Uwe E. Reinhardt is a professor of economics at Princeton University and he includes a warning in his first lecture to freshman students. “If at the end of this course you still trust me, I have failed in my mission.”
It is an introductory economics course, and the purpose behind his warning is to alert students to a dangerous animal roaming the jungle of economic policy: the sif. Sif stands for “structuring information felicitously” and he demonstrates how and why economists are particularly skilled at doing just that — selecting and shaping data to support a particular agenda.
His lesson is a good one for us to remember as we turn up our collars and brace ourselves to meet a storm of prescriptions and policy advice aimed at getting our economy back on its feet. It seems that every economist has an idea about what should be done and feels an obligation to share it with the new president and with anyone else who will listen or is too polite to indicate otherwise.
With an abundance of would-be navigators, then, we set off on the uncharted seas of this new and very different recession. It is not at all wrong to describe our economic situation as unprecedented. Previous recessions didn’t have the global complexities that this one presents. And even the Depression of the 1930s did not include the kind of Russian-doll revelations of losses in our largest financial institutions. The result: we are still taking soundings, uncertain of the right course.
We can know this without giving in to either recriminations or despair. Still, we can probably be forgiven if we look somewhat skeptically at the policies, programs and proposals that are being tossed around — and sometimes funded. They are so different that we instinctively know that they can’t all be right. There is a whole lot of guessing going on — well-intentioned, but still guessing.
The recent deal with Bank of America provides an example of two of the divergent ideas. The Treasury Department invested another $20 billion in Bank of America to strengthen the bank’s capital position after it posted greater-than-expected losses. Also, the feds also agreed to absorb any future losses in a $118 billion portfolio of troubled assets.
This type of portfolio guarantee has not been used much thus far in the government’s rescue-and-recovery efforts, and is a kind of recognition that the feds really have neither the experience nor the resources to manage portfolios containing hundreds of billions of dollars worth of securities of any kind, let alone those backed by complex financial derivatives and dicey home mortgages. Clearly the banks didn’t either, but that is another story.
A different approach, now getting a push on Capitol Hill, is an idea that has its roots in the original Treasury Department recovery plan in which the government was to buy the mortgage-backed damaged securities from banks. This would remove the mess from the financial institutions’ balance sheets and allow the banks to begin making loans again.
What is new about the idea is the introduction of a federally owned financial institution, a sort of “National Bank of Sorrows” to buy up the junk bonds now littering the balance sheets of commercial and investment banks around the country. Essentially, this would make more permanent the Federal Reserve’s program of lending to banks using those same dubious securities as collateral.
The big difference would be in the funding. What works for the Federal Reserve doesn’t always work on Capitol Hill. The Fed has about $1 trillion of short-term loans of this type on its balance sheet right now. That was a plus for the economy, but it is difficult to believe that Congress is going to give a new National Bank of Sorrows a trillion dollars to buy the banks’ rubbish, no matter how many economists swear that it is a great idea. It is more likely to be a modest effort, with modest results.
There aren’t a lot of navigational aids to help us get through this recession — certainly not any placed there by economic theory. In our country and elsewhere, the evidence indicating the effectiveness of economic stimulus programs has been unconvincing. Even the famous New Deal programs implemented during the 1930s had little visible effect on the overall economy.
There is reason for optimism, though. Last year’s sudden collapse of our financial institutions took us by surprise and we had trouble keeping our feet under us. Today, even though we all recognize that we will still have to take some more hits in terms of job losses, we seem stronger, our attitude more balanced, more positive. In economic terms, that is something we can bank on.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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