Monday, December 16, 2013
By Gonzalo Lira
If policymakers were gunfighters, they’d be out of bullets: They have run out of effective policy tools to improve the economy.
So the question is simple: If there is a recession in 2014, and policymakers are out of bullets, how will it play out across the American economy?
|What the Fed is looking at.|
Recently, Deutsche Bank’s Jim Reid very astutely pointed out that the current “expansion” of the U.S. economy is on its fifth year—the seventh longest in history.
We are due for a recession.
Now, before facing up to a possible 2014 recession, let’s ask ourselves: What happened during the last recession?
No one can quite agree as to the specific causes of the 2007–09 recession—and fighting that particular fight isn’t the point of this essay. But we can all more or less agree that global overindebtedness caused a mini-Minsky Moment, whereby borrowers could no longer borrow enough to keep from defaulting on their previous loans. Hence September 2008. Hence the collective global “Ahhh!!!!” moment that we all recall with such sweet and fond nostalgia.
To stave off what looked like financial and economic Armageddon, the Treasury Department first under Henry Paulson and then under Timothy Geithner, and the Federal Reserve under Ben Bernanke, basically threw money into the economy: The Treasury’s Troubled Asset Relief Program (TARP) originally authorized $700 billion to buy up toxic assets, while the Fed created the Maiden Lane vehicles, lowered interest rates to zero (zero interest-rate policy, ZIRP), and simultaneously created money by way of the various iterations of Quantitative Easing (QE).
Combined, these Treasury and Fed programs prevented the bankruptcies of the so-called “systemically important” (a.k.a., “Too Big To Fail”) banks, and provided the U.S. Federal government with the cash to carry out the 2009 stimulus program. After all, had it not been for the Fed’s purchases of Treasury bonds by way of QE, the yields on the government’s bonds would have risen so high that the stimulus program could not have been financed, let alone the +$1 trillion deficits of 2009, 2010, 2011 and 2012.
via Gonzalo Lira.