Anger is everywhere these days. We’re mad about the economy and our personal balance sheets. We’re angry with the Obama administration and with Congress.
And don’t get us started on bailouts and budget deficits, which have many of us particularly upset. Later this year, many of us will take that anger to the polls.
But before the fall elections, we need to better understand those things that have stirred the most public outrage. If people vote based on the snippets they hear from network news and talk radio, this year’s election may prove to be another shot in our collective foot.
There were four sets of actions to counter the financial crisis and recession. First was the massive direct lending from the Federal Reserve to myriad financial institutions. These include AIG and many commercial banks. The Fed also did things like help J.P. Morgan take over the carcass of Bear Stearns.
As much as this offended some, we need to acknowledge two facts. While these were bailouts in the sense of public funds going to keep a company from going broke, or in the case of Bear Stearns to minimize its death throes, stockholders in most of the bailed-out firms did lose all or most of their equity. (But yes, too many overpaid executives kept their jobs.)
More important, such interventions, however distasteful, are part of the long-established central bank function of lender of last resort to prevent catastrophic collapses in financial markets. The importance of this role has been recognized for three centuries and was a primary reason we established the Federal Reserve after the Panic of 1907.
One can legitimately find fault with many details of how this Fed intervention played out, but it is hard to find many economists, liberal or conservative, Republican or Democrat, who would deny that the central banking function is necessary or that we did not face a dire situation. Indeed, some economists who are most skeptical of government action in the economy, like Allan Meltzer, criticize the Fed for not having done enough in the fall of 2008.
And if one wants a partisan take, remember that both Alan Greenspan and Ben Bernanke, who together chaired the Fed for more than two decades, were nominated by Republican presidents. They were confirmed, and repeatedly reconfirmed, by majorities of both parties in the Senate.
A second program, now almost forgotten, was the $152 billion Bush stimulus plan enacted in February 2008 with bipartisan majorities in both houses. Because it consisted almost entirely of personal income tax “rebates,” it still gets little criticism.
That is not true of a third action, the Troubled Asset Relief Program. Unlike money simply created by the Fed, this $700 billion program to recapitalize financial institutions came out of the Bush administration’s Treasury, with support from the Fed and the Securities and Exchange Commission.
Treasury Secretary Henry Paulson was appointed by Republican President George W. Bush. SEC Chair Christopher Cox was also a Bush appointee and had been a prominent GOP member of Congress for years.
TARP passed Congress because of votes by Democrats at the pleading of a Republican administration. Voting for it while many Republicans took a powder was the right thing to do for the economy. But politically, it was one of the most idiotic things any party has done in decades. The failure of Democratic leaders to tell Paulson and Bush they needed to get their own party on the line fostered demagoguery that will cause economic as well as political problems for years.
Subsequent votes to authorize the second tranche of TARP money were urged by the new Democratic administration and passed by a Democratic majority. Many Republicans, including Sen. John McCain, who voted for TARP in the first place switched their position on these subsequent votes in 2009. Moreover, the subsequent use of TARP funds to facilitate bankruptcy packages for GM and Chrysler that favored labor unions was criticized by economists of both parties.
Obama’s $787 stimulus package in early 2009 — the fourth action — was that of a Democratic president passed by Democratic congressional majorities over near-total Republican opposition. Economists were much more divided on this than on Fed emergency lending in 2008, with 400 of them, including a few Nobel laureates and the new head of the Minneapolis Fed, signing a petition opposing it. But many more economists, including prominent Republicans like Martin Feldstein, economic adviser to Ronald Reagan, favored additional stimulus spending funded by borrowing even if many quibbled about specific details.
Indeed, Gary Becker, a prominent conservative University of Chicago economist, acknowledged broad support among economists for fiscal stimulus in 2009 when in a recent interview he groused that “90 percent or so of economists were closet Keynesians.” Becker also criticized the Obama plan because little of the money actually was spent in fiscal year 2009.
Becker is right; increased spending by the Obama administration did little to increase the deficit through September 2009. According to the Congressional Budget Office, this amounted to $230 billion of a $1.4 trillion deficit. The TARP program, together with sharp drops in tax revenues resulting from the recession and increases in outlays through long-established programs like unemployment compensation, caused most of the increase over the last Bush budget.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.