Over the last couple of days, in reaction to the fifth anniversary of the collapse of Lehman Brothers, there has been quite a bit of reflection about where we have been, where we are now, and where we’re going. Writing at The Atlantic, Derek Thompson blames everybody:
This is a failure of Fed leadership. It’s absurd for Bernanke to focus on historically low inflation while the employment-population ratio continues to drop. But it’s the system, too. The Fed is not designed to easily and immediately put money in the hands of households. A first-order effect of QE is that banks have more dollars to lend. A second-order effect is that families and firms that want loans (for mortgages, for offices) will get better terms. A third-order effect is that people with money will be more confident in the economy when they think the Fed has its foot firmly planted on the accelerator. All of this should help typical, cash-strapped families. Richer companies can hire more people and good feelings breed good feelings. But the Federal Reserve doesn’t write checks to households. It doesn’t drop money from helicopters on Sun Belt exurbs.
The federal government can “drop money” into bank accounts. In fact, it did. It’s called a tax credit. It was a part of the 2009 stimulus — a huge, historic, essential effort to help American families, directly. But the stimulus was also way too small. Whose fault was that? The White House, for being so famously wrong about how bad unemployment would be? The Bureau of Economic Analysis, for being so famously wrong about how fast the economy was shrinking? Republicans, for rejecting every follow-up effort to stimulate the economy? Washington, for clearly and repeatedly preferencing the values of the rich over the poor?
The answer is … yes. They were all all fault. For different reasons. Washington’s fiscal policy has been a tactical, statistical, philosophical, and moral failure.
I think it might be productive to think about the winners and losers over the last half dozen years. The losers are clear: those who lost their jobs and remain unemployed, those who lost their homes. The winners are clear, too: financial companies, large companies, politicians. There are, however, other losers and among them I would place anyone who believes that government policies will be allowed to operate in continuing approximation. There was one shot at the fiscal stimulus bullseye and it was wasted. By virtually every reckoning the size and, more importantly, the structure of fiscal stimulus was inadequate.
That’s why to Mr. Thompson’s list I would add Harry Reid and Nancy Pelosi. More than anyone else they were responsible for the structure of fiscal stimulus in 2009. If it succeeded at its objective, then its most obvious objective must necessarily have been paying off political supporters since that what it succeeded in doing. It failed in providing fiscal stimulus timely enough or targeted enough to jumpstart the economy.
Of course, to blame everyone is to blame no one and, implicitly, to believe that nothing can be done. I do believe that there are things that could have been done and that still can be done. It is political calculation that prevents them from being done.
I thought we had the ability to stop the severe drop we had, and we did. I did not think we had the ability to put things back on track. Way too much bad debt and total debt in the private sector. Too much debt in the public sector. Prime the supply side all you want and it wont matter if no one can afford to buy. Prime demand and you are running up public debt, not workable unless you start with low levels. On top of that we had our impending issues with entitlement spending, especially medical, that no one wanted to touch.
With perfect management, whatever that is, things could be better, but not much. You would still have the long term unemployment problem. Cyclical UE becomes structural. The states that are doing fairly well are those that avoided or minimized the crisis to begin with. Same for the countries that are performing fairly well right now. The key is avoiding financial crises. Fixing them afterwards is not something we really know how to do.
Steve
I thought we had the ability to stop the severe drop we had, and we did. I did not think we had the ability to put things back on track. Way too much bad debt and total debt in the private sector. Too much debt in the public sector. Prime the supply side all you want and it wont matter if no one can afford to buy. Prime demand and you are running up public debt, not workable unless you start with low levels. On top of that we had our impending issues with entitlement spending, especially medical, that no one wanted to touch.
With perfect management, whatever that is, things could be better, but not much. You would still have the long term unemployment problem. Cyclical UE becomes structural. The states that are doing fairly well are those that avoided or minimized the crisis to begin with. Same for the countries that are performing fairly well right now. The key is avoiding financial crises. Fixing them afterwards is not something we really know how to do.
Steve
Very Panglossian of you. My views are quite different. I don’t think we “stopped the severe drop”. I think we suspended it. It’s also possible that it would have stopped itself. I honestly don’t know.
However, since we’ve made no structural changes to the financial system, I think the overwhelming likelihood is that we’ll see a rerun of 2007-2008.
There were alternatives. For example, we could have taken the Swedish alternative and nationalized the banks. As I said at the time, I would have preferred that to what we did which was nationalizing the losses and privatizing the profits.
I also see that you’re holding to the “balance sheet” theory of the turndown. If that’s the case, I would think that you would be more concerned that we’re not clearing those balance sheets than you appear to be.
There are alternatives that wouldn’t run up public debt. I’ve mentioned the most obvious previously: reduce spending on things that don’t contribute much to economic growth and spend more on things that would. We’ve done almost the opposite.
Finally, I don’t think it’s a job for perfect management. I think it’s a job for something other than completely self-serving management.
Dave:
There are times when you seem to operate in a parallel universe where politics do not exist. We could have nationalized the banks? A Democratic president up against a rabid right wing that was already calling him a socialist not to mention secret Muslim spy? The stimulus could have been far bigger? What? In what reality could that have happened? Because it sure as hell wasn’t possible in the actual political environment of the time.
Of course we could have. It would have been called something different. It’s a question of marketing and salesmanship. We have very nearly completed nationalizing the home loan business and are in the process of nationalizing the educational loan business. It’s not being protested (at least not very much ) because that’s not what it’s being called.
And, Michael, most of the decisions about the banks were made before Obama was elected president.
My emphasis when I mentioned the stimulus was on its structure but, yes, it could have been larger. Democrats had control of the White House and both houses of Congress. They made a political calculation as to the size of stimulus that wouldn’t present undue political cost. That they made the calculation is a fact. That the calculation was correct is not a fact. It’s an opinion.
There is a balance between policy and politics. I understand that. Believe me, I understand that. We have swung much, much too far in the direction of politics to where it’s the only consideration and policy considerations never bubble to the surface.
Washington, DC has become a sort of political Valhalla where skeleton armies fight the same battles every day, reviving overnight. IMO that’s the real story of the stimulus, of healthcare reform, of immigration reform, and so on. The sides are aligned around buzzwords. “Guaranteed cover”. “Community rating”. “Infrastructure spending”. Legislation is evaluated based on the number of buzzwords.
I’m with Dave on this. Look at the PPACA. The President said the program should cost about $900 billion. Why? Just look what the Congress put into the legislation to meet that arbitrary number. Of course skeptics understood the figures were, at best, hopelessly optimistic and they were right. It was similar with the stimulus – a number was declared and then the political battle turned into one of who got the goodies.
Panglossian? I am trying to convey pessimism. As I said, I think (YMMV) our efforts helped stop the slide. Everything else I said was negative. While agreeing with you that the stimulus could have been spent better, I dont think it would have made that much difference since we got ourselves into such a big hole, and so did the rest of the world. As I have said in the past, I expect, barring a positive shock, a sluggish economy for a long time.
Steve
“Panglossian” and “pessimistic” aren’t in conflict. Dr. Pangloss believed that what happened was the for the best in the best of all possible worlds. Not the best of imaginable worlds. Possible. A better outcome would have been impossible.
Isn’t that how you characterized both the intervention into the financial system and the subsequent economic interventions? That they were the best that could be accomplished short of impossible to realize perfection?
I, on the other hand, think that the intervention into the financial system failed in its objective which was to make it sound again. To the extent that it succeeded it merely succeeded in slowing the crash. The reason for that is pretty clear: they proceeded along the assumption that the problem was liquidity when the problem is, was, and always has been solvency.
I also think that the only objective that was unqualifiedly accomplished by the PPACA was paying off constituencies. If that wasn’t the intent, it’s a remarkable coincidence.
1). The Fed and Treasury have authority to go into any bank, fire everybody and appoint replacements with no prior authorization from Congress. We could have brought big finance to heal and just didn’t bother.
2). Obama made explicit that the stimulus was intended to soften the landing, not to reverse it. The President was openly liquidationist in his approach a la Herbert Hoover, believing markets would reach a new equilibrium on their own without significant intervention. Certainly the advisers he was listening to (putrid toad Larry Summers and corrupt ignoramus Tim Geithner) were of this persuasion. Two administrations stood by and let a financial crash bleed into the real economy.
I do believe I was in the distinct minority here and at OTB calling very vociferously for what I call “the standard model” of restructuring. I was panned. But the standard model calls for those who made the mistakes, be they management or equity, to get hosed and pay the costs. Redo the balance sheet per the contractually agreed upon terms. The remaining spoils, such as they might have been, would have sequentially waterfalled down the cap structure. Life would have gone on, and good lessons learned. Reform would have been market based, and a bitter, but valuable lesson. Real change. But that’s not what we did.
So we now have the very people bemoaning “too big to fail” and advocating government solutions and such crapping around about the failure to reform.
Get a fucking clue.
Next: ObamaCare vs real healthcare reform.
I expect no better a result.
“That they were the best that could be accomplished short of impossible to realize perfection?”
No, or at least I didnt mean to convey that. I am saying that I have no idea what works when you have large amounts of debt in both the private and public sectors, especially when the private sector is at record levels and a lot of it is truly bad debt. I think much of the stimulus money could have been spent better. It might make a difference some time in the future, but in the short run I dont see it mattering that much in comparison with the bigger issue of debt overhang and the long term conversion of cyclical to structural UE.
As to the financial sector reforms, I think they were probably the best our politics will let us achieve. The full scale propaganda effort to blame the entire crisis on the CRA and GREs was a real success. Every bill passed now must appeal to the 60th Senator voting for that bill. Guarantees we get severely compromised bills.
Drew- I agree that we needed to get rid of management involved in the crisis. I think we should have had a lot more prosecutions also.
Steve
A private debt overhang is simply a diversion of flows from the real economy, flows easily replaced/resolved with appropriate policies. Instead the currency monopolist restricted supply below effective demand and so here we are.
I’d like to hear how public debt restricts the government’s capacity to respond with fiscal policy.