Yesterday’s N&O features an op-ed making the claim that the federal government’s response to the recession failed because it didn’t go far enough. The article seriously lacks any understanding for the cause of the recession in the fist place, and clings to some superstitious notion that government action can “fix” the economy (as if the economy is like a car engine).
The primary objections that the article’s author, unsurprisingly a university professor, raises about the government’s response is that it didn’t stimulate enough cheap credit and consumer spending.
The leading example is the bank bailout. Only one-third of the TARP funds even went to banks. Instead of using the money to clean the toxic waste out of bank vaults, the Treasury bought just enough bank stock to prop up their share prices. And the money came with almost no stipulations about how the banks could use it.As a result, the banks aren’t back to normal, judging by their anemic lending.
First off, there was no shortage of capital injected into the banking system – note the trillion dollar spike in excess bank reserves in the last couple years. Left out of the article, however, is any speculation by the author as to why the banks may not be lending as much as she’d like to see. A few primary reasons are:
- the Federal Reserve began, in an unprecedented move, paying banks interest on their excess reserves, incentivizing them to park much of their assets on the sidelines
- banks have an increased demand for cash because of the diminished and otherwise uncertain value of their assets, until their balance sheets are cleaned up they will want to hold more liquid assets
- there is an intense sense of regime uncertainty – a public policy environment in which economic actors are not sure what policies politicians will implement next – along with an uncertainty about what impact the massive and mysterious health care and financial overhaul bills will have on their bottom line
The article’s author then laments the lack of government direct “stimulus” spending.
And then there’s the $800 billion stimulus package. Only about one-third of that was actually new spending, which is what it takes to get the economy moving. And this money is spread out over several years, further weakening the power of its economic punch.
In the overly simplified and crude world of Keynesian (and university elite) economists, the driving force of the economy is consumption spending. Thus their repeated calls for more government stimulus spending to give the economy a “push.”
But what these folks never address is just where that money comes from. Furthermore, the notion that consumption spending is what drives economic growth is a myth – which I addressed here.
Our current recession was caused by, in large part, cheap credit pumped into the housing market courtesy of the Federal Reserve, along with a very shallow pool of savings the result of high ratios of consumer spending.
So what does the good professor think will bring back economic prosperity? More cheap credit and higher levels of consumer spending!
And to think the author of such nonsense gets paid to teach economics at one of the nation’s finest universities.
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