I can't argue with today's Post editorial on the Fed, primarily because I have no clue what they think they are saying. The Post comes out in favor the Fed's expansionary policy given the continued weakness of the labor market (yeh!). But it then warns:
"Still, these benefits [sustaining growth] come with risks attached. Among the biggest risks is that easy money from the Fed enables banks and firms to postpone necessary restructuring — and for Congress and the White House to postpone getting the federal government’s long-term fiscal situation under control."
Let's look at these separately. In terms of the banks, the Fed free money policy, and previously its special lending facilities, does more than just allow the banks to "postpone" restructuring. It allows them to avoid restructuring and continue to operate with an implicit too big to fail guarantee.
Citigroup, Goldman Sachs, Morgan Stanley and most of the other big boys would have been bankrupt if the market was left to run its course. Instead the Fed stepped in and shoveled trillions of dollars of below market loans to these banks. This is what is known in other circles as "welfare."
The Post and other media outlets have given us the children's story that we made money on these loans. But this is just silliness. Using the Post's accounting, if the Fed gave me a 30-year mortgage at a 1.0 percent interest rate and I repaid the loan in full by 2042, the Washington Post would say that the government made money on this loan.
The reality is that at a time when the market demanded a huge risk premium to lend money to these banks, the Fed invited them in to borrow as much as they wanted at near zero rates. This both allowed them to get through the crisis and reinforced the idea that these banks carried the implicit "too big to fail" government guarantee.
In this context, it is hard to see any issue about "postponing" restructuring. The Fed allowed them to avoid restructuring. The argument that we had no choice is just false. First, the government could have put whatever conditions it wanted on these loans.
For example, Citigroup could have been forced to sign an agreement that it would break itself up into 10 much smaller banks by 2020 as a condition of borrowing the money. Its choice would then be bankruptcy or break up.
It's also important to note that the "Second Great Depression" was just a scare story the Wall Street boys came up with to help sell the bailouts. Argentina was able to regain the lost ground from a full-fledged financial crisis in one and a half years. There is no reason to assume that Bernanke and the rest of economic team is that much less competent than Argentina's, which means that even in the worst case scenario we would have only be looking at 2-3 years of a severe downturn, not a decade of double-digit unemployment.
Moving on, it is not clear what necessary restructuring the Post expects to happen in firms. Suppose the Fed did not try to boost the economy and the unemployment rate was still in double-digits. What restructuring would we be seeing exactly? Clearly firms would lay off more workers and cut back investment, but what does this have to do with restructuring? And what part of this is "necessary?"
Finally, the Post seems very upset that the government doesn't have a higher interest burden. It complains:
"Net interest payments on the federal debt actually fell between 2008 and 2011, as a share of gross domestic product, even as the deficit tripled. Mr. Goodman argues that this phenomenon gives policymakers a false sense of security about the federal government’s fiscal predicament."
I think the problem is that the Post doesn't have access to the budget information. If it did it would know that the reason the deficit tripled and we have anything that can possibly be called a "fiscal predicament" is that the economy collapsed.
Those who have access to budget documents know that the deficit was small, less than 2.0 percent of GDP, just prior to the crisis. It was projected to remain low long into the future. There was projected to be a long-term budget problem, but this was a result of the broken U.S. health care system driving up the cost of Medicare and Medicaid. This pointed to the need to fix the health care system, not the budget.
So any near term deficit issues are the result of the downturn. Why on earth shouldn't the Fed act to minimize the difficulty of financing this deficit? What good does the Post think would be accomplished if the Fed tried to make financing the deficit painful? Would we take away some school lunches and throw some senior citizens off Medicare?
If there is a logic to the Post's position I would be happy to hear it, but as their factchecker might say, it's not even wrong.
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