Recession Similarities

First of all I would like to point out a disclaimer that I have not studied any of the American Recessions in general, but from my basic knowledge along with a great interactive piece provided by the New York Times I would like to discuss some similarities (How the Government Dealt with Past Recessions.)

One of the important parts to understanding government intervention is the idea of Keynesian Economics. This is a theory of a British Economist who believed that government intervention using fiscal and monetary policy is necessary from time to time to stimulate the economy; fiscal policy being tax cuts and government spending and monetary policy controlling interest rates and money supply.

Clearly, we are all aware that this has become a trend in modern economics as the government intervention has steadily increased over the years. Harvard Professor Jeff Frankel points out an interesting observation of the 1960 recession: essentially, JFK was the first to use fiscal policy and it seems that because of the democratic process, anything he could have done to stimulate the economy took too long to get through. I find this interesting because I believe that there can be a strikingly similar comparison to government intervention with the first stimulus package. When President Bush was in office he tried to get a tax refund to hit the American citizens. It went through but the effects were not felt. As the economy really started to tank, there was a much larger stimulus package enacted (something like 750 Billion). Critics at the time were saying that there was not enough known about the potential problems in the banking industry for a government intervention to help in any way. I do believe that this could be considered right.

As we now know billions of dollars were being shelled out to distressed companies like AIG and Bank of America, with limited restrictions. This lead to them using the government’s money to cover their own behind instead of using it to lend and write off assets like it was intended for. Today we have already lent more money to car companies and we are looking at another equally large stimulus package with more restrictions, when the economy is starting to show signs of turning.

Did we jump in too early when no one really knew how to fix the problem? Further, is the next stimulus package necessary or are we once again prolonging something that is not necessary?
Another interesting comparison is that of Columbia Professor R. Glenn Hubbard about the credit crisis that we faced in the recession of 1990. That was one crunch that we had not seen before. Federal Reserve Chairman Alan Greenspan used monetary policy by lowering the interest rates and that helped stimulate the economy.

This is quite intriguing when it is compared to our recession because we have already lowered the interest rates to the lowest they have ever been. There is no lower to go before they are handing money out. It seems that this mess we are tangled in now may shed light on many of the policies we have enacted and we may discover more of what works and what clearly does not. Maybe the whole problem derived from lax lending laws and the government trying to stimulate the number of home owners in America? Maybe there is nothing we can do for this problem but lower interest rates for the time being and wait for people to stop being so fearful of the market?

Only time will tell,

Matthew James