What Ended The Great Recession?

by Mario Rizzo  

Some business forecasters with a not-too-bad record are predicting that the recession will be over by the end of the year.  (NBER dates the beginning to December 2007.)  

Of course, the recovery in terms of real output from the Great Depression began in the 3Q of 1933 and that did not preclude high unemployment rates and a further recession in 1937. Here. Let that pass for the moment. 

If recovery begins, the discussion about why will also begin. Let’s confine ourselves to evaluating policies designed by the government to produce recovery. Some of the likely candidates are:  

Fiscal Stimulus 

Since the signs are recovery are supposedly now – a mere three months after the stimulus package was passed – and at a point where only about 19% [$148.6 billion of $787 billion] of the stimulus money has been expended by May 15th, I think it implausible that we could attribute a recovery to stimulus.  

TARP Lending to Banks  

It will be slightly easier to attribute recovery to TARP (“Troubled Asset Relief Program”) lending to banks. However, bank credit was never the major problem. Here and here. It hardly budged during the early months of the recession. Then with the initial TARP lending it spiked and has been gradually falling but it is still greater than at the beginning of the recession.    

TALF and Securitized Lending   

Perhaps TALF (“Term Asset-Backed Securities Loan Facility”) is rescuing us. The Treasury has been buying mortgage backed securities, securities backed by student loans, etc.  After all, the problem, so to speak, is securitized lending.  However, just before the recession began securitized consumer lending was $689 billion and by March 31, 2009 it was $640 billion — about a 7% drop. There seems to have been a small revival in securitized consumer lending but only in recent weeks

One could argue that the drop would have been worse without TALF. Let’s see some evidence.  

The Confidence God  

Perhaps what is causing the recovery (if such there is) is the expectation of stimulus, of bank bailouts, of a government-induced revival of securitized lending, etc. On the other hand, the markets seem to be expecting inflation. See Sandy Ikeda’s post immediately below.

In any event, if there is recovery soon, the public will no doubt attribute it to Team Obama. But then when the inflation occurs they may well do the same. It is also likely that such inflation will be accompanied by high unemployment because the recovery will have barely begun. Welcome back to the 1970s.  

At least this is one plausible scenario.

6 thoughts on “What Ended The Great Recession?

  1. I agree we are in store for stagflation (squared).

    What is interesting of course is that every recession in history has always ended. So it is odd when people want to find “the cause” for the recovery this time. (I realize you are aware of this, Mario; I’m just elaborating on your post.)

    For example, suppose everybody ends up thinking it was TALF. Well, there was no TALF during the last x recessions (I don’t know how many there were in between the Great Depression and now).

    I keep coming back to medical analogies. If a kid gets the flu, and each of his five brothers tries a different remedy–like kicking him in the face, pouring syrup on his toes, and reciting limericks–the kid would eventually get better. Some of his siblings’ remedies did nothing, and some actively prolonged the sickness.

    Yet after he eventually gets better, the siblings would argue over whose cure “worked.”

  2. The monetarist economists, some monetarists that I know of at least, already attribute the success of a recovery to the Fed’s “Friedmanite” timely and robust actions of injecting liquidity in the financial system through a variety of channels (discount window, money actions, direct asset purchases, lending guarantees for a variety of financial assets and so on) thus preventing a serious deflation and therefore reviving business and consumer confidence.

  3. Bogdan Enache,

    I think there is a pretty strong case that can be made for that explanation. The old adage is “don’t fight the FED” and while there are a lot of other things happening, the Fed’s actions “timely and robust” have been the biggest positive in preventing deflation and a much bigger problem.

    As Bob Murphy says, stagflation is a definite concern – a combination of greater government intervention, higher taxes (2010 and beyond), greater potential corporate taxation and a whole lot of money swimming in the system will be a problem going forwards.

    One interesting viewpoint, which I have not had sufficient time to digest, comes from Bob McTeer in his latest blog post. He differentiates Monetary base from “money growth” (i.e., money in circulation as bank reserves and currency). He speculates that while the long term rates may be indicative of an inflation premium, they may also indicate that monetary policy is tight (especially in the context of all of the borrowing by the treasury).


  4. Bogdan,

    Please tell your monetarist friends to read Anna Schwartz, who has denounced the FED policy as not only inappropriate, but decidedly NOT Friedmanite — if you get the right lesson from the Great Depression.

    Also see John Taylor’s work on this.

    The governmental cycle of deficits, debt and debasement hasn’t been stopped by team Obama, so don’t count on this recovery being sustainable. Right now as Mario hints, there is an expectation that all of these policies are going to stimulate the economy, but what happens when they prove to be ineffective at doing that and instead just create further distortions and confusion.

  5. It is interesting that no one seems to credit Hoover’s Reconstruction Finance Corporation with helping to end the Great Depression, but I think such a case can be made. After all, the Great Depression was primarily a financial crisis.

    The comments about the quantity of lending after TARP is revealing. The fact is that we have been in a credit crunch. One of the problems with a credit crunch is that there are no handy statistics to point to as an indicator of such a condition. Thanks to the monetarists, a lot of work has been done of the definition and measurement of money; similar work needs to be done for credit. Of course, interst rates are well documented, but lending standards, which are equally important,are not.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s