The Crash of Sept 2008--One Year Later
Original post made by stephen levy on Sep 18, 2009
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 questionsabout 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 customerssomething 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 agoavoiding another Great Depression.
on Sep 20, 2009 at 12:52 pm
stephen levy is a registered user.
Friday's California job data were dismal and hopeful--a tale of two stories. California's unemployment rate reached 12.2% while job losses fell to the lowest level this year.
It is clear why residents are skeptical when economists say the recession is ending. For most residents the only reasonable measures of the economy are job growth and income growth.
Job levels are still declining although the rate of decline has slowed considerably. The decline in job loss and the slowing number of new unemployment claims are part of the evidence that economists of all political thinking use to say that the recession IS ending.
Still, any substantial job growth is at least six months away and thus the two stories of "still bad now, but going in the right direction" coexist.
And I still think it is remarkable that one year later we are talking about how soon and strong the recovery will be, not whether the nation and world are edging toward another Great Depression.
on Sep 22, 2009 at 4:29 pm
Paul Losch is a registered user.
There seems to be a trend that has gone on for 20 or more years. When the US economy "recovers," quality jobs do not accompany the recovery.
I honestly do not know what to make of this. It is apparent the work that was done in the States now is done elsewhere, be it tech support in Mumbai or production of consumer products outside of Shanghai. Such jobs will not come back.
I have a potential customer who wants to know if I can make things in the US, and the answer is "no." I can finish them here, but the industry of which my company is a part has no production facilities any more in America. It is a dis-connect with this prospect, as we both are small companies and cannot revitalize something that can be made much less cheaply offshore.
So this whole notion that things are getting back to normal has an eerie quality to me. I am glad, as Steven points out, that the bleeding was stanched, things could have been much much worse.
But if I were to draw a graph, it would show a downward trend, with the crisis of last year being a huge downward spike, and the efforts by both the Bush and Obama folks, along with the Fed, and major countries on which there is an interdepence, creating an upward spike, but the longer term trend line is still heading down.
We really have to figure this out. And many of the polemics of late are so unhelpful.