Wednesday, January 25, 2017

Who Saved the American Economy?

Now that our world is awash in a newfound passion for facts, it will be useful to examine the claim that President Barack Obama saved the American economy and prevented another Great Depression.

Holman Jenkins addressed the issue in the Wall Street Journal. For those who believe in facts and especially who believe that facts might actually disprove some of the claims about the Obama presidency, it’s a sobering exercise.

Who is claiming that Obama saved the economy? For one, Jenkins writes, Harvard economist Kenneth Rogoff is, and Rogoff is not some political hack or media polemicist.

Jenkins quotes Rogoff:

Harvard economist Kenneth Rogoff claimed on NPR this week that Mr. Obama “pulled us out of a very deep abyss,” though Mr. Rogoff also allowed that President Bush deserves “a little credit here.”

How did the American government tackle the economic crisis?

One way was through TARP:

The Troubled Asset Relief Program may have been the least of the rescue measures, but it was the highest risk, because the people’s bipartisan representatives were required to put their imprimatur on unpopular bailouts. Nonetheless, TARP was enacted Oct. 3, 2008, almost four months before President Obama took office.

What about bailing out banks? Jenkins lists the actions taken:

On March 16, 2008, the Federal Reserve arranged a fire sale of Bear Stearns. Between Sept. 19 and Oct. 26, numerous other institutions were bailed out; the money-fund industry and commercial paper market were propped up; bank depositors were favored with a big extension of deposit insurance.

And saving the automobile industry:

On Dec. 19, as a final act, the Bush administration directed $17.4 billion in TARP funds to keep General Motors and Chrysler afloat so the Obama administration wouldn’t be confronted with their liquidation on its first day in office.

The Obama administration took over the narrative and granted itself credit for ending the crisis and precipitating the recovery. What exactly did it do?

Jenkins summarizes:

When he finally arrived, his contribution consisted of fudgy bank “stress tests,” less to establish confidence in the banks than to establish confidence in the new administration, under lefty pressure at the time to reinflame the crisis by nationalizing the industry.

He gave us a $787 billion pork-barrel “stimulus,” an exercise in hand-waving which ever since has figured prominently in the efforts of Obama publicists to create confusion about what ended the crisis.

Jenkins is not saying that the Bush administration or the Federal Reserve did a good job. They apparently botched the Lehman Bros. collapse. In so doing they unleashed a global financial panic:

As all now agree, it was Lehman, not the washing through of modest subprime losses, that turned a regional U.S. housing downturn into a global financial panic. In his memoirs, Fed chief Ben Bernanke protests that the Fed knew exactly what a catastrophe Lehman’s unmanaged collapse would be, but its hands were legally tied at the time.

He concludes:

Let it be said that, in the kind of omission that damns a presidency in the eyes of the cognoscenti, it was President Bush who should have and could have stepped up and provided his appointees political cover to spare the world the Lehman meltdown.


Trigger Warning said...

Listening to Harvard economists is an exercise in self-induced stupidity. Consider Larry Summers. Or the amusingly and accurately named Alan Blinder (sometimes denoted Professor Blinder-Thanabat). Or Jeffrey Sachs, who consulted Boris Yeltsin into building a criminal oligarchy.

Listen to Harvard economists at your peril.

Ignatius Acton Chesterton OCD said...

Something that rarely gets discussed in all this is moral hazard. One of the reasons Bush Treasury Secretary Henry Paulson didn't want to bail out Bear Stearns or Lehman was because it would provide perverse incentives to investment banks, which are in the business of financial leverage and risk. This is why investment bankers are compensated so enormously: because they take great risk. Give them enormous leverage without risk, and you have more than economic considerations... you have serious ethical and moral economic problems to contend with. TARP worked because it was a structured propping up that would get paid back.

I don't know the ins and outs of global macroeconomics, but I do have some understanding of microeconomics. Regardless of who gets the credit for "saving" the American economy, we here in Detroit suffered mightily. Michigan accounted for 50% of all U.S. manufacturing employment losses. And we had to endure the recklessly stupid, thoughtless indignity of armchair idiots asking questions like "Do we really need an auto industry in America?" Given all the madness that went on and the enormous systemic risk brought on by investment bankers peddling risky derivatives (with full government backing), perhaps we should've been asking "Do we really need investment banks in America?" Both questions are stupid, but only one of them was actually posed during the crisis.

And, in the end, there is an important thing that is NOT often discussed, and that is the political class's responsibility for creating this financial meltdown. The 2008 episode was created because of the implicit federal guarantee on paper produced by Fannie Mae and Freddie Mac. And we are continuing this madness through the enormous debt fueled by sister Sallie Mae. The political class likes to point fingers, and I think more fingers have to be pointed back at them. We should be asking "Do we really need a D.C. bureaucracy to create massive moral hazard and systemic risk to the financial system?" I'm not holding my breath.

The most radical and best thing President Trump could do for the American economy would be to put us back on the gold standard so these D.C. boobs couldn't create QE euphemisms to mask their inflationary pseudo-economy with fiat currency.

Sam L. said...

Under Obama, we've had eight years of the Annual Tour of The Summer Of Recovery!! Didn't come to a venue near me.

Ares Olympus said...

No question that Obama followed the Bush administration's approach, and these effective bailouts were deeply unpopular positions on both sides of the aisle, and as IAC said, initially the Federal reserve believed moral hazard existed in bailing out Lehman, and refrained, and market panics took over when the investment world saw a 100 year institution go under in a day.

And the reality of our interconnected world is that anyone holding short term debt with assets as collateral for the debt can lose everything in a day. And every single bank in the country was in trouble. It was called a liquidity crisis, which is only a problem because everyone tries to grab something solid when the virtual wealth may be worthless or unaccessible. And FDIC insurance could only cover a smallest fraction of what people think they have. And the end of Glass-Steagall under Clinton helped put everyone in danger.

IAC also calls on restoring the gold standard, that was initially abandoned by FDR in 1933 when he endeda convertability of dollars into gold, and completed in 1971 when Nixon put the dollar completely on fiat terms, with only the Federal Reserve's dual mandate to keep inflation and unemployment low as limits to how much money can be lent. And because of the weak economy, the effective ZIRP has been with us during the entire Obama presidency.

So now we've almost set up Trump for failure, since we've basically made markets dependent upon low interest rates, and raising rates will raise mortgage rates, and raising mortgage rates will make current house values too high for most buyers, and home values will fall, and we risk falling back into underwater mortgages, which we tries so hard to escape.

Anyway, its clear to me that we'll never voluntarily go to a gold standard as long as our country benefits by being the world currency of exchange, and the crazy reality is the wider global economy is deperate for dollars, and since all dollars come from borrowing, we literally can't borrow and create money fast enough for the world economy, at least as it has existed so far.

But this must change sooner or later, and it would have happened long ago, except that every currency in the world is on its own "race to the bottom" to compete with us, because a rising currency sinks exports.

But if we accept globalization as we know it is dead, but its just been running on momentum for the last 10 or so years, then globalization is reversing, AND leaders like President Trump, who promote effective isolationist polices, tarrifs and such, these are the last stages of globalization, as everyone tries to keep their own share of a shrinking pie.

Strangely you get calls from the far Left and the Right against "neo-liberalism" while everyone directly involved in keeping everything running says it will make us all poorer, and I'm sure they're right, and so the only way their arguments are wrong is if we knew the future, and could see how much we're in overshoot, in our debt that hides our obligations that will never be paid.

I can't even blame politicians for this, and people like Ron Paul are right to distrust the federal reserve, but unfortunately the only thing worse than an independent central bank is a central bank controlled by the government, where it can create money for all its spending.

I tend to think someone like Trump could be the "fall guy", so not to "Make America Great Again" like he promises, but to force the dishonesty of our economic system into the light. So we get a 20,000 DOW today, but that's an illusion of bullish investors, nothing more, and so real test will be whether we want to pay the $12 trillion bailout that will be demanded in the 2018 crisis, while fixing nothing else.

So maybe this is how Michael Moore is right - Trump will be the last president of the United States, at least as we know it. Yet, irrationality has carried us a long way, and timing is an open question. I can't guess what more games can be played.