Thursday, March 8, 2012

Bank Bailout and Obama Stimulus - Economists Overwhelmingly Approve

The Initiative on Global Markets, at the Booth School of Business at the University of Chicago, has assembled a panel of 40 leading U.S. economists to whom they put public policy issues weekly and publish the results of the responses.

This week's proposition was:

Because the U.S. Treasury bailed out and backstopped banks (by injecting equity into them in late 2008, and later committing to provide public capital to any banks that failed the stress tests and could not raise private capital), the U.S. unemployment rate was lower at the end of 2010 than it would have been without these measures.

Of the 40,  11 strongly agreed, 21 agreed, 5 did not answer the question and 3 were uncertain.  Not a single economist disagreed with the proposition.

Back on February 15, 2012, two propositions on the Obama stimulus package were submitted to the panel:
Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.
80% of the panel agreed or strongly agreed with the proposition, while 2% disagreed and 2% strongly disagreed.  (The balance did not respond or were uncertain.)

The second proposition was:
Taking into account all of the ARRA's economic consequences — including the economic costs of raising taxes to pay for the spending, its effects on future spending, and any other likely future effects — the benefits of the stimulus will end up exceeding its costs.
Here the voting was much closer, which I presume was primarily in light of the future costs to address  the huge amount of deficit spending.  46% agreed or strongly agreed that the Obama stimulus package would end up have a net benefit to the country.   27% were uncertain, 12% disagreed or strongly disagreed, and 2% did not respond.  So for those that expressed an opinion, by an almost 4 to 1 margin, the economists said the Obama Stimulus would end up being of a net benefit to the country.  Obviously, that doesn't mean that it was the optimal approach.

The most humorous comment on the bank bailout came from Luigi Zingales, a professor at University of Chicago, who agreed with the utility of the bank bailout and added:
If the only choice is between evil and Armageddon, evil might look ok.
The New Yorker, in September 2009, published an excellent article on the dire situation facing Henry Paulson, Ben Bernanke and Timothy Geithner in September 2008.  The article, by James B. Stewart, is titled "Eight Days, The Battle to Save the American Financial System." Here is its conclusion as of September 2009:
 Meanwhile, the economy is still in a deep recession, with unemployment at nearly ten per cent. But the simple fact is this: America did not plunge into the economic abyss it faced that Thursday night. The bold stroke of guaranteeing the money-market funds stopped the panic and halted withdrawals from the funds. The commercial-paper market slowly came back to life and, with it, the credit markets. Turning Morgan Stanley and Goldman Sachs into bank holding companies with Fed supervision and support stopped the run on investment banks. The details and mechanics of the TARP legislation proved less important than the sense that a comprehensive plan to address the crisis was under way. The reprieve bought enough time for the reemergence of reason over unbridled fear.

No comments:

Post a Comment