This is the second in a three-part series on the economic crisis.
Even if a global economic recovery still eludes us, has President Obama’s new team already achieved a stunning turnaround in US economic policy? Or has the administration just been fighting the last war, paying far too much attention to ancient history, special interests and political correctness in its programs to stimulate the economy, fix the banks and providing debt relief to homeowners?
For lifelong students of the Great Depression like Federal Reserve Chairman Ben Bernanke and Larry Summers, it probably seems that Obama’s economics team is right on track. In less than a month, Obama has pushed his record $787 billion stimulus bill through a highly partisan Congress. The resulting projected federal deficits will be even larger as a share of of national income than those incurred under FDR, until World War II. At a time when unemployment is rising sharply, this should be good news for the economy–if the plan really is expected to be stimulating.
On February 10, Treasury Secretary Timothy Geithner announced a bold, if somewhat imprecise, $2.5 trillion program to relieve US banks of dodgy assets once and for all. Combined with trillions in other loans and guarantees from the US Treasury and the Federal Reserve, this is designed to avoid another costly Great Depression-type error, in which scores of banks were allowed to fail and credit markets seized up. If the plan really is expected to work, that should also be good news for the economy.
Bernanke also concluded from his lengthy studies of the Great Depression that the Federal Reserve had blown it way back then by keeping monetary policy too tight. So ever since last summer he’s made the US money supply as loose as loose can be, ballooning the Fed’s balance sheet to nearly $1 trillion and driving real interest rates down to zero, while pressuring his counterparts in Europe and Japan to folllow suit.
Obama’s team also has emphasized the importance of avoiding the beggar-thy-neighbor “protectionism” of the 1930s–aside from a little “Buy American” language in the stimulus bill and a few remarks from Geithner about China. If loose monetary policy and tighter lips are sufficient for recovery, it should be just around the corner.
Finally, in the course of Obama’s drive to pass the stimulus, he traveled to troubled communities in Indiana, Florida and Arizona and heard first-hand that millions of American homeowners and small businesses could use a little financial aid of their own right now. So Obama has committed $275 billion of the remaining TARP/”Financial Stability” funds to this purpose. In principle, this should also be good news for the economy–if we really believe that the plan has what it takes to stem the galloping pace of foreclosures and bankruptcies.
Obama and his team may really believe that their first month in office compares favorably with FDR’s in 1933. Historical pitfalls have been avoided, and there has been no shortage of good intentions, optimism and action. The new president has also assembled a team that includes, by its own admission, the nation’s brightest economists and its most experienced veterans of the Fed and the Treasury.