The recession is finally ending, government economics experts and the media say, hailing the rescue efforts of government agencies. Those tempted to celebrate should first examine the actual data, beginning with the $787 billion stimulus package.
Earlier this year, President Barack Obama’s new economic team drew up a forecast to garner support for massive deficit spending. Recall that the official unemployment rate was a little more than 7 percent — and rising — back in January, when the new president was sworn in. The Obama team warned that if the government stood by and did nothing, unemployment might get as high as 9 percent by the end of this year.
In contrast, Obama’s team projected that the stimulus package would keep unemployment from breaking above 8 percent during the entire recession. The rest is history. The stimulus package passed, and the official unemployment rate for September was 9.8 percent. So not only is unemployment worse than what Team Obama said it would be, it’s worse even than they predicted it would be in the absence of the celebrated stimulus package. We see a similar pattern when it comes to the massive bank bailouts.
These include the $700 billion Troubled Asset Relief Program (TARP), spearheaded by former Treasury Secretary Hank Paulson, as well as the myriad relief programs run by the Federal Reserve. Recall that back in September 2008, the credit markets were in turmoil after the government’s surprise decision to let Lehman fail. Secretary Paulson warned that if he weren’t given $700 billion and very wide latitude in doling it out to major financial institutions, the U.S. credit market would collapse, and mid-sized businesses would be unable to make their monthly payrolls.
Paulson ended up getting what he wanted, and since then the Federal Reserve and Treasury have claimed success regarding their “rescue” of the financial sector. The innocent observer could be forgiven for thinking that there was a “credit crunch” brewing back in the fall of 2008, but that the American economy has since dodged a bullet because of the quick and bold actions by Paulson and Ben Bernanke at the Fed. Yet the data tell the exact opposite story.
According to the Fed’s own archives, total business loans were steadily rising throughout 2008, and were actually at an all-time high in October 2008. (Remember that Congress approved Paulson’s TARP request in early October 2008.) Since then, business loans have fallen steadily.
As of August 2009, total business loans are down by almost $192 billion from their October peak, a drop of almost 12 percent in just 10 months. If someone were shown a simple graph of the U.S. loan market and asked, “When did the great credit crunch of 2008 occur?” the obvious answer would be, “It started in October 2008.” Indeed, some economists argue that it was Paulson’s panicked request that spooked investors. The Federal Reserve also contributed to the collapse in lending when it decided to pay banks interest on the reserves they kept parked on deposit with the Fed — a policy begun in October 2008.
The government and media analysts should stop talking as if the “success” of these programs is self-evident. A simple look at the facts suggests that the interventions have been abject failures. Instead of cheerleading a bogus rescue, media analysts should tackle the obvious question: If this weak performance doesn’t cause proponents of massive deficit spending and corporate handouts to doubt themselves, what would?
Would a more free-market approach have yielded better results? Americans don’t know because neither the Bush nor Obama administrations considered that option. The next administration to tackle a recession should look to the market more than intervention. There is still time for the Obama administration, because the current recession, contrary to news reports, may not be over after all.
Murphy is a senior fellow in business and economic studies at the Pacific Research Institute. He can be contacted at [email protected]
In the Union-Tribune on Page B6