The Costs of the Federal Bailouts


Friday September 3rd, 2010   •   Posted by William Shughart at 12:12am PST   •  

Ever since the bursting of the real estate bubble became evident at the end of 2007, Washington has been on a spending spree to avert events that, in its collective judgment, threatened the stability and solvency of the U.S. financial system and economy as a whole.

Although the U.S. economy has experienced recurrent cycles of boom and bust throughout its history, comparisons were quickly drawn between the macroeconomic events of 2008–2010 and the Great Depression of 1929–1946. The parallels seem so obvious that the more recent downturn is now often referred to as the “Great Recession.”

Those parallels are accurate in the sense that both downturns had common causes and were preceded by periods during which the Federal Reserve generously expanded bank credit. The Fed’s actions underwrote run-ups in stock prices and real estate values and were followed by a tightening that triggered significant contractions in economic activity and significant increases in unemployment. (If you think today’s 9.5% unemployment rate is unacceptable, remember that in 1933 a full one-fourth of the labor force was out of work, and that was at a time when most families had a single breadwinner.)

According to policymakers then and now, the appropriate “hydraulic” Keynesian remedy is more federal spending—financed primarily by borrowing—to offset freefalls in personal and business expenditures and raise aggregate demand.

Thinking that a modern New Deal would jumpstart the economy, Presidents George W. Bush and Barack Obama already have spent nearly $4 trillion to bail out homeowners who can’t pay their mortgages, bail out privately owned companies in the automobile and financial services sectors, and bail out towns and cities that claimed they might otherwise have to lay off public school teachers and other municipal employees.

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