Today, Jared Bernstein, Chief Economist for Vice-President Joe Biden, held a conference call with progressive bloggers to discuss the economic stimulus package. During the call, he made an interesting argument about the intersection of the stimulus package with the financial stability program outlined by Treasury Secretary Timothy Geithner yesterday.

Bernstein likened the effects of the economic stimulus package to a “chain”; a stimulus dollar will be spent by a consumer, helping the business it is spent at, in turn helping that business’ suppliers (when more stock is purchased), and onward and upward. This chain is less effective when banks aren’t lending:

I view the economic stimulus package and the financial stability plan as extremely complementary…That chain won’t be able to function to its full effect if the credit lines are frozen.

The theory is that, as long as banks are sitting on their money, economic recovery will be more difficult, because businesses and individuals won’t have access to loans with which to make larger purchases. To this end, Geithner announced the Consumer & Business Lending Initiative, a $1 trillion program aimed at revitalizing lending:

When banks making loans for small businesses, commercial real estate or autos are able to bundle and sell those loans into a vibrant and liquid secondary market, it instantly recycles money back to financial institutions to make additional loans to other worthy borrowers…Unable to sell loans into secondary markets, lenders freeze up, leading those seeking credit like car loans to face exorbitant rates.

The plan, then, is to support these secondary markets, “by providing the financing to private investors.” The money will come from the Federal Reserve, not from any of the other already designated TARP funds. But the take-away message from Bernstein is that these two plans — stimulus and stability — really can’t function to their full extent without each other.

House and Senate conferees met for more than nine hours of closed-door negotiations yesterday to reconcile their differing versions of the economic stimulus bill. Senate Majority Leader Harry Reid said he hoped an agreement could be reached by today, but declined to detail the progress made.

Politico’s Glenn Thrush is reporting that the Senate may yield on including a $15,000 home-buyer’s credit in the stimulus:

The key here, House Dems say, was Obama’s Monday press conference in which he signaled his strong intention to back Pelosi on a handful of key spending initiatives, especially $21 billion in school construction and technology grants, $10.3 billion in COBRA insurance and $8.6 billion in new Medicaid coverage for the unemployed…House Democratic staffers see several areas of potential accommodation with the Senate, including alterations to the mixture of tax cuts and spending that could result in scaling back a $15,000 homebuyer tax credit, a favorite of the Senate GOP.

First Read reported that $15 billion in school construction could be added to the bill, in lieu of the credit. This would be a fantastic swap, and Congress should make sure it happens.

As the Wonk Room has explained, the home-buyer’s credit is poorly targeted, more useful to wealthier households, and won’t actually help the housing market. Kash Mansori at Econbrowser wrote that “all the house purchase tax credit will do is to modestly increase the number of houses sold each month… with no noticeable impact on house prices.” A panacea for our economic woes, it is decidedly not.

School construction, meanwhile, can provide significant stimulus, quickly. As the Center for American Progress’s Michael Ettlinger explained:

[T]he American Society of Civil Engineers estimates that spending $127 billion to $268 billion is needed to bring school facilities to a good condition. The projects these funds would pay for are among the infrastructure investments that can be brought up to speed very quickly. The construction sector, which would benefit most from this funding, has enormous idle capacity and more idle workers than any other industry.

The Senate’s “compromise” bill, as it stands now, would create about half a million fewer jobs than the House bill, despite costing $20 billion more. The rumored amendments would begin to address that disparity.

Cross-posted at ThinkProgress.