Oct. 17 (Bloomberg) -- For two years after housing prices began falling and a year after the bursting of that bubble turned into a financial crisis, U.S. consumers soldiered on. Month after month, their spending, the mainstay of the economy, kept increasing.

Now, for the first time in 17 years, slower income growth, tighter credit and the loss of wealth from plunging stock prices -- along with house prices that still are falling -- have caused them to retrench. The result is the onset of a recession the depth of which no one can yet gauge.

Various parts of the government, with the Federal Reserve leading the way, have taken a series of unprecedented steps to deal with the financial crisis. But more aggressive action is needed to help restore consumer and business confidence and enable households and state and local governments to boost spending.

That's the best way to keep the slump as short and as shallow as possible.

One bit of help on the way is a 5.8 percent cost-of-living adjustment in monthly Social Security benefits beginning in January, the biggest increase in more than a quarter-century. The Social Security Administration said yesterday that will lift the average retired worker's benefit by $63 a month, or a cumulative $36 billion next year.

The Fed cut its target for the overnight lending rate by a half-percentage point to 1.5 percent on Oct. 8. The Federal Open Market Committee should do so again at its Oct. 28-29 meeting. That action is already widely anticipated in financial markets.

Congressional leaders are also planning to have a lame-duck session after the Nov. 4 election to consider enacting a fiscal stimulus package, expanding on the $168 billion measure passed in February that provided rebate checks to most taxpayers.

Proper Stimulus

Another dose of stimulus is urgently needed, though it should be carefully crafted. Some ideas under discussion, such as a cut in capital-gains taxes, would reduce federal revenue without providing much immediate help to the economy.

Given the grave economic situation and the need for quick action, Democrat Barack Obama and Republican John McCain should have their advisers begin planning for a presidential transition so it can get under way as soon as the election result is known.

For instance, by Election Day, they should know who they want as Treasury secretary, chairman of the Council of Economic Advisers and head of the White House National Economic Council - - or whatever its equivalent might be called in the next administration. If possible, their choices should be available a few days after the election to advise the president-elect and Congress as the debate over the stimulus package begins.

Thawing Markets

On Oct. 15, both Fed Chairman Ben S. Bernanke and his vice chairman, Donald L. Kohn, said that all the measures so far -- including injecting $250 billion of new capital into U.S. banks -- won't free up frozen credit markets right away or restore economic growth quickly.

``Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,'' Bernanke told the Economic Club of New York.

The Treasury is working as fast as it can to encourage additional banks to accept an infusion of government capital to allow them to expand their lending. The department is moving rapidly also to begin purchasing troubled mortgage-related assets from financial institutions, both to get them off banks' balance sheets and to establish prices for assets for which there has been no ready market.

Awkward Period

Efforts by the Federal Deposit Insurance Corp., to expand coverage of its insurance and to guarantee new debt issued by banks, and by the Fed, to begin purchases of some commercial paper directly from issuers, also will take time to help free up lending.

All in all, this is an awkward period for many of the stabilization efforts. They have been announced but not yet implemented, and details haven't been agreed upon, so it's impossible to know what impact they eventually will have.

Whatever stimulus package is debated in the lame-duck Congress, it should focus on items that will provide help right away. The middle-class tax cuts of $500 for individuals and $1,000 for couples proposed by Obama would fit that bill. So would his idea for $25 billion in grants to state and local governments, some of which -- such as Virginia and Maryland -- are talking about employee furloughs and other budget cuts as revenue falls.

Less Effective Ideas

More money for infrastructure investments, also proposed by Obama, would be less effective. McCain's proposal to use $300 billion of the $700 billion in the rescue plan to buy mortgages at face value and to grant government-insured mortgages to the owners, reflecting a home's lower value, would provide a huge windfall for lenders.

Obama's suggestion for a $3,000 grant for each employee a business adds, beyond some base number of workers, isn't a good idea. There's too much churning in the labor market even in normal times for tax authorities to be sure companies don't manipulate the numbers. What if a job is added at one location and one is cut at another?

It won't be easy to come up with a coherent plan that will really help. The president-elect and the Congress have to make it happen.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net

Last Updated: October 17, 2008 00:01 EDT