Resident Fellow  Desmond Lachman

Sir, Your editorial "More help needed for US economy" (August 11), recommending a second fiscal stimulus package, sits oddly with the mounting evidence that the first fiscal package has failed so miserably to jumpstart the US economy.

Before Congress goes down that path, it would do well to focus on how the ongoing housing market and credit market busts distinguish the present US economic downturn from previous cyclical downturns, which makes the present downturn less responsive to the traditional monetary and fiscal policy quick fixes of the past.

In recent congressional testimony, Treasury secretary Hank Paulson correctly observed that the US economy would continue to encounter "bumps in the road" so long as home prices were falling. Yet, the annualised pace of decline in home prices at the national level has now picked up to 16 per cent. And it has done so at a time that a record level of unsold housing inventories and an alarming rise in the foreclosure rate now point to a further substantial decline in home prices in the year ahead.

Rather than focusing on another fiscal stimulus quick fix, which might be politically gratifying but of dubious longer-run economic value, Congress should be grappling with the very much thornier and pressing issue of how to put a brake on the present downward spiral of the housing market. It should do so not simply because housing constitutes the main component of the average American's wealth but because of the potential damage that a further decline in home prices could wreak on an already fragile US banking system.

Congress should also now be focusing on the probable enormous cost to the US taxpayer of repairing a financial system that has been ravaged by years of egregiously poor lending practices that went well beyond reckless mortgage lending. Hopefully, such an exercise might give Congress pause about engaging in another bout of fiscal policy largesse to boost consumption in an economy that is so desperately deficient in savings.

Desmond Lachman is a resident fellow at AEI.