Nina Easton is a conservative commentator. Here is an article that she wrote, which appeared online today. My comments are in italics.
|Washington's inconvenient economic truths|
By Nina Easton, Washington editor
On 10:35 am EST, Monday November 2, 2009
Now that we're officially (if barely) out of the Great Recession, it's time for our nation's elected officials to get down to serious business -- that of taking credit, assigning blame, and calling each other liars.
Barely? We're growing at nearly 4% and could be growing a lot faster if more economic stimulus were applied.
The $787 billion stimulus package signed by President Obama is the picked-over carcass in the middle, with the White House claiming credit for millions of jobs "saved" and the Republicans accusing Team Obama of playing fantasy foosball with hard economic data.
But the stimulus package is mostly beside the point -- at least so far -- which poses an inconvenient political truth for both President Obama and his GOP foes. The real credit for a rebounding economy goes to the Federal Reserve Board -- chaired by a Bush appointee, Ben Bernanke, whose term was just re-upped by Obama.
The Fed only sets interest rates; it cannot add to aggregate demand, which is is what has been so lacking. How does she support her claim that the real credit for the rebounding economy goes to the Fed?
Some credit for stabilizing the financial system can also be given to a wildly unpopular bank bailout launched by President Bush's Treasury Secretary and endorsed and sustained by President Obama's Treasury Secretary.
It could be argued that the bank bailout--in the form it was conducted, i.e. sustaining non-bank intermediaries--was counterproductive. If the Fed had understood its role and lent on an unsecured, unlimited basis to commercial banks, as is their directive, then the "financial system" would have been fine and we would have eliminated a lot of unecessary intermediation.
Try making those points to angry voters in next year's midterm elections.
No elected Democrat really wants to embrace TARP, no matter how much Tim Geithner has tweaked and re-tweaked the bank rescue program, and no matter how many billions banks have since returned, stapled with interest payments to U.S. taxpayers.
Tarp was an extravagant use of taxpayer money. One hundred times what is spent on food stamps, for no good reason.
Likewise, Republicans are painfully aware that last summer's "tea party" rebellions had as much to do with public anger over these Wall Street bailouts as they did with opposition to government-run health care.
Some economists, like Stanford University's John Taylor, think TARP was an unnecessary disaster. Others, like Allen Sinai, president of Decision Economics, say the government missed an opportunity to drive a real turnaround as we stared into a financial abyss.
Yes, there was no change. And Tarp sustained some of the very non-bank, speculative entities that contributed to the crisis.
Instead of injecting capital into banks who were unlikely to lend the money back out in such a dismal credit environment, Sinai argues the government should have supported housing prices -- the root of the crisis -- by directly intervening in the mortgage market.
That's one idea. How about supporting incomes via payroll tax cuts and giving money to cash-strapped states. In other words, you support the real economy and the banking crisis goes away.
Still, most economists credit TARP, followed by Treasury's requirement for the big banks to raise private capital, with stabilizing the financial sector -- a prerequisite to the 3.5% GDP growth for the third quarter that was reported last week. (Even Sinai credits TARP with a small but measurable role in last week's good news.)
The decision to force banks to raise capital was an admisssion by our policymakers that they don't understand our own banking system. Banks are already regulated as to their capital adequeacy. Ostensibly the FDIC and controller of the currency was doing that job.
Says the American Enterprise Institute's Alex Brill, former chief economist to the House Ways and Means Committee: "There is a lot of fair criticism about how TARP operated. But the banking system is the grease in our economy. As a result of TARP, we're in a much better place today." Even though, as Brill acknowledges, "TARP is scary for a lot of politicians and voters."
Banks are functionally agents of the government when it comes to lending and money creation, however, our leaders fail to recognize this. They also fail to recognize that banks make loans based on the ability of those loans to be paid back, which is a function of basic economic conditions. We still have 15 million people unemployed, yet our policymakers are scratching their heads as to why banks are not lending.
There is similar disagreement among economists over the impact of the $787 billion stimulus bill that a Democratic Congress passed and President Obama signed last February.
Sinai calculates that the tax and income supports, along with aid to states and cities, were responsible for about 40% of the 3.5 GDP growth rate reported last week. (Though Sinai and other economists include in their measurements the Cash for Clunkers program, which clearly caused an uptick in auto manufacturing. But that month-long trade-in program has ended, and wasn't even part of the original Obama stimulus bill.)
Yes, income supports via automatic stabilizers, like SS, Medicare and unemployment insurance. NOTHING was done proactively to help incomes rise. In fact, the Fed's zero-interest-rate policy actually has led to a decline in interest income, which is not an insignificant part of national income.
Brill argues that Obama's stimulus had very little impact on GDP because very little money is getting out the government door. "The bureaucracy and red tape in these projects is systemic," he says.
Agreed. Most of the "spending" went for Tarp (about $400 billion). When you remove Tarp from the deficit, the shortfall is about 7% of GDP, which seems wholly inadequate when you are dealing with the worst downturn since the 1930s.
And Stanford's Taylor argues in his blog that the Bureau of Economic Analysis tables released with last week's GDP numbers "make it very clear that the $787 billion stimulus package had virtually nothing to do with the improvement."
It had some, but not a lot. And much of the actual spending was in the second year, so the jury is still out on this.
What's harder to ignore in this improving economic picture is the role of the Fed, which has effectively bypassed an ailing banking system to pump credit into the economy. The Fed's interventions have been manifold: through the commercial-paper market and short-term loans to banks; through supports for loans to small business, auto buyers, credit-card holders and student-loan borrowers; and through a commitment to buy up $1.25 trillion in loans tied to home mortgages.
Despite interest rates being brought down to zero, total bank credit has declined by $400 billion in since last December. This woman has no clue about what she is talking about. Moreover, since hte gov't is a net payer of interest, zero-percent interest rates have resulted in an income cut to many people.
"Where you see that is in home sales and housing starts," says Sinai. "The GDP numbers showed a nice increase in residential construction. Also, home prices have bottomed out. That's a secondary effect of the Fed's actions."
No. It has to do with the fact that housing construction fell to unsustainably low levels.
Of course, Fed monetary policy, which has kept interest rates at effectively zero, has also "had a significant effect on the economy," says Sinai, producing a stock-market rally that caused wealth gains, and boosting investor confidence. And a lower dollar, he notes, has helped exports, which showed a healthy increase in last week's GDP figures.
The stock market's gains are felt more by people at the top--the highest income earners--and do little for folks at the bottom or in the middle. Moreover, achieving export growth in a highly competitive global export economy meant reducing the real terms of trade for Americans. Exports are a cost; imports are a benefit.
As the economy improves, economists will give a pat on the back to Bernanke -- even as they worry about inflation and what will happen when he takes his foot off the money accelerator. But don't look for 435 House members and 36 U.S. Senators seeking reelection next year to take to applause lines for Bernanke -- or his Federal Reserve Board.
The economists are wrong. Bernanke had nothing to do with this recovery if indeed it lasts, becausee the Fed has absolutely zero tools to deal with raising the level of aggregate demand.
The effect of TARP, the most widely publicized piece of last year's government response to the financial crisis, was to stir fierce populist sentiment. The Fed, a historically secretive and mistrusted agency, doesn't escape those passions. Libertarian Ron Paul of Texas, who has called for an end to the Fed, introduced a bill to audit the agency's monetary policy-making -- and 308 House members have since signed on.
Ron Paul is an idiot and his constitutents are idiots for keeping him in office.
This isn't a clean Republican-Democrat divide; it's a grass roots-elite divide. And the Fed's key role in America's economic recovery is one of those truths that just isn't convenient on any campaign trail right now.
The Fed has had zero role in this recovery. She's clueless.