What Half a Depression Looks Like — And How We Escaped (So Far) the Other Half
. . .we can call this a "half depression," because the picture above could easily have been twice as bad if the Federal Reserve, Treasury and Congress under both Administrations had not thrown everything including the kitchen sink to stop a full on depression. That's the conclusion of a just released but as yet little discussed study (e.g., see DeLong on Leonhart) by economists Alan Binder and Mark Zandi.Like Baker, I'm uncomfortable with the Blinder Zandi study to the degree it ignores that other options besides bailing out the TBTF firms on Wall Street were possible (though not likely under the Bush regime: Treasury Secretary Paulson, after all, was Goldman Sachs through and through). As I argued at the time, September 2008, in Let Wall Street Burn:
Binder/Zandi developed a model to estimate how much GDP would have shrunk and unemployment increased if the federal government had taken none of the monetary and fiscal actions of the last two years. From the initial Times story:
"In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration's fiscal stimulus program, the nation's gross domestic product would be about 6.5 percent lower this year.[*]
"In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation. . . ."
Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P.
As many have noted before, a huge chunk of today's deficits were caused by the near-depression baked into the cake by 2008. Since this year's GDP growth is now expected to be about 2.5 to 3.0 percent, the Binder/Zandi study suggests that without massive federal intervention, GDP would have shrunk by about 3-4 percent, instead of growing slowly. Worse, instead of 15 million unemployed, we'd have over 23 million without work. So Binder/Zandi provide support for the Obama Administration's (and many other economists') argument that their actions (and the Fed/Treasury bailouts before Obama took office) have at least prevented a depression.
The economists examined the Federal Reserve's actions, which were about double the size of the ARRA stimulus bill and provided trillions in loans, loan guarantees and asset purchases. These actions thus likely had a greater effect on turning the economy around than the ARRA/stimulus bill alone, though they argue the combined efforts likely reinforced each other. This finding should increase pressure on Bernanke's Fed to do even more on monetary easing to ensure the economy does not slide back into a recession or worse and to tackle unemployment more aggressively.
A second point from Rampell's chart is how it helps assign responsibility for the depression/unemployment catastrophe. The worst unemployment level was reached about six months ago, in January/February of 2010, but for a year before that, unemployment had been in free fall. Obama's ARRA/stimulus didn't pass until early 2009, and most of it took 6-12 months to kick in.
What the chart tells us is that gross mismanagement by the previous Administration, their financial regulators and regulatory philosophy created conditions for a genuine depression. That depression was only narrowly avoided, so far, by massive interventions by the federal government.
Even then, the Bush Administration's economic team passed a Great Recession-near-Depression onto the Obama Administration, which has been struggling ever since to turn the economy around.
But this is not just George Bush's legacy; it's the legacy of an entire economic philosophy and regulatory attitude, supported as holy doctrine by the entire Republican Party and all too many Democrats. Most still haven't taken responsibility for this huge failure; instead, they would/could, if allowed to rule again, easily drag us back into a Depression. Voters take note.
Finally, the chart makes clear that the federal government is not even close to doing all it needs to do with stimulus spending and monetary support to reverse course and meaningfully hasten the reduction in unemployment. By any standard, those efforts remain less than half enough; it took a long time for Obama's advisers to concede this (sort of), and there are growing indications the Federal Reserve recognizes this too. [Update: see Fed member's deflation warning hints at policy shift.]
The Obama Administration now has the responsibility to lead the way out of the catastrophe it obviously inherited from Bush's economic team and a shared, failed philosophy. That members of that team or those who retain that philosophy still have jobs as economic advisers is both astonishing and dismaying.
"JULY 28, 2010 1 P.M. CORRECTION: This article now contains corrected figures for our estimate of 2010 GDP with and without the stimulus. As the article now reflects, GDP in 2010 would be about 11.5% lower without the government's response, and the fiscal stimulus has raised GDP by about 3.4%."
Update: Dean Baker critiques the study's assumed counterfactual:
"While the analysis of the stimulus is pretty standard and very much in keeping with other estimates, this is not the case with the analysis of the financial sector policies. The problem with the study is the implicit counterfactual. It effectively assumes that if we did not do the TARP and related policies, that we would have done nothing even as the financial sector melted down."
We want to force a shift of the financial system way from the big-money operations of Wall Street, back to the relatively small lending operations to Main Street. So we let the top dozen or so institutions go under. At the same time, the Fed should make a very public show of back-stopping the smaller commercial banks all around the country - just like it did for JP Morgan Chase in the Bear Stearns "bail-out." The one nagging problem is what to do about all the shareholders? Whoever the next President is can send emissaries to the various pension funds and mutual funds to tell them in no uncertain terms of the intent to let the big Wall Street players meet their well-deserved doom, taking their shareholder with them. If someone wants to bet in a game of chicken that the next President would not actually let the big Wall Street players go under and remain a shareholder, well, they were warned. Yes, this is "talking down" the big Wall Street banks, but it would only be them getting a taste of the medicine they themselves have been cramming down the throats of the rest of the economy (such as having conniptions over Costco paying its employees much more than the retail industry average).The Obama administration, unfortunately, has failed to solve the Too Big To Fail problem, making another financial crisis inevitable at some point in the next few years, perhaps even just months. At that point, we will again have the opportunity to let the big Wall Street money center firms destroy themselves, and give control of the credit system back to local and regional bankers who are closer to and more in tune with Main Street and its real economy.
What remains of the big Wall Street players can be sliced and diced, and parceled them out to all the thousands of remaining small banks. For example, a Chase branch or Citi branch in Peoria is offered to 1st National Bank of Peoria for a song.