At City Journal John Michaelson’s post on our phlegmatic economy eventually gets around to the crux of the problem:
Averting a crisis was necessary. But the Fed and the Treasury did not stop there. They wound up bailing out huge Wall Street banks that contribute little to the productive “real†economy, along with insurers (AIG) and huge and inefficient industrial companies. Embarking on a new policy of “quantitative easing†to bolster the lending market, the Fed blew up its balance sheet by purchasing debt to keep interest rates down, certain that productive borrowing would ensue. Before the crash, at the end of July 2008, the Fed’s assets were $0.9 trillion. By July 2017, they had ballooned to $4.5 trillion (see graph above). These measures yielded little. Near-zero rates did not spur an expansion of jobs or of productivity-enhancing research. Instead, the easy money went to other uses, including the funding of mergers and acquisitions among giant companies and private-equity-sponsored, highly leveraged buyouts.
I expressed my opinion long ago. Rather than bailing out the big banks, they should have been broken up. Their capitalization was zero at that point. It could have been done without running afoul of the Takings Clause and as others, notably William Black, have written it was within the regulatory agencies’ ability to deal with.
Instead the decision was made to preserve them like national treasures and use quantitative easing, which used to be called “extraordinary measures” but have now become all too ordinary, to boost the incomes of the ultra-wealthy in the hope that they would invest enough in the real economy to ensure a robust recovery, something that did not transpire. And so we have the present situation in which more than a decade later thousands of counties still haven’t seen a recovery in employment, jobs, or output. A relative handful of counties have recovered nicely, however.
