International Monetary Fund sees weak U.S. economy through 2009!

WASHINGTON - July 30, 2008 - The U.S. economy will be weaker in 2009 than this year, the International Monetary Fund said Wednesday.

"Our forecast is more pessimistic than the consensus," a senior IMF official told reporters upon release of the agency's latest review of the economy.

Although the U.S. economy has been stronger this year than expected, the second half of this year and the first part of next year should be slow as banks tighten credit and consumer spending slows, the IMF said.

Past history shows that the recovery from housing busts is often slow, the IMF said.

To help pull the economy out of the ditch, the White House could consider giving lenders financial incentives to reduce mortgage principal to homeowners. At the moment, any such write-down of principal is voluntary.

The risk remains of a vicious downward spiral where weak banks push growth lower, which weakens banks further and so on. Housing prices could also overshoot on the downside, the IMF said.

Just in case, Treasury should devise emergency plans to allow banks to swap a wide array of assets for cash if there was a major disruption to financial markets, the IMF said.

Until it is clear when the economy recovers, the Fed should hold interest rates steady at 2%, but get ready to tighten if inflation risks mount, the IMF said.

The Bush regime rejected the IMF forecast, the IMF staff report said. Treasury Department officials saw a faster recovery and pointed to "flexibility" of the economy and the rapid policy response.