Friday, August 28, 2009

Slowing the Economic Free Fall

The revised GDP number for the second quarter came out. The U.S. economy contracted at an annual rate of 1.0 percent in the second quarter, which in itself isn't much to cheer about. But in context, it's actually encouraging. GDP had fallen 5.4 percent and 6.4 percent in the previous two quarters.
What happened to arrest the economy's free fall? Four government prorams, the bank bailout, the Fed's monetary policy, the stimulus plan and cash for clunkers, have had a decisive effect.
The bank bailout poured billions into our financial institutions to keep them afloat. It wasn't pretty, and some folks whose bad behavior helped get us into this mess did better than they deserved. But a modern economy needs a functioning financial sector. If the government had not acted to shore up the banks, the economic crisis would have been much worse.
The Federal Reserve flooded the market with liquidity to ensure the availability of credit. The Fed's balance sheet has grown
from $939 billion a year ago to $2.1 trillion today.
So why haven't we seen an explosion of inflation? If inflation is quantity of money times velocity, the answer is that money hasn't been moving as fast. Families and businesses slowed spending, increased savings and have been paying down debt. Lenders contracted lines of credit across the board. Many of the exotic derivatives that greatly expanded leverage have fallen out of favor.
The stimulus package is working. Even though much of the money for big projects has yet to be spent, the $288 billion in tax cuts and the $144 billion in aid to state and local governments have already had a big impact. Imagine what would have happened here in Delaware if the state had had to find another $155 million in cuts or higher taxes to make up for the help provided by the stimulus plan.
The cash for clunkers program (relatively modest at $2.9 billion) sparked 700,000 new car sales in three short weeks and
pushed the new car market above the break-even point for Ford, GM and Chrysler.
The U.S. economy has been through a scary roller coaster ride over the last year. Millions of American have lost their jobs and their homes. There will be more job losses and foreclosures in the coming year. But millions more who were worried about losing their jobs, homes and retirement savings are breathing easier than they were last winter. I know I am.


Anonymous Anonymous said...

Michael Castle voted against the economic recovery didn't he?

8:47 AM, August 29, 2009  
Blogger Tom Noyes said...

Not a single Republican in the House voted for it.

12:03 PM, August 29, 2009  
Anonymous Anonymous said...


12:11 PM, August 29, 2009  
Anonymous Anonymous said...

While this is encouraging, do we have any reasonable predictions of the longer term impacts?

Is this a short term stimulus bump in economic activity or something that will last?

The stimulus funding is helping now, but will we have to pay a large price later due to the structural problems of an increased deficit?

Do we have an exit plan? I am a little fearful that much like Iraq, we cannot keep dumping sand down a rat hole forever to artificially keep many economic sectors on life support.

How do we keep things going without the high level of federal funding over the long term?

7:46 AM, August 30, 2009  
Anonymous Anonymous said...

If we can trust past experience to prevail, the economy will stabilize and grow steadily until Republicans return to power.

10:46 AM, August 30, 2009  

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