We could use a little economic disaster
The recovery is stalling because the government intervened too soon. A little disaster goes a long way to wipe out bad business.
More Disasters, Please!Skip to next paragraph
Subscribe Today to the Monitor
Whoa. Tuesday’s gains had disappeared before traders’ coffee had gone cold, yesterday morning. The Dow ended the day down 173 points…signaling what looks like a 7th straight week of losses. Stay tuned.
Oil ended the down at $95. The dollar went up.
The trouble with the financial catastrophe of ’07-’09 was that there wasn’t enough of it.
“What recovery?” asks TIME Magazine this week.
There is no recovery. Of course, you knew that, dear reader.
But what no one seems to know is ‘why’. So we’d like to make a small contribution to the intellectual life of the economics profession and the popular understanding of the events before, during and after the crisis of ’07-’09. That is, we’d like to explain.
How come the economy is so listless? How come there are so few jobs? How come house prices are falling?
We’ll tell you. Because the dopes running economic policy didn’t give catastrophe a chance! Instead of letting disaster wipe out all the bad investments, bad investors, bad bankers, and bad businesses, the feds pumped in money to keep them going. Well, guess what. They’re still going!
Four years after the crack up in the US subprime debt market, there is still no sign that things are getting back to ‘normal.’ Growth rates are low or negative – 1.8%, 0.5% and minus 3.5% in the US, Britain and Japan, respectively. Decent jobs are hard to find. Household earnings and balance sheets are sinking.
The only positive thing that can be said is that we dodged a worse disaster. In Japan, for instance, economist Richard Koo credits financial officials. Through 20 years of on-again, off-again deflation, they avoided a big loss in GDP and kept everyone working. Yes, stocks and real estate fell 80%…but by bailing out big business and the banks, catastrophe was averted.
Then, in ’08-’09, it was the West’s turn to duck. Says former US Treasury Secretary Laurence Summers: “We averted Depression in 2008/2009 by acting decisively.” In America, Ben Bernanke, Barack Obama, Tim Geithner and everybody else rushed to save the economy, just as the Japanese had done before them. Bernanke warned Congress that if they didn’t pass the TARP legislation immediately, “we might not have an economy on Monday.”
He should have shut up.
Then, he levered the Fed’s balance sheet so that it acted like a dike. The floodwaters passed; the US economy was spared.
These efforts too were successful. Every economy in Europe is still afloat. Barely.
“Traditionally, the US economy has recovered robustly from recession,” continues Mr. Summers in The Financial Times on Monday, “…within a couple of years after the only two deep recessions of the post first world war period, the economy grew in the range of 6% or more – that seems inconceivable today.”
We’re not even close. Since the crisis, growth in the US has averaged less than 1% a year. Properly adjusted for inflation and population growth, per capita GDP has declined and is now almost certainly negative by more than 2%. This explains why millions of people remain jobless 2 years after the recession supposedly ended. Ten million fewer people have jobs now than 5 years ago. The official unemployment rate is back over 9%, with 25 million who lack full time work.