Economic Recovery from the Great Recession

Economics Without The B.S.**: Economic Recovery from the Great Recession

[**  Double entendre intended.]

Economic Recovery from the Great Recession

To understand what it will take to recover from the 2007-2009 Recession, first requires you to understand the magnitude of the recession; and, that requires a look back at the Great Depression of the 1930s.

I think most of the ‘experts’ have under-estimated just how serious the Recession of 2007-2009 and the Financial Crisis of 2008 were.  The immediate steps to alleviate the Financial Crisis cost us trillions of dollars – that is TRILLIONS with a ‘T’, not billions or hundreds of billions as many people and news organizations think.  I know of no better source of information than the Federal Reserve report of December 1, 2010.

That report covered Fed transactions from December 2007 to July 2010.  There were over 21,000 transactions in all.  $9 Trillion went out through the Fed discount window alone; but, in addition, there were a whole host of other measures never contemplated by previous Feds or Central Banks.  There were days when over $1 Trillion was being loaned out, with the biggest day being December 5^th, 2008 for a total of $1.2 Trillion.  Loans provided by the Term Auction and Primary Dealer Credit facilities alone totaled nearly $13 Trillion.    In addition to banks getting bailed out by the Fed, were investors – Fidelity, Black Rock, Merrill Lynch, T. Rowe Price, Oppenheimer, PIMCO, and CalPERS among others.  Non-bank companies got Fed bailouts – GE, Harley-Davidson, Caterpillar, McDonald’s, Verizon, as well as pension funds and insurers.  Although it is legal for our Fed to have exchanges with foreign central banks, it is not legal for our Fed to bailout foreign companies.  But that didn’t stop our Fed.  The December 1, 2010 report shows that our Fed lent to the central banks of Britain, Japan, Sweden, South Korea, Australia, Denmark, Mexico, Norway, Switzerland, and the European Central Bank, in some cases so the foreign central bank could make the loan available to companies within their country.

All of these constitute the bailout by our Fed, monetary policy by the Central Bank.  None of this includes fiscal policy by our Federal Government, which was sparse in comparison to the magnitude of the economic setback.  Under Bush we had a $700 Billion TARP-I.  Under Obama we had TARP-II for another $700 Billion.  In addition to Fed actions, we had the FDIC guaranteeing bank debt during the take-over/restructuring of banks that failed (over 100 I believe) and the AIG bailout/rescue along with GM and Chrysler among many others.  And the states were doing nothing in the way of an economic stimulus; and, instead were doing just the opposite and cutting back on spending.

Simply put, you cannot reallocate trillions of dollars out of a $14 Trillion economy (at that time) and not expect negative ramifications.  During the Depression of the 1930s, you had a three year period where we were in a deflationary spiral that reached almost 30 percent.  That long, persistent deflationary spiral wiped out an entrepreneurial class who too often use extended credit for their investments; and, that resulted in the failure to invest and create new jobs which was faced by FDR’s Administration.   When this entrepreneurial class gets hit, investment ceases, and economic growth collapses, and the economy shrinks.  During the Great Depression, the GDP shrank from around a little over $100 billion during the Roaring ‘20’s to a little over $55 billion during the depth of the Depression during the ‘30s.  This calamity is what caused the Great Depression to last so long until a recovery could be generated, mainly from the outbreak of WWII which created a demand for goods.  In 2008 our economy was around $14 trillion.  So if you are critical of the Fed actions under Ben Bernanke with the bailout of Wall Street at the expense of Main Street, think where you would be today if the economy went into a deflationary spiral and GDP shrank from $14 trillion to $8 trillion?  And for those who would be opposed to any bailout on the grounds of moral hazard, I would ask:  If it took WWII to get us out of the Great Depression, what do you think would get us out of the Financial Crisis of 2008 if we had no bailout?

So while we may have had a bailout to prevent a deflationary spiral from wrecking havoc on our economy, we still have an economy which has been undergoing a transformation from the 1990s but is out of balance with the needs in our society because it has been more based on the consumer sector of our economy at the expense of the industrial and commercial sectors of our economy with the resultant service sectors and financial services taking up some of the slack.  Because the commercial and industrial sectors are less of a factor in our economy it is difficult to prime the pump with Government spending; and, you must remember that the multiplier effect is significantly higher for manufacturing  (1.4 output for each 1.0 input) compared to other sectors (info technology is 1:1; wholesale/retail trade is around 0.7:1).  This is why we have a stagnant economy characterized by slow growth.  It has nothing to do with the nonsense that has been propagated by a bunch of experts who are out of touch with the great majority of people.

There is no reason we cannot get back to a period of better growth – in the 4% range – if we put more emphasis on the industrial and commercial needs in our own country along with investment in R&D, infrastructure, energy, health and the bio-sciences, space and ocean exploration, and upgrading our educational system for children and adults to emphasize the technical skills required for a society that is innovative and wants to explore.  [You will excuse me if I came through the 1960s when we had such leadership in our Government and the private sector, won’t you?]