This is the one-year anniversary of the Lehman Brothers bankruptcy, the collapse of the stock market, considerable anxiety throughout the country and the beginning of a major federal government effort to prevent another Great Depression.
In the aftermath of last September’s events Congress approved a large infusion of capital into the banking system (TARP or the Troubled Asset Relief Program). The Federal Reserve Bank continued to lower interest rates AND began an infusion of more than $1 trillion dollars in loans and loan guarantees, becoming America’s “lender of last resort”. And Congress passed a $787 billion stimulus package.
Parts of these programs drew criticism from liberals and conservatives. I would have initiated a different stimulus program with more infrastructure spending, more aid to state and local government and I would have preferred if the new long-term programs (which I mostly support) had not been included in the stimulus package but debated and funded elsewhere.
But the continuing back and forth about what could have or should have been done distracts from three remarkable facts that, in my opinion, get little attention.
First, one year later we are no longer fearing or talking about another Great Depression. We are talking about when, not whether, the recession will end and how quick and strong the recovery will be. We have moved from fear and panic to debate about how to proceed forward from the worst recession in recent history.
There are many unanswered questions—about the housing market and financial sector and about how consumers will or should act. Should we happy for or fearful about the tendency to save more and pay down debt.
Second, it was a massive and multi-part federal effort that changed the story. Governments here, in China and across Europe developed stimulus programs and addressed their financial sector issues. Governments have the tools and responsibility to prevent recessions from sliding into depressions.
Third, though the public discourse makes these choices seem controversial, in fact there is a broad consensus about the role of government in combating recession. Governments use the tools of interest rate cuts, tax cuts and incentives and direct spending to boost demand. In this special recession, we have added tools of aid to the banking sector, federal loan guarantees and the beginning of a loan modification program that as yet is not working as well as hoped for.
While the media makes each of these decisions seem like a major political and ideological battle, in fact the disagreements are about the mix and timing of using these tools not about the tool kit or that governments should act to combat recessions.
So where do we go from here.
For the short term the government role will remain critical for there is still a shortage of customers for private businesses. One of the reasons for government action is that even though private businesses are the main engine of economic growth, they respond to actual or expected customers—something still in short supply.
So I would not back off of the main intervention programs yet although we will need to do so starting sometime next year.
In fact I would add a little to the stimulus package by approving another extension of unemployment benefits and some additional aid for state and local governments.
Longer term we must build an economy somewhat less dependent on consumption. The share of consumption in the economy is likely to drop from 70% to a more historical level of 65% as we spend 95 cents of every dollar we earn rather than $1.05.
This is a good move although the transition may be bumpy. Where do we make up the extra 5%. The best places are in private investment in plant and equipment and in exports. To do this we will have to develop and sell goods and services that people want and at prices that are competitive on world markets.
There is no shortage of exciting areas where new goods and services can be developed and the federal stimulus program provides a first round of support. Still, to excite private capital investment we will need a strong program of federal support for innovation and research, more progress in education and whatever it takes to remove the housing and banking sector threats to a sound economy.
While these are difficult challenges and will require more bipartisanship and civil discourse than we have now, they are a better set of challenges to face than the one we faced just one year ago—avoiding another Great Depression.