BEIJING The recession in the United States will stretch well into next year, probably raising the need for another fiscal stimulus package at least as large as the first one, prominent economist Martin Feldstein said on Tuesday.
Feldstein, a Harvard University professor who is a member of President Barack Obama's Economic Recovery Advisory Board, told Reuters that the stimulus would offset only a relatively small piece of the likely fall in spending, exports and construction.
"I'm afraid that the economy will continue to slide down well into next year," Feldstein, a former head of the National Bureau of Economic Research, said in an interview in Beijing where he was attending a conference.
"I don't know when it will end, but the forecasts that it'll end later this year I think are too optimistic," he said of the recession.
President Obama signed into law last month a $787 billion fiscal stimulus plan, comprising $287 billion in temporary tax breaks and $500 billion in public spending.
That is in addition to the trillions the government has pledged or allocated to shore up the financial sector, including a public-private plan announced on Monday to help rid banks of $1 trillion in assets of uncertain value.
"The fiscal stimulus is just not large enough to offset the downward pressure that comes from reduced consumer spending. So unless somehow fixing the financial markets is enough to offset that, which I very much doubt, I think there will be a need for another fiscal stimulus package at some point," Feldstein said.
He noted that it was uncertain how Congress would respond to any proposal for another stimulus plan, but he said any future package would probably have to be on the same order of magnitude as the existing one, if not larger.
It should also be better designed so that more of the money actually gets translated into new economic activity through specific spending incentives, such as for purchases of cars or home improvements.
Feldstein, dismissing the skepticism of some analysts, described as "ingenious" the plan unveiled by Treasury Secretary Timothy Geithner to buy banks' toxic assets.
"I think it has a good chance of buying up a substantial amount of impaired assets from the banks, and to the extent that it does that, it can start the banks lending again," he said.
But there are still questions as to whether $1 trillion will suffice to clean up banks' balance sheets enough to make them feel confident to lend, Feldstein said.
He added that authorities should consider holding the sales of impaired assets at the same time that they inject government capital into them through preferred stock, in order to avoid a situation in which the banks' capital base is left weakened after writing down the losses on the sold assets.
Asked about the potential impact on the dollar of recent U.S. pump-priming, including the Federal Reserve's plan to buy $300 billion in long-term Treasury bonds, Feldstein said it was natural for countries such as China, the biggest holder of U.S. government debt, to have worries.
Economic fundamentals, such as the huge U.S. current account deficit, suggest the dollar could weaken over the long run and that China could again let the yuan strengthen, Feldstein said.
"I think as long as we have this enormous trade deficit, there's going to be downward pressure on the dollar."
China has kept the yuan in a tight range of 6.83-6.84 per dollar since the middle of last year, halting an upward climb that started after the 2005 revaluation.
"If the dollar starts coming down relative to other currencies, I think at some point when China is feeling more secure about domestic demand, they will go back to a policy of allowing the yuan to appreciate," Feldstein said.
(Additional reporting by Chen Min; Editing by Nick Macfie & Jan Dahinten)