The Pinocchio Recovery

But I keep seeing all those strings pulling the economy, and wonder if and when they can be cut.

For one thing, the stimulus programs that have come out of the federal government and Federal Reserve have underwritten the recovery.  These include cash-for-clunkers, the first-time home-buyer tax credit, the Fed’s facilities for buying Treasurys and mortgage-backed securities, as well as its move to lower its federal funds rate to essentially zero.

Cash-for-clunkers provided a spike to auto sales, but the program has already expired, and the auto sales are already falling back to the levels from before the program.  If the rest of the stimulus programs have a similar temporary effect, the economy may be stuck in its current state for some time.

……

Washington’s hope is that the stimulus will eventually give way to a natural momentum that will pull the economy out of recession.

– “The Pinocchio Recovery”, Paul Vigna, Dow Jones Market Talk