be explored to reduce the tax-payer commitment for which Congress approval would be needed. The difficulty is in regard to pricing of these bad assets and risk sharing. Congress would put tough conditions to make banks more accountable, now that large segments of the economy are under public control.