The Broader Market

by Jordan Eizenga

TBM has received commentary advocating for higher interest rates, spending cuts and generally contractionary economic policy.  Their arguments are based on a logic that seems to confuse the right policies to prevent a crisis for the right policies to respond to one.  Their logic is as follows:

1. Interest rates were kept very low through the 2000s, which allowed households and businesses to borrow very cheaply throughout that period.

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By Jordan Eizenga

As mentioned last week, Mark Zandi and Alan Blinder have produced the most comprehensive assessment of the government’s response to the financial crisis in a piece entitled “How the Great Recession Was Brought to an End.” The government was far from perfect in its response (particularly with respect to the size of its stimulus program).  That being said, the conclusions from the Zandi and Blinder research make clear that the government’s response did much to improve our economic situation.  In particular, they conclude that:

1.  By 2011, real GDP is $1.8 trillion (15 %) higher because of the government’s policies.
2. There are almost 10 million more jobs and the unemployment rate is approximately 6.5 percentage points lower than otherwise would have been the case if the government did not enact these policies.
3. The inflation rate is roughly 3 points higher than it would have been – 2 percent instead of -1 percent.

In the words of Zandi and Blinder themselves (neither of whom are liberal economists), “that’s what adverting a depression means.”

By Jordan Eizenga

Alan Blinder, Princeton economist and former fed vice-chairman, and Mark Zandi, chief economist at Moody’s Analytics, will release a report today that evaluates the federal government’s response to the financial crisis.  Advanced excerpts of the report illustrate that the report assesses both fiscal and monetary policy and notes that the both the stimulus and the Fed’s quantitative easing activities have had substantial impacts.  A preview posted by the New York Times Economix blog reads:

We find that the effects on real GDP, jobs, and inflation are huge, probably averting what would have been called Great Depression 2.0. For example, we estimate that, without the policy responses, GDP in 2010 would be about 6½% lower, payroll employment would be about 8½ million jobs lower, and the nation would now be experiencing deflation.

When we divide these effects into two components, one attributable to the various rounds of fiscal stimulus and the other attributable to the panoply of financial-market policies (including the TARP, the bank stress tests, and the Fed’s quantitative easing), we estimate that the latter are substantially more powerful than the former. Nonetheless, our estimated effects of the fiscal stimulus policies alone are very substantial: In 2010, real GDP that is about 2% higher, an unemployment rate that is about 1½ points lower, and almost 2.7 million more jobs….

None of this is to suggest that the initial stimulus was of sufficient size.  It does, however, invalidate the notion that stimulus spending is in any way a cause of high rates of unemployment or crowding out of private investment.  The federal government’s fiscal and monetary policy responses have clearly averted disaster.

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by Jordan Eizenga

The Bureau of Labor Statistics notes that the Consumer Price Index, a measure of inflation, dropped by 0.1 percent.  This comes at a time when consumer sentiment is at its lowest level in nearly a year.  This should mean that consumer spending is unlikely to pick up and generate inflationary pressures.  It also suggests that the US economy is likely to experience continued weak economic growth.  Indeed, the Federal Reserve recently downgraded its forecast for US unemployment and sees economic growth remaining sluggish throughout the next year.

To understand the likely effects of a weakening private sector recovery, consider the following truism for any country (which I borrow from an article by PIMCO’s Paul McCulley):

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By Jordan Eizenga

One of the next items on the President’s policy agenda will surely include reform of the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac.   Fannie Mae and Freddie Mac were created to purchase mortgages and bundle them together to form mortgage backed securities.  These securities functioned similar to bonds and were sold on to investors.  The benefit of this arrangement was that it provided liquidity to mortgage originators who were then able to make additional loans with this influx of cash.  

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by Jordan Eizenga

The paradox of thrift seems relevant to the current economic moment.  The concept, first introduced by John Maynard Keynes, goes as follows.  Households decide to save more at each level of income and consumption drops.  One might conclude that households’ decision to save more has resulted in a net increase in savings.  However, despite a conscious effort to reduce spending, the effect of all these thrifty households is that their savings levels have actually decreased or stayed the same.  The reason for this is that decreased spending can depress economic activity and thus, push down equilibrium incomes (all other things being equal).  Thus, the paradox of thrift is that increased saving can ultimately result in decreased saving.  Given that basic economics tells us that savings equals investment, stagnant savings also means stagnant investment. 

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