Broad Characteristics of Economic Stimulus Packages

8/7/2019 Broad Characteristics of Economic Stimulus Packages

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Broad characteristics of economic stimulus packages Size of economic stimulus packagesVirtually all OECD countries have introduced discretionary measures in response to the crisis,though the crisis-driven stimulus packages represent only one among other effects ongovernment

revenue and spending (e.g. the operation of automatic stabilisers).Based on a consistent approach to the definition of packages, the size of fiscal packages,introducedas a direct response to the crisis and measured by their cumulated impacts on fiscal balancesover the period 2008-10, amounts to about 3% of area-wide 2008 GDP.4 The crisis-relatedfiscalinjection is typically expected to be strongest in 2009, although again with some variations

betweencountries.However, there is considerable variation in the size of packages across countries, partlyreflecting the severity of the economic crisis, the fiscal position before the onset of the crisis and

thesize of automatic stabilisers (see Figure 5 and Table 1). As a share of GDP, the size of theeconomicstimulus packages ranges between 0.1% of GDP to over 5% of 2008 GDP. An unweightedaverage of countries introducing positive stimulus packages implies a typical stimulus package amountingtomore than 2% of GDP over the period 2008-10. But five countries (Australia, Canada, Korea,

NewZealand and the United States) have introduced fiscal packages amounting to 4% of 2008 GDPor more, the US package - at about 5% of 2008 GDP - being the largest. Countries with thelargestabsolute spending are the United States, Germany, Japan, Canada, Spain, Australia and Korea (indecreasing order) see Table 1. A few countries (in particular Hungary, Iceland and Ireland) areexpected to drastically tighten their fiscal stance.Most countries have adopted broad-ranging stimulus programmes, adjusting various taxes andspending programmes simultaneously. A majority of countries have given priority to tax cutsover

boosting spending (although Japan, France, Australia, Denmark and Mexico are clear exceptions). Onthe spending side, virtually all OECD countries have launched and/or brought forward publicinvestment

programmes. Australia, Poland, Canada and Mexico are projected to be the most pro-active inthis domain, with an increase in public investment as a response to the crisis close to 1% of 2008GDP or more (see Figure 6). Denmark, France and Japan also have a clear focus on publicinvestment.Transfers to households have often been made more generous in particular for those on lowincomes. A few countries (including the Czech Republic, Japan, Korea, Portugal, Mexico and theSlovak Republic) have also announced larger subsidies to the business sector.


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Non-OECD countries are also carrying out significant economic stimulus packages, e.g. China(USD 585 billion, 19% of GDP), Brazil (USD 152 billion, 15% of GDP), Russia (USD 101

billion, 8% of GDP)5, Chile (USD 4 billion, 2.8% of GDP) although definite figures and exact spending detailsare

hard to break out for most of these countries.4. These data capture the impact of fiscal packages and may not reflect all the measuresintroduced to boost activity. In

particular, recapitalisation operations and increases in public enterprises investment are notincluded. For further details on how the stimulus packages have been identified, see the OECD Interim EconomicOutlook , March 2009.5. This figure is based on Russia's response to the OECD policy questionnaire.POLICY RESPONSES TO THE ECONOMIC CRISIS: INVESTING IN INNOVATION FOR LONG-TERM GROWTH 19 OECD 2009

Table1.

The absolute size of fiscal packages (revenue and spending measures)2008-2010, in absolute USD millionsUnited States 804 070Germany 107 789Japan 99 992Canada 61 551Spain 56 754Australia 45 673Korea 42 667United Kingdom 38 003France 18 568

Netherlands 13 367Sweden 13 109Denmark 8 668Finland 8 575Belgium 8 016Czech Republic 6 500

New Zealand 5 404Poland 5 145Austria 4 600Switzerland 2 486Luxembourg 1 968Portugal 1 963Slovak Republic 35See notes and sources for Figure 5 and footnote 4.Figure 5 . The size of fiscal packages (revenue and spending measures)2008-2010, as % of 2008 GDP-5-3-1


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135Tax cuts and other revenue measuresGovernment investment, transfers to households and businesses (subsidies) and other spending

measures1. Weighted average of the above countries excluding Greece, Iceland, Mexico, Norway,Portugal and Turkey. 2. Simple average of abovecountries except Greece, Iceland, Mexico, Norway, Portugal and Turkey. *No data available for 2010. N ote : This information is based oninformation up until 24 March 2009. The figures include only discretionary fiscal measures inresponse to the financial crisis. Estimates

provided here do not include the potential impact on fiscal balances of recapitalisation,guarantees or other financial operations. They alsoexclude the impact of a change in the timing of payment of tax liabilities and/or government

procurement, a popular measure in several

countries. When applying the accrual principle, such measures are not reflected as part of thestimulus packages. Still, they affect fiscal balances measures on a cash basis and may have an impact on the economy. See also footnote 4.In the case of Mexico and Norway no data areavailable for 2010.20 POLICY RESPONSES TO THE ECONOMIC CRISIS: INVESTING IN INNOVATIONFOR LONG-TERM GROWTH OECD 2009Figure 6 . Government investment in stimulus packages over the period 2008-20 1 0 as % of 2008 GDP-1.7-0.20.00.00.00.00.00.10.10.10.20.20.30.30.30.30.30.40.60.7


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0.70.80.80.91.1

1.31.32.6-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3IcelandIrelandHungaryItaly

NetherlandsSlovak Rep.Switzerland

BelgiumAustriaUK FranceCzech Rep.

Norway*SwedenJapanUSAFinlandPortugal

New ZealandLuxembourgSpainGermanyDenmark KoreaMexico*CanadaPolandAustralia

Note: See notes and sources for Figure 5 and footnote 4. * For Mexico and Norway, no data areavailable for 2010.

A comparison of the absolute or relative size of these stimulus packages and their componentsis challenging for various reasons. First, most plans await political ratification andimplementation and thus their details are still changing. Moreover initial plans are often followedup with additional measures ( e.g. the case of Australia, Chile, Germany, the Netherlands,Slovenia, Switzerland, Japan or India who developed several packages).


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Second, the exact financial details and how the priorities are weighted in budgetary terms areusually still uncertain. In some cases the plans propose new budgetary allocations ( i.e. amountswhich are supplementary to initial 2008, 2009 and 2010 budgets), whereas in many other casesthey also propose to carry planned government spending forward ( i.e. relabeling of plannedexpenditures).

6 Also often the figures quantifying the size of the recovery packages are not for identical time periods (some covering 2009-2010 whereas others cover shorter or longer time horizons).Moreover, sometimes defining whether a discretionary measure has been adopted as a responseto the crisis involves an element of judgment. In some cases governments have anticipated thecrisis and factored in responses as part of the usual government budget ( i.e. not within a stimulus

package).In other cases, governments continue, intensify and accelerate previous competitiveness andinnovation strategies, rather than implementing an explicit recovery package. Although

potentially important and more time-consistent than crisis measures, these are not explicitlycaptured by an analysis of stimulus packages.

6. In OECD estimates, where possible, measures changing the timing of payments ( i.e. bringingforward government payments) are not included. While it is difficult to quantify the effect of such measures on activity, they do have the merit that over a medium-term horizon their fiscalimplications may be negligible while they may provide an important short-term stimulus.

POLICY RES PON SES T O THE E CONOMIC C R I SI S: INV EST IN G IN INNOVA T ION FO R LON G - TER M GR OW TH 2 1 O E CD 200 9 Third, the size of these plans usually does not take into account automatic stabilisers whichwork as a tool to dampen fluctuations in real GDP without any explicit policy action by thegovernment.OECD work shows that there is an inverse correlation between the size of discretionary fiscal

packages announced/implemented among OECD countries and the strength of so-calledautomaticstabilisers (the latter are particularly weak in Korea, Japan, the United States, Switzerland and

NewZealand). Fourth, these figures do not take into account legislative or regulatory changes whichmighthave important impacts ( e.g. changing rules and procedures to facilitate the acceleration of

plannedinvestments and public procurement, introduction of new innovative R&D tax creditmechanisms).

Nonetheless, this is an attempt to provide a comparative, quantitative and qualitative descriptionand analysis of certain aspects of crisis-related stimulus packages of OECD countries. M ain features and broader objectivesMost economic stimulus packages aim to stimulate demand in the short term (injecting cashinto the economy and protecting existing jobs). However, most governments also plan to foster medium- to long-term growth through investments which have repercussions on the supply side.Tables 2 and 3 present the main objectives and measures of the currently announced or concluded crisis-related policy packages for OECD member countries, accession countries7 and


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enhanced engagement countries8 (excluding financial measures such as bank bail-outs andrecapitalisationoperations).Broadly speaking the nature of plans can be distinguished between: i) measures aimed at saving

banks and the financial system excluded from the scope of this document, where possible, ii)

measures aimed at supporting businesses (tax cuts including cuts in value-added tax rates,shorttermcredit guarantees, reduction of non-wage labour costs, stimuli for retaining or hiring staff),iii) measures aimed at particular industrial sectors (notably the automobile and the constructionsectors), iv) measures to support household consumption and reduce their exposure to the crisis(including tax cuts, cash payouts to households, unemployment benefits, support to low earnerssuchas pensioners, cuts in healthcare costs, home owners' grants), and finally, v) Measures relatingtoinnovation and long-term growth, which are the focus of this paper. Certain measures also takethe

form of regulatory adjustments ( e.g. non-financial measures to stimulate green technologies).7. Chile, Estonia, Israel, Russia and Slovenia.8. Brazil, India, Indonesia, China and South Africa.22 POLICY RESPONSES TO THE ECONOMIC CRISIS: INVESTING IN INNOVATIONFOR LONG-TERM GROWTH OECD 2009Table 2 . M ain objectives and targets of O E CD country budgetary stimulus packages,excludingmeasures aimed at the financial system ( e.g. recapitalisation), M ay 200 9 C ountry M easuresA ustralia Large infrastructure investments (road, rail, housing, and education infrastructure); taxmeasures; support toconstruction sector; financial support to pensions, workers, families, home owners and others;support to smallenterprises ( e.g. temporary business investment tax breaks); and training measures.A ustria Infrastructure (thermal renovation of public buildings, schools); investment incentivesthrough tax measures;support to SMEs (loan guarantees, direct loans, promoting export competitiveness, etc.); regionalemployment

programme; additional R&D spending; and measures relating to day-care.Belgium Speeding up of public infrastructure projects and encouraging housing investment;measures to help firms (in

particular small ones) to maintain their operations (alleviate financial burden of companies,facilitate payments);safeguarding purchasing power of households; and green technology and energy cost-cuttingmeasures.C anada Investments in roads, bridges and public transport, investments in clean water as well asin knowledge andhealth infrastructure (including post-secondary institutions, research equipment, digitisation of health records,


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extension of access to broadband services and green energy infrastructure); investments in therenovation andretrofit of social housing and support for home ownership and the housing sector; personal and

business taxrelief; access to financing, support and training to citizens affected by the crisis; and support to

most affectedsectors and communities ( e.g. targeted funding for the auto, forestry, agriculture, andmanufacturing industries).C zechRepublicIncrease in public expenditure; lowering of taxes and social insurance contributions and directassistance tohouseholds; and improving the functionality of the sickness insurance system. A morecomprehensive package iscurrently being debated.D enmark Current measures mostly focused on bank aid and financial measures (beyond the

scope of this analysis).EuropeanUnionInfrastructure projects (trans-European transport projects, high-speed Internet); employmentsupport initiative(including for the low-skilled, apprenticeships, training, reduction of social charges, etc.);investment in R&D,innovation and education; access to financing for business; reduction of administrative burdensand promotionof entrepreneurship; increase of climate change and energy security investments; improvementof the energyefficiency in buildings; and promotion of "green products" and the development of cleantechnologies for carsand construction.Finland Measures aimed at the infrastructure (transport construction and broadband); energy andmining sectors;education, research, and training; and others as part of the Finnish Innovation strategy.France Mainly investment in public enterprises (post, energy and railways), defense,investments in strategic areas(sustainable development and clean technologies, higher education and research and the digitaleconomy);investment for regional and local authorities (in partnership investment in hospitals, childcarefacilities andother social institutions); support to employment, housing, the financing of firms (in particular SMEs), health,and some measures for the environment. Special measures targeted at the automobile sector.Germany Infrastructure (particularly schools and universities, also measures to foster

broadband); measures to help businesses and households retain employment and overcome the crisis (secure funding,government guarantees,


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reduction of non-wage labour costs, income tax cut and other means to ease burden onhouseholds e.g.

payments for children); training and upgrading grants (raising levels of education); fosteringinnovation andR&D; green technologies. Special measures targeted at the automobile sector.

Hungary Accelerating construction projects of national importance; simplifying the applicationsystem of the NationalDevelopment Plan; simplifying construction regulation, financial measures to ease financing of (small) firms(including microfinance, venture capital and interest subsidies); easing the administrative burdenof firms; andR&D and Innovation support.I celand Despite heavy impact of crisis, the full operation of automatic stabilizers is guaranteed;measures for unemployed and benefits to the self-employed; improving the financial capacity of households,mortgage

payment adjustment for homeowners; payment adjustments for businesses ( e.g. postponing the payment of VAT); and measures to stimulate employment, including through the acceleration of labour-intensivetransportation investment projects.I taly Stimulating investments on infrastructures and research (including broadband); supportinglow-incomehouseholds (tax cuts for poorer families and pensioners); reducing the tax burden for SMEs;focus on greeningthe automobile sector and support to methane systems and the purchase of ecological cars.Japan Support for household consumption; tax reductions on mortgages; benefits for dependent

persons; cutting of healthcare costs; creation of new public-sector jobs in nursing, retirement homes and childcare,and jobs relatingto the protection of the environment; raising the self-sufficiency ratio of food; funds on a priority

basis toresearch in advanced technologies and related research; and reduction of taxes for eco-friendlycars.Korea Focus on sustaining green technology and value-added services to build new engines of growth (includingsustainable energy, technologies to reduce greenhouse gas emissions, information technologiesas well ashealthcare and tourism).POLICY RESPONSES TO THE ECONOMIC CRISIS: INVESTING IN INNOVATION FOR LONG-TERM GROWTH 23 OECD 2009Table 2 . M ain objectives and targets of O E CD country budgetary stimulus packages,excludingmeasures aimed at the financial system ( e.g. recapitalisation), M ay 200 9 (continued)L uxembourg


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Support of purchasing power through targeted measures; support of business activity through taxmeasures andfinancial support; of business activity through public investments; direct support of enterprises indifficulty;creation of an administrative environment conducive to economic activity; support tackling the

effects of thecrisis on employment; and measures to prepare growth after the crisis.M exicoTransport infrastructure programme; Temporary Employment Programme and the Programme toPreserveEmployment; protection of family incomes (extending the social health care coverage, freeze onenergy prices,and supporting households to change old home appliances to energy-saving equipment);supporting SMEs byreducing electricity prices, increasing credit availability and using government procurementtargeted at SMEs.N

etherlandsMeasures focused on problems in the housing market; export credit insurance; help for medium-sizedcompanies; and measures aimed at the health care sector. Additional package of measures aimedatsustainability, innovation, education, the labour market, infrastructure and construction.N orway Tax relief and measures for employment, welfare and the environment. Emphasis onmunicipalities (schools,nursing homes, churches); construction (in particular transport and buildings with energyefficiency in mind);employment, readjustment and skills; business R&D (direct grants and grants for PhD-students)and ICTs(infrastructure, digitising of government services, electronic signature, etc.). Also, focus on greenmeasures.P oland Facilitating investment financed from EU funds; stimulating investment intelecommunication infrastructure;financing for enterprises, especially SMEs (including credit guarantees, micro-finance); supportto R&D; andfocus on renewable energy.P ortugal Public investment in education (modernisation of schools); energy (especiallytransmission infrastructures andrenewable energy) and new-generation technologies (broadband networks); promotion of economic activity andemployment (creation of fund for industrial restructuring, financing facilities to SME andexporting enterprises;new corporate tax benefits; reductions of social contributions in special cases; education/training

programmes);strengthening of social protection; investments in R&D; and support to the automotive sector.Slovak Republic


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Infrastructure (roads, high-speed broadband, new atomic reactors); transfer of financial sourcesfrom basicresearch to applied research and innovation; reallocation of funds to SMEs and venture capital;and increaseenergy efficiency.

Spain Tax cuts; spending on public works and other stimulus measures to raise employmentrates; liquidity to creditstrappedcompanies (especially SMEs) and households (families, in particular); special help to theautomobilesector and modernising of basic industries such as transportation, energy, services andtelecommunications; andmodernisation of the public civil service.Switzerland Railway and road infrastructure; energy efficiency of buildings; tourism industry;and export promotion.Turkey Tax cuts (on income, businesses and consumption); other revenue and fiscal measures;credit facilities and

guarantee schemes for SMEs; contributions for public pensions; measures to reduceunemployment; support tohealth care; and measures targeted at increasing economic competitiveness (details to beconfirmed).UnitedKingdomCut in value-added tax rate; acceleration of capital investment projects (likely to include someresearchinfrastructure) and for accelerated roll-out of broadband; credit line and loan guarantees (in

particular for SMEs); and measures to combat unemployment ( e.g. paying companies to hire and train theunemployed).UnitedStatesDirect relief to working and middle-class families (tax credit, expansion of unemploymentinsurance, state fiscalreliefs, etc.); large infrastructure investments (roads, public transit, high speed rail, smartelectricity grid and

broadband); protecting health care coverage of citizens and modernising the health sector (including itscomputerisation and digital health records); increased funding for key scientific and engineeringagencies;modernisation of classrooms; laboratories and libraries; and fostering renewable energy

production andinvestments. N ote: These tables exclude financial or other measures aimed at the liquidity of the financialsystem / the banking sector.Source: OECD, based on publicly available stimulus plans, announcements and replies to theOECD questionnaire (cut-off date end of April2009).


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24 POLICY RESPONSES TO THE ECONOMIC CRISIS: INVESTING IN INNOVATIONFOR LONG-TERM GROWTH OECD 2009Table 3 . M ain objectives and targets of non - O E CD country budgetary stimulus packagesC ountry M easuresOECD

accession countriesEstonia Infrastructure (water management, transport, municipal infrastructure, etc.); vocationaleducation and healthservice infrastructure; support to firms (loan and export guarantees, technology and developmentincentives,etc.); support to the construction sector; entrepreneurship measures; occupational training andactive labour market measures; and energy-saving measures for housing.I srael Tax reductions; infrastructure investments (desalination plants, railways); credit lines for

business (especiallySMEs) and export credits; funds to hire workers and retraining; and support to R&D.C

hile Early tax returns; Construction of new public infrastructure and investment by publiccompanies; financialresources to SMEs and the economy through fiscal guarantee schemes; subsidies to housingmarket; andemployment protection (including subsidies to hire younger workers).Russia Tax cuts; enhancement of social welfare; provision of healthcare and social guarantees;state support for employment; maintenance and development of industrial and technological potential; retrainingandemployment; measures for SMEs; reduction of administrative burdens on businesses: measuresto support R&D;and measures supporting energy efficiency.Slovenia Measures aimed to infrastructure, energy and environment; support to enterprises ( i.e.assuring financialliquidity and safeguarding existing jobs, helping company investments, etc.); measures toimprove labour market, life-long learning and social security; and increasing expenditure in research andeducation.OECD enhanced engagement countriesBrazil Housing for poor families; credits for firms; and support to the automobile sector.I ndonesia Infrastructure (mainly roads); education spending; and support to affected industriesI ndia Value-added tax cut; infrastructure investments (mostly in rural areas); support to socialsecurity schemes andhousing; measures to help businesses (in particular labour-intensive export sectors, e.g .textiles/handicrafts.C hina Low-income housing; rural infrastructure; water; electricity; transportation; theenvironment; technologicalinnovation and rebuilding after disasters such as earthquakes. Support package to auto and steelindustries.South


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A fricaPublic investment in economic infrastructure; support to low-income workers, the unemployedand vulnerablegroups; employment and skills development; effective industrial or sector strategies, higher levels of private

sector investment and entrepreneurship; pursue the transformation of the informal economyactivities; andimprove and streamline government delivery and regulation. N ote: These tables exclude financial or other measures aimed at the liquidity of the financialsystem / the banking sector.Source: OECD based on publicly available stimulus plans, announcements and replies to theOECD questionnaire in the case of accessioncountries (cut-off date end of April 2009). Information for the OECD enhanced engagementcountries is provisional and not based onreplies to the OECD questionnaire.When it comes to Measures relating to innovation and long term growth, OECD and non-

OECDeconomies focus on the following themes in existing economic stimulus packages: Improving the infrastructure ( e.g. roads, mass transit, information and communication

technologies [ICT]). Support for science, research and development (R&D) and innovation. Investment in human capital, education/training (including schools, teachers). Promoting the investment in and uptake of green technologies and innovations to foster

energy-efficiency and sustainable economic growth. Support for innovation and entrepreneurship (including support for innovation and

investment in small and medium-sized enterprises [SMEs], venture capital, etc.).Most countries announce that they are implementing the above measures in order to emergestronger from the crisis through sustainable investments in infrastructure, research and other means to secure competitiveness and a new foundation for growth in the future.POLICY RESPONSES TO THE ECONOMIC CRISIS: INVESTING IN INNOVATION FOR LONG-TERM GROWTH 2 5 OECD 2009M easures relating to innovation and long - term growthThe second part of this paper discusses the planned measures relating to innovation and longtermgrowth in more detail while providing country examples.In terms of financial weight, infrastructure investments, education and sometimes greentechnologies are the first and second most important of these spending items in stimulus

packages(Table 4). Yet, in many cases the above components of economic stimulus packages are related:e.g.additional financial measures in favour of infrastructure overlap with spending on R&D (newlaboratories) and spending on the education category (new schools). Similarly, investments ingreentechnology contain some spending for more energy-efficient housing ( i.e. infrastructure) or R&D(fostering research in renewable energy). Some more medium-term impacts also exist, e.g.scientific


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research results fostered by increased R&D budget might later prove useful for the developmentof smarter infrastructures ( e.g. intelligent transport systems) or greener technologies.Table 4 . Financial weights of selected, long - term policies in O E CD country stimuluspackages, M ay 200 9 Infrastructure Science, R&

Dand innovation Education Green technologyA ustralia AUD 9.7 billion AUD 2.9 billion AUD 15.7-17 billion AUD 5.7 billion

% of GDP 0.82% 0.25% up to 1.4% 0.48%C anada CAD 20.3 billion CAD 800 million 1.9 billion CAD 2.8 billion% of GDP 1.27% 0.05% 0.12% 0.18%C hile USD 700 million USD 8.8 million USD 147 million USD 0% of GDP 0.50% 0.01% 0.10% 0%Finland EUR 910 million EUR 25 million1 EUR 30 million EUR 38 million% of GDP 0.48% 0.01% 0.02% 0.02%France EUR 4.7 billion EUR 46 million2 EUR 731 million EUR 30 million% of GDP 0.24% 0.00% 0.04% 0.00%

Germany 3 EUR 11.5 billion4 EUR 1.4 billion EUR 14.5 billion5 EUR 5.7 billion% of GDP 0.5% 0.1% 0.6% 0.2%Korea KRW 50 trillion (USD 36 billion) of green investments (5.14% of GDP) distributedthroughout thesecategories although a detailed break-down is not yet available.N orway NOK 3.8 billion NOK 170 million2 NOK 270 million NOK 1.6 billion% of GDP 0.16% 0.01% 0.01% 0.06%Sweden SEK 8.6 billion SEK 9 billion SEK 500 million SEK 2 billion% of GDP 0.27% 0.29% 0.016% 0.06%P oland PLN 91,3 billion PLN 16,8 billion n.a. PLN 2.5 billion% of GDP 0.072% 0.013% n.a. 0.002%P ortugal EUR 50 million EUR 224 million EUR 682 million6 EUR 260 million% of GDP 0.03% 0,13% 0.41% 0.16%US A USD 100 billion USD 16 billion USD 83 bill USD 59 billion% of GDP 0.70% 0.11% 0.58% 0.41% N ote : Based on 2008 GDP. Figures are only indicative as applying identical, clear-cut definitionsto these categories and making themcomparable across countries is very difficult. For instance, a certain degree of double-countingmay still occur between spending on itemssuch as infrastructure and education ( e.g. building schools) as measures could fit in multiplecategories.1. Finland has high public R&D support outside of its stimulus package and has pledged tomaintain it.2. The R&D figures for France, Norway and Portugal do not include carrying forward their R&Dtax credit payments.3. In Germany, some expenditures remain to be determined on the sub-federal level.4. This figure contains EUR 0.3 billion additional funding for a programme for modernisinginsulation of buildings and roughlyEUR 0.8 billion for energy-use modernisation of federal buildings.


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5. This figure contains EUR 8.6 billion of investments in energy efficient school and other education-related buildings.6. In the case of Portugal EUR 500 million for the modernisation of schools is only included inEducation.Source : OECD estimates based on publicly available data, replies to the OECD questionnaire

and consultations with member countries.The policies discussed below are only part of the government responses to the economic crisisand only a broader analysis can yield an understanding of all public measures and their impacts.2 6 POLICY RESPONSES TO THE ECONOMIC CRISIS: INVESTING IN INNOVATIONFOR LONG-TERM GROWTH OECD 2009 I nvesting in infrastructureMost OECD and non-OECD economic stimulus packages contain a focus on improving thenational infrastructure mostly through public works see Tables 2 and 3. The targetedinfrastructureinvestments are mostly concerned with roads, railroads (including freight networks), public

transport, airports, childcare facilities, schools and universities, hospitals, energy networks andsecurity, and a modern ICT infrastructure (see Box 2).In its Nation Building Package, Australia, for instance, plans development work on projects inhousing, health and hospitals, and transport (with a focus on rail networks) and communications(approximately AUD 10 billion worth of infrastructure investment, excluding plans relating tonextgenerationnetworks). New Zealand has factored in spending USD 100 million on roads andUSD 87 million on housing, with a focus on initiating about USD 70 million-worth of fast-tracked

projects before July 2009. Japan has offered a subsidy to municipalities of JPY 4 billion to repair andquakeproof public facilities. In the context of its plan to improve the environment for rivers,Korea

plans to establish a green transport network, a green information infrastructure and to securealternative water sources and build eco-friendly mid-sized dams.Canada has assigned CAD 6.4 billion to renew infrastructure in partnership with provinces andmunicipalities and CAD 515 million to accelerate projects such as construction of schools, water andwaste-water projects and critical community services infrastructure. The United States will bedevoting a total of USD 100 billion to infrastructure (in addition to research infrastructure): over USD 17 billion in public transit and high-speed rail, USD 40 billion for roads, bridges, dams,water,and USD 7 billion to expand broadband access. Mexico plans to rebuild the nations highways,

bridges and other public-use facilities (USD 42 billion). Chiles special infrastructure plan worthUSD700 million (10% increase on the 2009 budget) is focused on an extensive housing investment

plan,road construction and maintenance, and investments in different areas such as health-relatedinitiatives, schools and stadiums, among others.The EU has proposed to modernise its infrastructure with a focus on trans-European energy


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interconnections and broadband projects, mostly through the frontloading of existing budgets.Germany announced EUR 18 billion for infrastructure, mostly educational infrastructure(childcarefacilities, schools, and universities), hospitals, transport and ICTs. The Netherlands hasannounced

EUR 1.2 billion in infrastructure and construction investments ( e.g. health care buildings,schools, bridges, ports). Building on its crisis-related EUR 4.7 billion infrastructure spending, Spain planstoinvigorate merchandise transport by high-speed railway and to improve the road infrastructures.Italy is to fund railway investments (EUR 960 million), and the quality of the public transportservice(about EUR 1.5 billion over the three-year period 2009-2011). The Slovak Republic is buildinghighways, new energy infrastructure and speeding up broadband Internet access whereas theCzechRepublic is spending CZK 14.4 billion on infrastructure and Estonia EUR 670 million. South

Africa iscommitted to maintaining the planned high levels of investment in public sector infrastructure(mainlytransport, energy, water and sanitation infrastructure, housing construction, ICT infrastructure, aswellas education and health infrastructure).Most of these infrastructure investments have the express aim to add to resource-preservationand sustainability. For instance, the construction of more energy-efficient buildings is privileged,along with retro-fitting and updating of public buildings and schools. A few countries haveannouncedinvestment in thermal renovation of public buildings and households ( e.g. Australia's plan toinsulate2.7 million homes). In many plans, the construction of roads and public transport is expected toleadto reduced traffic congestion and gas consumption.

Non-regulatory measures in the field of infrastructure are also heavily concerned with thestreamlining of the approval process of (large) infrastructure projects.POLICY RESPONSES TO THE ECONOMIC CRISIS: INVESTING IN INNOVATION FOR LONG-TERM GROWTH 27 OECD 2009Box 2 . " N etworked recovery": I nvesting in IC T infrastructure and applicationsMany of the existing stimulus packages put some emphasis on deploying ICT infrastructure anda 'networked recovery'

i.e. the notion that ICT infrastructure and its use are a tool to revive the economy through newinnovative services and offer solutions to pressing social challenges.Existing references to communications infrastructure in stimulus plans cover two key areas:extending broadband toareas without connectivity and upgrading existing networks to support very high-speedcommunications. The focus of many


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plans is on closing the broadband gap by providing universal broadband coverage throughout thecountry, but mostly in ruraland remote areas. Some plans also devote resources to building out new, very high-speednetworks (next-generationnetworks). In most cases, the exact meaning of broadband and unserved or underserved' is

mostly not yet defined in termsof geography, speeds or technology. In all cases, the deployment of broadband is to ensureconnectivity of most if not all

businesses and households. The table below illustrates these initiatives, including details on the planned financial investmentand policy goals. Other OECD countries have developed new broadband plans in parallel to thedevelopment of their stimulus

packages ( e.g. France, Hungary, Japan, Ireland, Korea, and Spain). Other OECD work deals withkey considerations to take intoaccount when public funding is used to support broadband.9P lanned investment Goals P enetration targets Speed targetsA

ustralia AUD 40 billion(USD 33.4 billion)Fibre all the way to the premises 90% of Australians 100 MB/sC anada CAD 225 million(USD 211 million)Extending broadband coverage to un-served rural and remotecommunitiesn.a. n.a.Finland EUR 66 million of EUR 200 million(public-private)Extending high-speed

broadbandEvery household by 2016 At least 1 MB/s

by 2010, 100MB/s by 2016France n.a. Development of broadband network in small or medium-sizedcities, extending (fixed / mobile) broadband.Internet on TGV Est lines (EUR 15 million), and developmentor networks for education and researchAccess to broadband by2010 and mobile

broadband by 2012 for everyonen.a.EU EUR 1 billion(USD 1.46 billion)Extending and upgrading high-speed Internet (focus on ruralcommunities)100% coverage of high


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speed internet by 2010.n.a.Germany estimated EUR 150 million(USD 219 million)Accelerating the spread of broadband networks. By 2010 all

unserved areas connected. nationwide capable broadbandaccess by no later than the end of 2010By 2014, of householdsshould have access tohigh-speed Internet (all

by 2018).Target is 50MB/sJapan JPY 3 trillion(USD 29 billion)Intelligent transport systems, improving IT infrastructure in

the medical sector (new fibre-optic network), training of IT personnel, the promotion of e-government, and the creation of new industries such as environment-related IT.n.a. n.a.L uxembourgEUR 195 million(USD 285 million)Accelerating the build-out of Luxconnect information highway,including through boosting public telecommunications worksn.a. n.a.P ortugal EUR 50 million fiscalincentives1(USD 73 million)Subsidised investments in new generation broadbandnetworksOptic fibre that will allow1,5 million users toconnectn.a.Slovenia over EUR 15 million Extending broadband to households and public institutionsConnecting householdsand public institutionsAt least 1 MB/s

by end of 2010Spain n.a. Measures for overseeing the installation of new generationfibre and regulating broadbandn.a. Up to 30 MB/sthroughoutSpain, at costoriented

prices


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UnitedKingdom 2 to be announced Universal service commitment for broadband Virtually everycommunity2 MB/s per

second by 2012UnitedStatesUSD 7.2 billion(EUR 4.9 billion)To foster broadband service to unserved / underserved areas,

promote broadband in schools, libraries, health-care providers, and other entities.n.a. Not set minimumdata speeds1. In parallel to its stimulus package, Portugal is planning to increase broadband Internet and

local area network access in schools (EUR 61 million).2. The UK also pursues the 'Digital Region' project, a GBP 10

Speaking at a Labor Day event in Milwaukee, Wis., President Barack Obama unveiled a newstimulus package designed to jump-start the economy before the November elections, as pollsshow Democrats lagging.

Obama is not pressing for a payroll tax holiday the most stimulative tax cut, as it encouragesemployers to hire workers within a given time frame. Instead, the Obama administration is

proposing $50 billion in new infrastructure investment. Here is the relevant portion of thespeech.

THE PRESIDENT: Now, let me tell you, another thing weve done is to make long-overdueinvestments in upgrading our outdated, our inefficient national infrastructure. Were talkingroads. Were talking bridges. Were talking dams, levees. But were also talking a smart electricgrid that can bring clean energy to new areas. Were talking about broadband Internet so thateverybody is plugged in. Were talking about high-speed rail lines required to compete in a 21stcentury economy. I want to get down from Milwaukee down to Chicago quick. Avoid a traffic

jam.

Were talking investments in tomorrow that are creating hundreds of thousands of private sector jobs right now. Because of these investments, and the tens of thousands of projects they spurredall across the country, the battered construction sector actually grew last month for the first timein a very long time.

But, you know, the folks here in the trades know what Im talking about nearly one in fiveconstruction workers are unemployed. One in five. Nobody has been hit harder than construction


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workers. And a lot of those folks, they had lost their jobs in manufacturing and went intoconstruction; now theyve lost their jobs again.

It doesnt do anybody any good when so many hardworking Americans have been idled for months, even years, at a time when there is so much of America that needs rebuilding.

So, thats why, Milwaukee, today, I am announcing a new plan for rebuilding and modernizingAmericas roads and rails and runways for the long term. I want America to have the bestinfrastructure in the world. We used to have the best infrastructure in the world. We can have itagain. We are going to make it happen.

Over the next six years, over the next six years, we are going to rebuild 150,000 miles of our roads - thats enough to circle the world six times. Thats a lot of road. Were going to lay andmaintain 4,000 miles of our railways - enough to stretch coast to coast. Were going to restore150 miles of runways. And were going to advance a next-generation air-traffic control system toreduce travel time and delays for American travelers. I think everybody can agree on that.

Anybody want more delays in airports?AUDIENCE: No!

THE PRESIDENT: No, I didnt think so. Thats not a Republican or a Democratic idea. We allwant to get to where we need to go. I mean, Ive got Air Force One now, its nice. But I stillremember what it was like.

This is a plan that will be fully paid for. It will not add to the deficit over time - were going towork with Congress to see to that. W e want to set up an infrastructure bank to leveragefederal dollars and focus on the smartest investments . W ere going to continue our strategy

to build a national high-speed rail network that reduces congestion and travel times andreduces harmful emissions . W e want to cut waste and bureaucracy and consolidate and

collapse more than 1 00 different programs that too often duplicate each other . So we wantto change the way W ashington spends your tax dollars . W e want to reform a haphazard,patchwork way of doing business . W e want to focus on less wasteful approaches than wevegot right now . W e want competition and innovation that gives us the best bang for thebuck .

The administration is also asking for $100 billion to make permanent a research anddevelopment tax credit and $200 billion to let companies to deduct the full cost of the capitalinvestment next year. Finally, the White House is pushing hard for the Senate to pass the small

business bill that has languished for months when it returns from recess next week

2009 Stimulus Package Overview.


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The economic stimulus package was the primary source for the Presidential debates in November 2008what the package would entail and how the money would be divvied out became the major concern of the economy. President George W. Bush outlined the new stimulus package and now it remains that President Barak Obama must issue out nearly a trillion dollarsworth of funds. Thus, it is imperative to understand how the economic stimulus package is meant

to perform, and what went wrong in past stimulus packages, particularly the most recent packagefrom 2008, before looking into the impact that it will have on the residential real estate market inthe future.

It was well-known that the stimulus package of 2008 failed considerably as it consisted primarily of tax rebatesand surveys showed that much of the extra money was saved or used to pay debts, neither of which generates direct economic activity (New York Times, EconomicStimulus). According to the same article by the New York Times, the economic stimulus

package of 2009 will total $825 billion (or more) and will include a combination of fundingsolutions. The numbers have been changed drastically for the past eight months, and even the

New York Times doesnt have the exact breakdown, but they do comment that a basic

breakdown of the finances will include $507 billion in spending programs and $282 billion intax relief (New York Times). They have solid information, but the question remains: will thiseconomic stimulus package have the same faults as the package that caused so much economicand public dissent in 2008?

Spending programs and tax relief mean virtually nothing for an economy seeking answers, but as David Leonhardt wrote in his article, when governments have taken aggressive steps tostop an economic decline, they have succeeded. The Germans did it in the 1930seven thelimp Japanese recovery plan of the 1990s makes the casealthough dithering over a bank rescue kept Japan in a slump, government spendingmade things better than they wouldotherwise have been. Leonhardt makes the case that since the Germans and Japanese couldmake a stimulus package work, then the US should have similar success. His theory is basedupon the history during the summer of 1933 [when heads of government and their financeministers met in London to talk about a global economic crisis. They accomplished little andwent home to battle the crisis in their own ways (Leonhardt). The story continues that morethan any other country, Germany.. then set out on a serious stimulus program. The government

built up the militaryput up stadiums for the 1936 Berlin Olympics and built monuments[leading Germany to] escape the Great Depression faster than other countries (Leonhardt).Because of Germanys efforts, corporate profits boomed and unemployment sank (Leonhardt).Leonhardt is making the example from history because it worked, and he comments, it is stillrelevant.

One question that has given the 2009 stimulus package so many political difficulties is that the public doesnt know where the money is going. According to an article on SeekingAlpha.com byOckham Research, the Bank of America alone needed $200 billion just to stave off bankruptcy in2008 And, even worse, this amount is far from what they really need to get back to where theywere before 2008. The article goes further to say that there is still considerable risk in thesecompanies, even though nationalization is not likely, there could be more pain yet to come in theconsumer credit and commercial real estate markets. These commercial banks have a lot of exposure to both of these areas. We are not saying whether Bank of America will need to raise


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capital again or not, but we do not see a rapid recovery for them either (Ockham Research). The problem facing Bank of America right now, and all the other banks that havent failed or mergedwith others, is a newly distrusting economy.

It seems, to an outside observer at least, that there is a great deal of spending occurring that is

unrelated to the housing crisis now plaguing the economy. A New York Times article byEdmund Andrews and Peter Baker does much to explain what went wrong when insurance giant,AIG, decided to give out bonuses after their $150 billion bailout from the first stimulus packagein 2008. In fact, AIG planned to pay about $165 million in bonuses by [March 14, 2009] toexecutives in the same business unit that brought the company to the brink of collapse last year.Moreover, word of the bonuses stirred such deep consternation inside the Obama administrationthat [the] Treasury Secretarytold the firm they were unacceptable and demanded they berenegotiated. But the bonuses will go forward because lawyers said the firm was contractuallyobligated to pay them (Andrews and Baker). It seems an easy way for AIG to keep their

bonuses, by claiming they are backed by the lawwhen the President himself is in charge of issuing the money and determining how it is spent, especially since, less than a week after the

taxpayers rescued AIG, company executives could be found wining and dining at one of the mostexclusive resorts in the nation (Whoriskey), spending close to a million dollars on entertainmentand spa treatments.

The debates rage over the scruples of AIG and their daring in a time of economic crisis. Theyhave countered that the bonuses are legally warranted, despite the fact that they have been caughtspending stimulus money on wasteful entertainment. This alone is enough to cause severedistrust for the government within the economyespecially since the government seems to havetheir hands tied in regulating AIG. But, as the New York Times has commented, the governmentis still obligated to help AIG financially, despite their misdeeds this past year.

Moving on, while indeed the stimulus package itself might seem complex and vague, the rules of the tax incentive are simple. Les Christie of CNNMoney explains that first-time buyers canclaim a credit worth $8,000 - or 10% of the home's value, whichever is less - on their 2008 or 2009 taxes if they purchase their new home before December 1, 2009. Christie goes on toclarify that buyers may not have owned a home for the past three years to qualify as [a] firsttime buyer. They must also live in the house for at least three years, or they will be obligated to

pay back the credit.

Meaning that, for the people who have been providing stimulus for the economy by buying oldhomes, renovating them, and flipping them, the tax credit does not exist. Further stipulations saythat they get to keep the credit if they can make the payments without defaulting or being late, or,of course, going into foreclosure.

The problem with this tax incentive is that, offered to such a select group of people as it is, itmay not provide enough stimulation for the economy. To truly stimulate this economy,something must first be done about the three million people who just lost their homes toforeclosure last year (Armour, USA Today). Where are they living? Did they become part of therenting community, are they back living with their parents, or are they homeless? There is amuch deeper issue at stake here, and one which it appears the stimulation coordinators are


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adeptly ignoring. Of course, they do not want additional foreclosures on their hands by providingstimulation to the wrong people, but as Armour makes note, some consideration must be given tothose who foreclosed last year.

As Tyler Cowen said in his recent article, I dont see much of a huge confidence boost

following the passage of the stimulus bill. I dont blame President Barak Obama here. Rather,theres too much bad news from other quarters. Spending towards recovery is like trying to catchthe proverbial falling knife. What Cowen means is that this new economic stimulus bill might

be too little too late. A person can hardly get out of debt when taking on more credit cards to doso, and if this is the case, which it most usually is, how can the economy be saved by yet another,much larger loan? Cowen goes further to make the prediction that the economy will face yetanother recession when these stimulus funds run out.

Foreclosure Crisis.

Reviewing the affect on home loans within the last six years, a look will now be taken into the

root cause of the recent foreclosures and the resulting housing crisis of 2009. For now, tounderstand how the housing crisis became such a grave concern, a search to find the source of the foreclosure crisis between 2006 and 2009 must be undergone. The experts all seem to agreethat by 2007, the emphasis on lending hit an all-time highand perhaps this should have beenviewed as a foreshadow into the future. Such free-lending practices, it can be said, caused theslow spiral into debt and foreclosures now seen in the economy today.

Moreover, for the first time in economic history, predatory lending may be the root cause in thiscurrent housing crisis. In 2007, a Field Hearing entitled The Effect of Predatory lending and theForeclosure Crisis on Twin Cities Communities and Neighborhoods, was given before the USHouse of Representatives. Sharon Glover was called before the stand to give her testimony on

predatory lending practices in her city. Glover testified that her husband dies in 1994 and it soon became difficult to make her $1200 mortgage payment. They purchased the home in 1984 for $94,000; and, in 10 years of payments, Glover was looking to refinance to lower her monthlycosts.

Ocwen Mortgage Company approached her and she signed the paperwork without reallyknowing what she had agreed to. Later, Glover discovered that her home was refinanced for $162,000of which $70,000 was missing and her new payments rose to $1550. In 2003, her

payments went up to $1945 a month and Glover was forced into foreclosure a short time later.Glovers story is like numerous others called to testify before the House of Representatives in2007 and serves to highlight the beginning of the foreclosure crisis.

Moreover, back at the start of 2004, Americas banks discovered that they could borrow moneycheaply from Asia and lend it out to higher-yielding domestic mortgages while usingsophisticated financial engineering to control their risks (Brad Delong, The StimulusPackage). Overall, financial markets are thus voting that the Obama deficit-spending packagewill succeed: that its implementation will not raise interest ratesand that the increase ingovernment spending will not be neutralized by a corresponding fall in private spending(Delong). This brings up the time-honored philosophy of supply and demand. The more money


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given out by the banks, the less money the banks have and the higher interest rates, by this process, have to climb.

Any time free lending is introduced into an economy, there will be an eventual and unavoidableend. Money is not an endless resource. At the time, however, free lending was seen as a way to

revive a waning economy. Lower interest rates and less stringent application requirements hadmore people buying homes than ever before. All in all, the economy, it could have been said by2006, was looking promising for the United States.

As Delong mentions, free-lending began in 2004, as banks realized it would be cheaper to freely borrow great sums of money and turn it into residential and corporate real estate loans for a great profit. Between 2004 and 2006, spending on housing roared upward from a pace of $624 billionto a pace of $798 billion a year (Delong). The word flipping soon hit the American vernacular as many realized how easy it was to obtain a home loan, fix up the house, and sell it for a mass

profit. However, soon there came a point where not only did the houses stop selling, but theflippers could no longer afford the massive mortgages while waiting for buyers that just werent

coming.Two reality shows called Flipping Out and Property Ladder both highlight the lives of flippers and depict them buying homes for bargain prices, fixing them up with high-scaleappliances and features, and selling them rapidly for high profits. Both shows have seen quite afew seasons, but both shows have also seen a very significant decline in how properties areselling, which will be discussed fully in the next section when a look is taken at the decline of home values.

The reality shows highlight very clearly that fewer homes, especially in the last year, have beenselling. It is not uncommon to catch a new episode of either show and watch as the flippers go in

with high hopes only to be left with an excessive mortgage payment and no potential buyers onthe horizon. What the shows do, perhaps by accidentor maybe by designis to emphasize thefact that not only are more homes than ever in foreclosure, but also, less people than ever are

buying.

In September 2007, a Hearing was called before the House of Representatives entitled RecentEvents in the Credit and Mortgage Markets and Possible Implications for US Consumers and theGlobal Economy. Congressman Gary Ackerman was called to the stand to explain how free-lending was responsible for the current and future real estate markets decline. Ackerman saidthat from 1995 until not so long ago, Americas subprime mortgage market seemed to be in themidst of a boomsubprime products were so lucrative that brokers approved the loans hastilyand sometimes recklessly, sometimes without requiring complete and proper documentation.

Ackerman explained that subprime products were being marketed to individuals who were notcredit-worthy enough for a mortgageby all accounts, this rush to pass out high-risk loans wasthe first mistake. Individuals who had no business being approved for car loans were moving intonew houses. Ackerman was then asked to comment on the outcome of the loans, to which heresponded that originators then took these loansmany of which should have been assessed asmuch riskier than they wereand packaged them into securities to sell to investors.


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When further questioned, Ackerman stated that in an effort to deliberately mislead investors,however, some originators and credit-rating agenciescalled Nationally Recognized StatisticalRating Organizations (or, NRSROs), colluded. First, the credit rating firms would consultwiththe originatorsto advise the originators how to design the packaged securities to ensure that theriskiest piece of the product was adequately masked. Then, the credit raters would

assignfavorable ratings to these mortgage-backed bonds, giving investors the impression that aneutral, unbiased party with a proven track record of assessing risks thought highly of thesevolatile products.

Ackerman finished by commenting that most perplexing of all is that Congress alreadyidentified problems stemming from NRSROs and passed legislation seeking to increasestatutory authority to oversee the credit-rating agency industrythe Credit Rating ReformActwas signed into law by President Bush [in 2006]but [Congress] has not acted to either discipline these NRSROsor to make certain that these insidious practices are thwarted in thefuture.

However, despite Ackermans testimony in 2007, unprecedented defaults and the prospect thatmore than two million families may lose their home in 2008 alone, signals capitalisms biggesttest in the post-war era (Turner, 1). In fact, current numbers estimate for 2008, to paraphraseStephanie Armour of USA Today, that there were more than three million foreclosures in 2008,to which they estimate that nearly one in fifty-four homes were foreclosed upon.

A report in the same article by USA Today titled, 2008 Foreclosure Fillings Set Records, alsodetails the numbers, quoting that foreclosures [in 2008] were up 81% from 2007 and 225%from 2006, according to a report from RealtyTrac. Which, in looking at foreclosure

percentages, reiterates that the US has not seen such numbers in close to a century.

Figure 1: Source Stephanie Armour of USA TodayAs the figure above shows, the darkest color is where foreclosure numbers were at their highest,the lightest color being the smallest amount of change. The figure also shows that the foreclosurerate in 2006 was at 1.8%, and the change between 2007 and 2008 reached 81.2%.

Moreover, foreclosures remain a dominant concern for federal policymakers as Congressweighs the release of the second $350 billion from the $700 billion Troubled Asset Relief Program it passed in October. The House is expected to vote on a bill that would require at least$50 billion of that money to be spent on mitigating foreclosures (Armour). Furthermore, withforeclosures continuing to rise and the economy in a downward spiral, its not surprising you seeincreased foreclosures because of increased unemploymentthe question is what shape andform the help for homeowners will take (Armour). In fact, Armour is right that unemploymentis at an all time high. The Financial Forecast Center shows that the unemployment rate iscurrently at around 8%, but, by the end of this year, the rate could reach as high as 10.3%. Ratesthis high havent been seen in years. The rates have been steadily maintaining around 6% since1984, and in just 2004 rates were around 4% (Financial Forecast Center). A rise of nearly 6% in

just five years is dramatic.


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The USA Today article goes on to say that as foreclosures mount, other homeowners are jumping on falling interest rates to lower their monthly mortgage payments. Refinancingapplications, now about 85% of all mortgage applications, have surged to levels not seen since2003. In attempt to pay looming bills, people are often introduced to the process of refinancingtheir homes. For many, this process works wella new interest rate is granted for the term of

their loan and money can be cashed out of the equity paid into the loan itself. Home owners getmoney in their pocket and banks get money back into theirs as a result. Refinancing, in any case,stimulates both the lender and the borrower, and both can reintroduce that money back into theeconomy.

An article by Kelly Curran made notice that refinancing giant, Fannie Mae, experienced arefinancing [jump] to $77 billion in March, nearly twice the refinancing volume it experiencedduring the month of February and its largest refinance month since 2003. Curran interviewedTom Lund , the executive vice president who said that the volumes we are seeing are veryencouraginga majority of our business volume in March was in refinanced loans, and weanticipate that volumes will increase even more as millions of additional homeowners become

eligible to refinance under the Presidents Making Home Affordable plan. As money getsflooded back into the housing market from the stimulus bill, perhaps even more home ownerswill be able to refinance.

As it stands, the Making Home Affordable program is made up of two levels of aid one being a refinance program effective for an estimated 4 to 5 million homeowners. And given therecent historically low mortgage rates, homeowners have a strong incentive to try and refinance(Curran). Refinancing, whenever possible, is a great option for re-infusing the economy andstimulating the housing boom once again.

Luke Mullins of US News writes that it wasnt too long ago that mortgage rates were expected

to move sharply higher in the coming months thanks to rattled investors and mounting inflation.But while falling home prices and jittery financial markets have done little to assuage investor fears, a number of recent developments have combined to create a decidedly optimisticmortgage-rate outlook for 2009. He goes on to say that the National Bureau of EconomicResearch recently announced that the United States did indeed enter a recession in December 2007. While predictions as to the duration and depth of the recession vary, economists atGoldman Sachs revised their original forecast in the face of deteriorating economicnews[which] deepens and extends the expected recession (Mullins).

Mullins predicts that the recession is likely to put additional downward pressure on mortgagerates in two key ways. First, the economic contraction will work to stifle inflation. And second, itwill support the ongoing flight to quality, whereby investors move cash from more riskyinvestmentslike stocksto ultra-safe government securities. In doing so, more money leavesthe stock market, which means businesseslike bankslose their value and will, as a result,have less money to lend.

Moreover, although mortgage rates are likely to remain attractive next year, not everyone will be able to take advantage of them. Many homeowners with adjustable-rate mortgages that wouldlike to refinance into more-affordable, fixed-rate home loans have negative equity, meaning...


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Documents

Broad Characteristics of Economic Stimulus Packages