With the financial rescue package, the Treasury and the Fed are creating money and credit to jumpstart lending and to alleviate the recession, thus avoiding a deflationary spiral, says Marina Whitman, a professor at the Gerald R. Ford School of Public Policy and Ross School of Business.
"But as the economy recovers, it will be important to mop up the liquidity they created," said Whitman, whose research interests include international economics and corporate governance. "Otherwise, there will be strong inflationary pressures from it."
The stimulus package must be large and effective enough to revive spending by businesses and consumers, she says. The programs in the stimulus plan must be both timely and temporary, but terminating them when economy rebounds could be difficult, she adds.
"Can you imagine the public backlash if government assistance to the unemployed in maintaining their health care coverage or for education at the local level was suddenly cut off?" Whitman asked.
Ford School of Public Policy: www.fordschool.umich.edu
Ross School of Business: www.bus.umich.edu
Marina WhitmanFord School of Public PolicyRoss School of Business