In Part III of my 2009 economic outlook series, I made the argument that government would need to inject another $1-1.2 trillion into the banking system to stabilize the economy. The Wall Street Journal reported today that the Obama administration is considering doing just that. [subscription required] Supposedly the plan could be announced in the next couple of days. This should be viewed as constructive for the markets. In my view, this makes a massive fiscal stimulus package unnecessary and potentially inflationary and dollar-negative. While I like the investment focus of much of the package as a blueprint for future government spending focus (transportation infrastructure, energy efficiency, electrical grid, broadband access, electronic medical records), and have no problem with running mild deficits, the magnitude of the deficits we run will be the greatest by far relative to the economy since World War II and serves to put us further in debt to foreign countries when we should be seeking to move in the opposite direction.
Source: WSJ. Note: this chart doesn't include potential $1-2 trillion of additional bank capital injections
I don't mind the portion of the deficit allocated to the bank recapitalization, as long as the money is used to buy assets that will be sold eventually while providing a positive return.