I began drafting this post as a sort of lament. Contrasting how we have handled economic policy following the financial crisis of 2008 with other things. So, for example, if we handled economic policy the same way we do disaster relief when a hurricane struck the Florida Gulf Coast, we’d rush aid to all fifty states.
After noodling on this a bit I realized that we handle all sorts of things including housing, foreign policy, transportation policy, and any number of others exactly as we have economic policy. Discouraging thought.
After reflecting on it a bit more, I thought I’d try coming at the subject a different way. Physicians distinguish between acute care, the short-term treatment for a severe injury or episode of illness, and chronic care or long-term care as would be provided for diabetes, hypertension, or asthma. If policy-makers were treating the consequences of the collapse of the housing bubble as acute care, attention would have been focused on the handful of states, indeed, the handful of counties in those states, that have experienced serious problems. After all, by far the most intense collapse has occurred in just a handful of states: California, Nevada, Arizona, Florida. Other states, like New York, Virginia, Texas, and my own state of Illinois have not experienced anything remotely similar. Much of what we’re experiencing here are self-inflicted wounds and the consequences of the collapse where there actually is a collapse.
So, here’s my question. Should the policy response be one of acute care or chronic care and why? Or, if the answer is “both”, of what should each consist?
Acute care unfortunately requires a rapid response, which has become almost impossible in our system. In the case of the financial crash, it would also have required an early diagnosis as a balance sheet recession or consumer credit crisis rather than a banking crisis. The Federal Reserve itself appears only recently to have arrived at this realization, and I seriously doubt Congress or the president will ever get their heads around the concept.
The most politically realistic form of acute care would have been passage of a multi-year program to stabilize state budgets at pre-crash levels of spending back in 2008, but if the “experts” we pay to accurately call the plays didn’t understand the nature of the problem then what chance does a representative from Orlando have of getting it right?
I dont think banking crisis and balance sheet recession are mutually exclusive.
Steve
@Steve
A banking crisis in itself will not necessarily result in an economic crash because the Fed is always there to ensure liquidity. The balance sheet aspect was always the much more serious component and had it been addressed as such we would not be in this situation, bank insolvency or no.