WASHINGTON, D.C.

The financial crisis that brought down Bear Stearns clearly signals the risk of a recession, but current proposals to stimulate the economy are unlikely to resolve the problem, according to one Heritage Foundation official.

Historically, government stimulus plans "don't really work," said Rea S. Hederman Jr., senior policy analyst at Heritage. He said recently enacted tax rebates won't do much long-term good because "the government doesn't have a money tree" to pay for the rebates, and taxpayers must ultimately absorb the cost.

Some proposals to solve the mortgage crisis amount to "the federal government trying to take over more of the housing market," said Hederman, speaking Tuesday at an America's Future Foundation (AFF) panel discussion on the state of the economy.

However, he said, such interventions as the J.P. Morgan Chase takeover of Bear Sterns -- orchestrated and underwritten by the Federal Reserve Board -- were necessary to prevent "turmoil in the financial markets."

The collapse of Bear Stearns, which was trading at $80 a share earlier this year but was sold to Morgan for $2 a share, is the latest episode in the crisis caused by the mortgage crunch. And the situation may get worse, financial journalist R.J. Lehmann said at the AFF event.

"I'm somewhat skeptical of a quick recovery," said Lehmann, Washington bureau manager for A.M. Best, a financial research firm.

It was during 2006 and 2007, Lehmman said, that "insanity" prevailed in mortgage-lending practices, with some buyers receiving loans in excess of the purchase price of their homes, or homeowners getting similarly overvalued refinancing deals. Those deals were made at a time when interest rates were low and home prices were rising, and future refinancing could be expected to solve any payment woes.

Now, however, with interest rates on mortages higher and home prices falling, Lehmann said, "Those people are not going to be able to refinance." Because "balloon" payments in adjustable-rate mortgages typically kick in after two years, he said, the full impact of that crunch won't be felt until later this year or next year.

"We are looking into the abyss," said Megan McArdle of The Atlantic Monthly, predicting that the sagging economy would trigger a "gigantic budget crisis" for the federal government over the next few years.

Whoever is elected president in November will face "an increasing budget gap," as the fiscal condition of the Social Security and Medicare programs begin to worsen, McArdle said at the AFF event.

However, John Berlau of the Competitive Enterprise said there is no justification for "gloom and doom" economic predictions. Despite slowing growth, the current crisis has not yet caused a decline in GDP, he said.

"The public is clearly anxious, but the reason they're anxious is when they turn on the TV, they hear 'recession, recession, recession,' " said Berlau, noting that unemployment remains near historic low levels.

"Realizing where were are" is important, Berlau said at the AFF event, "so we don't rush into policies that make matters worse."