Calling Smith, Keynes, and Greenspan, and other dinosaurs...

What now?

We've all seen the world markets do a graceful dive over the past few days, in response to the fallout from the horrendous foreign policy moves and sub-prime lending debacle of the US. What is the proper response to this? I am calling for opinion here, as I don't actually know squat about macroeconomics beyond your basic guns 'n butter scenarios.

The US congress and "executive" branch are united with the Fed in promoting a $100-145 billion stimulus package that would be achieved by extending tax cuts to select members of our citizenry. The conservatives would apply the cuts to the businesses and the rich, while the liberals propose giving tax rebates to the poor and middle class. On one hand, the liberals argue that the poor and middle class would be more inclined to actually spend the money quickly, giving retailers a shot in the arm, and helping utility companies to avoid having to perform collections on poor families. However, the conservatives are arguing that that sort of expenditure only helps out the oil companies (?!) and China (since all goods are now manufactured there), which only makes a damning case against our stupid and lopsided trade status with China.

Other opinions out there in the econosphere, such as those of European investors, suggest that this simple fix is NOT AT ALL sufficient to prevent a recession. Those investors are worried about inflation, which the current emergency strategy ignores as unimportant. I am now out of my depth vis a vis the whole economy thing, but I would like to understand it better.

Won't you help? What should the policy-makers be doing to work their way up the tail of this tiger and collar it? If it's tax cuts or rebates (which activate my Skeptical Meter due to the fact that we are currently engaged in a war on two fronts!) then who should get the money? Most importantly, how do we make sure that the NIH funding levels stay the same or increase during this time of woe?