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Fighting recession has become a new kind of warfare

Five months into the economic crisis, experts predict a years-long recovery.

By Staff writer of The Christian Science Monitor / February 13, 2009

Signs of the times: From company board rooms and Wall Street to factory floors and residential neighborhoods, evidence of a troubled economy has spread across the nation. Treasury Secretary Timothy Geithner says turning things around will take “extraordinary" measures.

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It's been five months since then-Secretary of the Treasury Henry Paulson publicly warned of a growing crisis in credit markets. Since then, successive American administrations have fought a deepening recession with the intensity and mountains of cash usually reserved for war.

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Today lawmakers talk easily of numbers that a year ago would have sounded preposterous. The bank rescue announced this week could cost upwards of $2.5 trillion. The stimulus deal? That's $789 billion more.

Already the list of bailouts sounds like a roll call of past battles: AIG, Fannie Mae, Freddie Mac, GM, Chrysler. Almost 400 financial institutions now have received a federal infusion from Treasury's existing $700 billion recovery fund.

History tells them to react forcefully and fast to the downturn, say administration officials, and that's what they're trying to do. What they are fighting is not just the current downturn, but the possibility of years – perhaps a decade – of sluggish growth, of factories more idle than necessary, of unemployment that remains stubbornly high.

"The financial crises we face today are more challenging than anything our system has faced in the past ... It's going to require that we do extraordinary things," said Secretary of the Treasury Timothy Geithner at a Senate Banking Committee hearing on Feb. 10.

That may be so. But many in Congress remain uneasy about the process, unsure of the course of action, and concerned about simply handing the White House a blank check in these difficult times.

"We're talking about denominations that are daunting, ones that we've never talked about, ever before. And so the magnitude of the request is overwhelming in many ways," Sen. Christopher Dodd (D) of Connecticut, chairman of the banking panel, told Mr. Geithner.

To show how concerted the US campaign has been so far, consider what has happened to the Federal Reserve. Since August, the Fed – lender of last resort to the US economy – has tripled the size of its balance sheet by pumping cash into some tottering institutions, extending credit to others, and setting up entities to back securitized student loans and other consumer debt.

Plus, it has cut its benchmark lending rate essentially to zero. If fighting the recession is analogous to waging war, than Fed chief Ben Bernanke may be playing the shock-and-awe role of Gen. George Patton.

"This is unprecedented in the history of central banking," says Richard Sylla, a New York University financial historian, of the Fed's recent moves.

Normally a nation that piled on so much debt so quickly would be punished by international markets. The value of its currency would plunge, and the cost of servicing its debt would skyrocket.

That hasn't happened with the US, at least so far, because of its sterling record over centuries of meeting debt payments, says Professor Sylla. In fact, the US might be the only country that could make this approach work.

But it shows a willingness on the part of the nation's leaders to do whatever it takes to get out of the current mess, says Sylla. He teaches a class on the history of financial crises, and he says the ones that turned out well were those where there was bold political leadership.

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