The Blinder-Zandi Report

A paper by economists Alan Blinder, an economist at Princeton and a former vice chairman of the Federal Reserve, and Mark Zandi, the chief economist at Moody’s Analytics, finds that without the Troubled Asset Relief Program (TARP) that bailed out the nation's financial sector, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama Administration’s fiscal stimulus program - the much maligned American Recovery and Reinvestment Act of 2009 (ARRA) - the nation’s gross domestic product would be about 6.5 percent lower this year.

Additionally, Dr. Blinder and Dr. Zandi find that the US economy would have lost an additional 8.5 million jobs, on top of the more than 8 million lost so far; and the economy would be in the midst of a deflationary asset spiral, instead of low inflation. Overall, they conclude that the aggregate effects of the TARP and the ARRA "probably averted what could have been called Great Depression 2.0." I am not quite sure why economists apart from Paul Krugman always seem to forget about the Panic of 1873, a five-year long financial downturn marked by deflation, price instability and the first sustained period of mass unemployment in world history.

More on the Blinder-Zandi report from the New York Times:

Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P.

By comparison, the savings and loan crisis cost about $350 billion in today’s dollars: $275 billion in direct cost and an additional $75 billion from the recession of 1990-91 — or about 6 percent of G.D.P. at the time.

But the new analysis might not be of immediate solace to officials in the Obama administration, who have been trying to promote the “summer of recovery” at events across the nation in the face of polls indicating persistent doubts about the impact of the $787 billion stimulus program.

For one thing, Mr. Blinder and Mr. Zandi find that the financial stabilization measures — the Troubled Asset Relief Program, as the bailout is known, along with the bank stress tests and the Fed’s actions — have had a relatively greater impact than the stimulus program.

If the fiscal stimulus alone had been enacted, and not the financial measures, they concluded, real G.D.P. would have fallen 5 percent last year, with 12 million jobs lost. But if only the financial measures had been enacted, and not the stimulus, real G.D.P. would have fallen nearly 4 percent, with 10 million jobs lost.

The combined effects of both sets of policies cannot be directly compared with the sum of each in isolation, they found, “because the policies tend to reinforce each other.”

Oddly enough, the New York Times failed to link to the report but here it is: How the Great Recession Was Brought to an End (pdf). The title is perhaps a bit over optimistic given that we are not quite out of the economic doldrums as yet but I do think their conclusion is inescapable:

It is clear that laissez faire was not an option; policymakers had to act. Not responding would have left both the economy and the government’s fiscal situation in far graver condition.

Still no one has ever won an election with the argument that it could have been worse. 

Tags: US Economy, US Labor Markets, TARP, arra (all tags)


1 Comment

RE: The Blinder-Zandi Report

I don't think people get how linked Wall Street and Main Street are right now. OF COURSE the TARP bailouts were necessary - had Wall Street collapsed all at once, it would have taken millions of loans and mortages with it. The credit crunch we face now would be the nation's glory days compared to what it would be with more collapsed firms. And when people lose their liveliehoods and homes, local economies lose consumers and thus shed jobs and businesses. The banks really were too big to fail - TARP followed by (the yet to be taken step of) breaking up those banks was the proper approach, not stepping back and letting them destroy everything beneath them as the populists demand.

Obama and Paulson's mistakes weren't these bills. Obama never should have promised to limit employment to 8%. This allows Repubs to paint his policies as failures, when in fact the size of the downturn was larger than anyone realized - rather than preventing a 1-2% rise in unemployment and capping it at 8%, it now seems that Obama presented an even more drastic rise with a cap of what, 15%? 18%?

Unlike many Tea Partiers and other progressives, I've always supported TARP. I believe I called it "the worst bill I'll ever support" last fall, and I stand by that. I'm glad to see this paper come along to back it up with data. Even if these economists are off by half, they still remind us of the downturn's sheer size, and the sheer size and holdings of the banks. This is important news, and I wish I could rec'd the post twice.

by Nathan Empsall 2010-07-28 06:05PM | 0 recs


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