Economists Tell the Masses: "It Could Have Been Worse" Print
Dean Baker
Truthout, August 2, 2010

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It is amazing that angry mobs have not risen up and chased all the economists out of the country. While the greed of the Wall Street gang provided the fuel for the bubble, the economists played an essential role as enablers. This was most directly true for economists in policymaking positions, like Alan Greenspan at the Fed.

It was Greenspan’s job to stop the housing bubble. A competent and honest Fed chair would have recognized the bubble by 2002 and taken whatever steps were necessary to rein it in. And we should be 100 percent clear, in spite of all the song and dance about how the financial reform bill will prevent another bailout, the Fed absolutely had all the tools needed to stop this disaster. They just lacked either the competence or the integrity, or both.

But the economists in policymaking positions are just the beginning. There are thousands of macroeconomists across the country, in government, academia and private industry who track the economy as a full-time job. It is actually a well-paid job, with many drawing six-figure salaries and big name types getting close to $1 million a year.

Given the high pay for this profession, it was reasonable to expect that they would be able to see something like the $8 trillion housing bubble that eventually wrecked the economy when it collapsed. But, you can count on your fingers the number of economists who raised warnings about the housing bubble. The rest either did not see it, or didn’t think it worth mentioning.

Remarkably, no economists seem to have lost their jobs for this failing. Unlike dishwashers and custodians, economists are not held accountable for the quality of their work.

Now the economists are back telling us that we should be thankful that Congress and the Fed enacted the TARP and the other programs that saved Goldman Sachs, Citigroup and the rest from bankruptcy. A new study by Princeton University Professor Alan Blinder and Mark Zandi, the chief economist at Moody's Analytics, examined the impact of the TARP and the related Fed and FDIC bailout programs. The study found that without the bailout, GDP would have declined by another 6.5 percent and the economy would have lost another 8.5 million jobs. In other words, things might be bad now, but if we didn’t shovel trillions in loans and loan guarantees to Goldman Sachs and the rest of the Wall Street gang, they would be even worse.

Before we start thanking Goldman for taking our money, it is worth taking a closer look at the study. The big story here is the counterfactual. What does the study assume the Fed and Treasury would have done if we had not passed the TARP and the Fed had not come through with its vast array of emergency loan and loan guarantee programs?

The answer is that the study assumes that they would have done nothing. In other words, the question asked by the study is what would the world look like if the federal government had done absolutely nothing to counter the economic and financial downturn resulting from collapse of the housing bubble.

This counter-factual seems more than a bit unrealistic. Suppose we had let the market work its magic and put Goldman, Citigroup, Bank of America and Morgan Stanley into bankruptcy. Suppose that once these firms were in receivership and their bank units were in the hands of the FDIC, the Fed flooded the system with liquidity. How would this situation compare with the situation where trillions of taxpayer dollars were put at the discretion of Goldman and the rest through TARP and the Fed’s special facilities?

The Blinder-Zandi study tells us absolutely nothing about this scenario. In other words, Blinder and Zandi have constructed an absurdly unrealistic counter-factual and told us that the TARP was much better than this absurd scenario. This is like saying that people who don’t eat chicken will starve to death. Under the counterfactual that people who don’t chicken don’t eat anything else either, they certainly will starve to death.

But that is not a serious analysis of the benefits of eating chicken and Blinder and Zandi have not given us a serious analysis of the benefits of the TARP. This “it could have been worse” line should be flushed down the toilet. The reality is that greed and incompetence created an entirely unnecessary disaster. Tens of millions of people are still suffering from its consequences. And the Wall Street boys and the economists who are responsible for the disaster are all doing just fine. People should be really angry about this, and a silly study that might be used to tell them otherwise should just make them angrier.