It is mindboggling to consider the amount of newly printed money Washington has dumped into our economy in the last ten months or so. The Federal Reserve, Treasury, and the Congress have poured in over $9 trillion worth of stimulus, loans, stock purchases, and loan guarantee money. That figure represents about two-thirds of our GDP. However last night, Treasury Secretary Tim Geithner indicated in an interview on Bloomberg that what has been done so far is “too little too late”. Thus he proposed a new $2 trillion big bank bailout plan. The plan coupled with Obama’s stimulus bill will saturate the market with an addition $3 trillion. The new printing of dollars will bring the total to $12 trillion — if this doesn’t stabilize home prices, increase lending, and create four million jobs then I don’t know what will.
The President doesn’t seem convinced that all this spending will work. Speaking in Ft. Myers, Florida, on Tuesday, he stated his belief that his winning a second term in office could depend on whether he can turn the country’s economy around. The President stated, “If stuff hasn’t worked, if people don’t feel like I’ve led the country in the right direction then you’ll have a new president”. If history is any guide then chances are likely we will have a new president in 2013.
At the Federal Reserve Bank of Minneapolis, from 2000 to 2007, Timothy Kehoe, Edward Prescott and a team of 24 economists from around the world studied economic depressions that happened in the Twentieth Century. Instead of focusing on what caused each severe downturn, their study examined government’s reaction to the downturn and the consequences thereof.
First, they looked at the economic experiences of Chile and Mexico in the 1980s. Both countries suffered from falling international prices for the commodity they exported – copper for Chile and oil for Mexico. This in turn exposed a weakness in each country’s banking sector. In 1982, Chile took control of its banks; it liquidated the insolvent ones and reprivatized the solvent ones. It set up a new regulatory structure which allowed the market to dictate interest rates and allocation of credit to business. The immediate effect was severe pain, but by 1984 the Chilean economy began to grow and is still the fastest growing in Latin America.
Conversely, Mexico pursued policies which nationalized banks, provided credit at below-market interest rates to some large firms and no credit to others, and provided massive fiscal stimulus schemes to grow employment. Even though both nations arrived at the same place for the same reasons, it was how each nation’s government dealt with the crisis that determined their economic futures. Since 1982, Chile has experienced significant GDP growth while Mexico has languished with a negligible GDP growth increase.
Article comments
— go to most recent comments1 - Dave Nalle
Jesus CHRIST, Kenn. Sorry for shouting. This is about the most important thing I've read online in a year. That this report should exist and be published by the Fed and be so totally ignored is an outrage that just blows my mind. I knew this stimulus and bailout business was a bad idea, but to have it confirmed so clearly with historical models from a source within the system like this is just maddening.
Great work digging this up. I'm going to promote the hell out of your article.
Dave
2 - El Bicho
Compelling article. I dugg it.
3 - Clavos
Well done, Kenn. Puts the whole "stimulus" idea into a new (and very worrisome) light.
It's mind-boggling that the administration is rushing pell-mell to spend so much money with little or no consideration of the consequences; I've been very concerned about the inflationary potential of this boondoggle, but you've exposed a much scarier scenario.
4 - Dave Nalle
The scariest part is the gross incompetence or blatant malfeasance in having this information available and not even considering it. These are not the people you want running your economy.
Dave
5 - Glenn Contrarian
Kenn -
It's not often I'd agree with Dave, Clavos, and el Bicho, but you wrote a heck of an article...well said and well-researched. I'm not sure how to effectively refute what you posted. I'm not even sure that I can - but since articles that contain little or no arguable controversy breed little debate on BC or other forums, I see it as my duty to BC to refute you as best I can. So there!
Off the top of my head, the only obvious refutation would be from the American government's response to the Great Depression. Dave will argue otherwise, but the statistics show that by the end of 1936, by every economic measure the Depression was over, with the sole exception of unemployment which was then only slightly higher than it is right now (when measured by the same statistical method used then). We can therefore state with confidence that it was FDR's government stimulus and increased regulation that got us out of it.
In 1937, we went into a significant recession which lasted until we ramped up our industrial base for WWII - which was (for the purposes of this discussion) another example of government spending that improved our economy.
Most interesting of all is what I found in this article, which shows that we've basically repeated history. Here's a quote from the article:
"At first, [Hoover's Reconstruction Finance Corporation (RFC)] only lent money, leaving distressed banks with further obligations. Had it bought stock, the RFC would instead have put the banks a bit farther from disaster. But even after this problem became clear, Hoover did not want the RFC to buy bank stock -- that was socialism. Only with the Emergency Banking Act of 1933, suggested to Congress by Roosevelt and passed within hours, could the RFC buy bank equity. Over the next year, the RFC bought more than a billion dollars of bank stock -- an amount equal to around a third of the capital invested in U.S. banks."
And again, by 1936 our economy was back on track in every measure except for unemployment...which was only slightly higher than it is right now.
After WWII our national debt was every bit as hideous as it is now - and what did our government do? Truman and Eisenhower bumped the top marginal tax rate up to over 90% and we paid off nearly all of the national debt...and despite the Republican rhetoric about how bad high taxes for the wealthy are, our economy through the fifties and early sixties was the envy of the world.
There are two weaknesses in my refutation is that your examples are of modern-day economies and mine are from a half-century and more in the past...but I would also say that the general economic principles remain the same.
I could also say that your examples are of other countries, and mine are of America...to which you could riposte with my point about general economic principles regardless of the country involved. However, the differences in the complexity and the scale of the economies of those countries as compared to America's may well negate the aforementioned riposte.
I would summarize by pointing out that since laissez-faire Reaganomics got us into this mess, we should not trust to more of the same to get us out of it. Still, kudos to you for a great article - made me think, rather than simply react as with most other articles. Time for coffee and aspirin....
6 - Roger Nowosielski
Glenn, you're showing yourself to be a fair-minded person, almost a rarity on this site. Now, this comment of yours impels me to read Kenn's article.
7 - Kenn Jacobine
Thanks Fellas,
You know for the first time on this site I can really feel the love!
8 - Clavos
Don't let it go to your head, Kenn. We'll probably nail ya on the next one. :>)
9 - Roger Nowosielski
Well, Lumpy. Pablo is just very convicted. I don't think he's a troll just because he believes in the power grab by the movers and shakers (even if I don't share his views). If your definition of ideology has to do with having an idee fixe, then perhaps Pablo is an ideologue. But in that case, I can think of ideologues from the Left (no, I'm not going to name them)which are far more disruptive than Pablo or Cobra.
But can't the same thing be said of our colleagues
from the right?
As to open-mindedness - no, I don't think it's a widespread phenomenon.
10 - Ma(rk Ede)n
I think that it's safe to assume that both Bernanke and Geithner are aware of this research and its gloomy 'damned if you do -- damned if you don't' results.
There is no painless solution to capitalist crises. Perhaps they don't believe that civil society would stand up to the trauma of an unmitigated correction.
11 - Roger Nowosielski
But then again, perhaps that trauma is precisely what the country needs in order to wake up.
12 - Kenn Jacobine
Mark,
This crisis was not caused by capitalism. The U.S. is not even a capitalist society. This crisis was caused by the central planners at the Fed through their bastardization of interest rates and the malinvestments that transpired (i.e. housing). The same thing happened in the 1990s with the dot.com bubble. Now the Fed is pumping money in like there is no tomorrow in an effort to reinflate their bubble - they call it stabilizing prices. Buy gold my friend inflation is on the way.
13 - Roger Nowosielski
A very odd view, #92. The speculations on Wall Street, abuses and unmitigated greed had nothing to do with it. Only the government was at fault. And then again, the claim that "the U.S. is not a capitalist society."
Perhaps not in the pure sense that Mr. Jacobine would have liked to; and I'm very glad for the fact.
Be that as it may, this just about discredit the writer, in my view.
14 - Dave Nalle
The crisis was caused at least in part by the Fed embracing monetarism and then violating the most fundamental principles of monetarist theory and thereby demonstrating how absolutely correct Milton Friedman was.
Dave
15 - Roger Nowosielski
You can't be serious, Dave, to so completely absolve Wall Street of any responsibility in the matter - as though the Fed was only acting rather then reacting.
But in that case, you had better rethink your position as to the objectives of "the central planners," who are they and what they're up to. If I remember correctly, you are dead-set against any view which even hints at the possibility of conspiracy and world domination.
Roger
16 - Kenn Jacobine
Roger,
In the first place, the U.S. has what is known as a mixed economy - free market with a large does of government involvement. The following article sums up the extent to which Uncle Scam is involved in our economy: http://lovesliberty.tripod.com/id8.html
Secondly, the money had to come from some place for the greed to take place - the Fed. And it is funny that the greed you are talking about is in probably the most government regulated industry in the country - banking. As a matter of fact if any other industry was run like our banks the leaders would go to jail for running an illegal cartel. Why is this so hard to understand? The Fed continues to erode your purchasing power and destroy your savings while causing the most recent coming depression and you would prefer to believe the idiot talking heads and the slimy politicians in Washington about how "greed" has destroyed our economy. Talk about mushheaded thinking. This folks is why we have the problems we have today.
17 - Roger Nowosielski
Well, Kenn. These policies by the Fed didn't come about overnight. How long was Greenspan, for instance, in charge? So in that case, the conservatives are just as much in fault or the other side. Wasn't he there, too, even during Reagan.
So who runs the Fed? And if politicians do - all politicians - then we may as well close the shop. So where are you going with this?
18 - Kenn Jacobine
Roger,
This is a bipartisan problem. Greenspan was originally appointed by Reagan, but reappointed by Clinton and Bush II. The Congress has abdicated its Constitutional fiduciary responsibility over our money and given it to the Fed. The Fed was proposed by big bankers (JP Morgan, etc..) and exists for big bankers. It cares nothing about you and me as long as we stay calm and not rise up to overthrow the system. I of course favor an abolition of the system and a return to a commodity backed currency. This would limit federal spending, lower inflation, and end the illegal banking cartel which only serves the greedy on Wall Street.
19 - Mar(k E)den
Kenn, let's bracket the arguments about what/who caused the problem and whether our economy is capitalist. I'm interested in your suggestions to B & G about what to do now. Perhaps a drawn out period of depressed GDP growth is the best result they can come up with.
20 - Clavos
Buy gold my friend hyperinflation is on the way.
There. Fixed it for ya, Kenn.
21 - Roger Nowosielski
Kenn,
Well, at least we do agree on something. And I agree with you in that the government is the enabler. Don't get me wrong on another matter either - I'm not against capitalism per se; only in cases when it ceases being functional.
This crisis may yet bring about some good, if it will lead to a thorough restructuring. Meanwhile, the question still persists: why wasn't there anyone in the position of leadership to break up this - "conspiracy," should I say. So either they system was simply allowed to become a loose cannon while everyone watched, or the vested interest, in collusion with key government officials, have prevailed.
What do you think?
22 - Kenn Jacobine
Mark,
Its not up to B & G to fix the problem - they are the problem. Congress should repeal all bailout money not yet spent. It should immediately move to abolish the Fed and return our currency to the control of We the People (through our elected representatives). Insolvent companies and banks should be allowed to fail. This would be incredibly painful, but within a couple of years the American people would recover and rebuild the world's strongest economy.
If we continue the present course I am concerned we will relinquish our #1 standing economically in the world and our standard of living will be much lower because our currency will be in the dumper. Bernanke said to Congress yesterday that when the recovery comes the Fed will have to raise interest rates to combat inflation. First, do we trust the Fed will do that? After all this will hurt banks. Second, how high will those rates have to go to sterilize $12 trillion dollars and counting?
23 - Kenn Jacobine
Roger,
There have been people saying that we were headed for a fall from way back - Rothbard, Hayek, Hazlitt, Mises - the so called Austrian economists. More recently, Congressman and presidential candidate Ron Paul and his economic advisor Peter Schiff predicted this very crisis. But, of course Paul was marginalized and ridiculed during the primaries by the msm. Paul and Schiff are getting more attention now though -you can view many of their TV interviews on YouTube.
I simply think Americans don't like bad news and the politicians are the last to tell them any.
24 - Roger Nowosielski
I agree. There's still the question, though, what to do next and what are our options.
25 - Mar(k E)den
I see Kenn. So things will be better come the ever so painful lazy but fair revolution. Do you think that's a realistic possibility in the short term -- politically speaking, that is?