WASHINGTON U.S. companies, consumers and communities may grow so addicted to government financial help that cutting them off could trigger another recession soon after the current one ends.
Between the U.S. Federal Reserve's trillions of dollars in lending programs, the $787 billion stimulus package and $700 billion -- and counting -- in bank bailout funds, no one can accuse officials of soft-pedaling their crisis response.
But there is increasing concern that when the flow of public money subsides -- beginning next year when much of that stimulus package is spent -- the economy still won't be strong enough to stand on its own.
"The stuttering attempts to repair the banking and lending mechanisms so far by the new administration suggests that by late 2010, the specter of a second dip into recession will be looming large," said Merrill Lynch economist Sheryl King.
The latest evidence of the government's ever-changing plans came on Monday when insurer American International Group Inc got its third bailout, each with different terms.
That did nothing to improve confidence on Wall Street, where investors dumped stocks amid fears that the financial crisis was worsening.
The longer it takes to stabilize the financial sector, the more the economy suffers, and that feeds back into bigger loan losses and the need for even more government intervention.
John Silvia, chief economist at Wachovia, said the government's success so far in shoring up markets and reviving the economy resembled the pattern of police patrols.
"At each corner where a policeman is stationed, we witness a decline in crime," he said. "In every market where the Fed focuses its liquidity facilities," credit conditions improve.
Unfortunately, where there is no direct government support, conditions are grim. Merrill expects unemployment to hit 10 percent by the end of 2009, with house prices losing 10 percent to 15 percent more and the stock market dropping another 20 percent.
That could erase $6.5 trillion off of household wealth, on top of the $12 trillion hit consumers have already taken, Merrill's King estimated.
Those losses are a key reason why it is proving so difficult for the government to get much traction with its rescue plans because consumer spending accounts for more than two-thirds of economic activity.
Data released on Monday showed that Americans were rapidly rebuilding savings that they had run down in recent years when it seemed like rising home values and healthy stock markets would be enough to pay for retirement.
While that may be good for the global economy, which many economists say has been over-reliant on U.S. consumption, "recession has never been successfully arrested with austerity," Citigroup economist Steven Wieting said.
"While consumers in the U.S. will likely never really be the same as they were in the last decade, we can identify no source of growth for the global economy that doesn't involve a partial recovery in U.S. consumption," he said.
If spending isn't going back to the way it was, that may make it even harder for the government to ease up on aid.
Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke have warned repeatedly of the risk of pulling away the economic supports too soon. However, Bernanke and other Fed officials have also stressed the need for a clear exit strategy to ensure that their repair efforts don't spawn inflation.
In essence, the Fed and Treasury have been forced to take the place of the securitization market, where countless loans were repackaged and sold off to investors all over the world. While that proved to be the transmission mechanism for the financial crisis, it was also a vital aspect of lending and its collapse contributed to the global economic slump.
The Fed's own lending data shows that efforts to get money flowing again were having limited effect on the broader economy. Confidence has fallen so sharply that even those who can get credit are reluctant to borrow and spend.
According to the Fed's January survey of senior loan officers, 60 percent of domestic banks reported reduced demand for commercial and industrial loans, up from 15 percent in the October survey.
Some of the Fed's lending programs should wind down with little disruption because once credit markets improve, borrowers will be able to find better terms elsewhere, and the central bank can once again be the lender of last resort instead of the only viable option.
Extricating the Fed and Treasury from other means of support won't be so easy.
"Major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests," investor Warren Buffett wrote in his annual letter to shareholders. "Weaning these entities from the public teat will be a political challenge. They won't leave willingly."
(Editing by Kenneth Barry)