From the Initiative on Global Markets:
Because the U.S. Treasury bailed out and backstopped banks (by injecting equity into them in late 2008, and later committing to provide public capital to any banks that failed the stress tests and could not raise private capital), the U.S. unemployment rate was lower at the end of 2010 than it would have been without these measures.
78% of the economists polled either agreed or strongly agreed with the statement. I conclude from this that they do not believe on net that the U. S. is over-invested in the banking sector and that deadweight loss plays little or no part in our current economic doldrums.
It certainly goes a long way towards explaining the actions and statements of the chairman of the Federal Reserve.
I suspect they believe that credit markets wold have remain frozen and nearly all of our big banks would have gone bankrupt at once.
Steve
@Dave Schuler
Your analysis drastically underrates the importance of finance in a capitalist economy. The banking system is literally the private sector’s heart and were it to seize up, as steve points out, everything else grinds to a halt with it.
Were there really just two stark choices between the no-strings-attached bailout that occurred on the one hand and allowing the banks to collapse on the other? I don’t think so. I think that
1. There was a wide spectrum of alternatives and what was chosen was very near one of the extreme poles
2. Our financial sector is significantly larger than it would be without the various forms of support and subsidies that it receives and that actually retards growth. There’s a rather substantial body of scholarship that supports that latter conclusion.
“2. Our financial sector is significantly larger than it would be without the various forms of support and subsidies that it receives and that actually retards growth. There’s a rather substantial body of scholarship that supports that latter conclusion.”
Agreed. Not sure you want to address that while you are setting record TED spreads.
“1. There was a wide spectrum of alternatives and what was chosen was very near one of the extreme poles”
I think you can make a very good case that our bailouts came way too cheaply. We could have nationalized the banks, which might have worked out better. However, they were working in real time. We can sit back and speculate about what they should have done. They had to decide and work quickly. What really happens if the commercial paper market collapses? If the 6 banks that hold most of the credit cards all go BK at the same time? Beats me. Want to find out?
Steve
@Dave Schuler
Now that’s a different question and I agree with your answer. I absolutely favored a combination of ensuring liquidity and controlled demolition of the banking sector by letting them fail and taking them into receivership. Keeping institutions on life support as we have meant we avoided a depression but are now saddled with what some refer to as zombie banks, not solvent but not yet dead. It was better than doing nothing but is just about the worst form of intervention our government could have made.
Actually were the consequences dire enough, and they probably would have been, the Fed could have stated that all deposts were guzranteed as it assumed control of each dying bank and their financial infrastructure. Unfortunately we don’t know if anything like that was even discussed.
I read the question not as an abstract one or even True-False but as a question of optimization in a specific instance—the steps actually taken in the actual financial crisis. In that light I found the consensus answer of those polled Panglossian.
I think the brave minority who answered “Not certain” were not only correct but were addressing the question that was asked while most of the respondents gave an answer to a different, abstract question.