Lesson Learned

In 2008, we bailed out the bankers, and got the great recession, and a lost decade of economic activity in the worst downturn since the great depression.

In 2020, we sent money to ordinary people, and we got the fastest recovery since the introduction of the New Deal in the the early 1930s.

Bailing out bankers just gets you rich bankers, and the rest of us got screwed.

Bail out the rest of us, and everyone benefits, including the bankers:

When a financial and economic crisis strikes, policymakers have only two options.

One is to protect the financial system — cutting interest rates, pumping reserves into the banking sector, preventing big financial companies from collapsing. That’s known generally as monetary stimulus.

The other is to protect people — pumping money into household budgets, strengthening safety net programs such as unemployment insurance, allowing the government to step in as the source of family income when employers abandon them through layoffs and shutdowns. That’s fiscal stimulus.

For decades, economists and politicians have debated which is better.

The debate is over. COVID-19 delivered the answer.

The U.S. government’s $4-trillion outlay to keep Americans whole during the depths of the pandemic has resulted in a spectacular recovery — indeed, the fastest jobs recovery from the lowest nadir of the 12 American recessions since World War II.

What’s particularly telling is the contrast between the course of this downturn and the last one, the Great Recession of 2008-09, which at the time was the most severe recession since the war.

Today, two years since the U.S. economy was effectively frozen to fight a novel coronavirus, nonfarm employment has almost returned to its level in February 2020.

Government statistics show that on a seasonally-adjusted basis, employment has reached 150.4 million, about 2.1 million below the 152.5 million level of two years ago, a deficit of about 1.4%. That’s a record-shattering recovery from the bottom of the freeze in April 2020, when employment abruptly fell by 22 million jobs, or 14.4%, to 130.5 million.

That was the steepest collapse in employment of the postwar era, easily outpacing the 6.3% employment loss from January 2008 to February 2010. Two years into the Great Recession, however, employment was still falling; it wouldn’t return to its pre-recession level until May 2014, or about 76 months after the recession began. That was the worst job loss since 1948, and the slowest, longest jobs recovery.

………

But the lessons of the Great Recession recovery weren’t overlooked by policymakers confronting the next crisis. One lesson was that monetary stimulus can be very effective, but for a relatively narrow slice of America. The Federal Reserve’s slashing of interest rates effectively to zero produced spectacular growth in corporate profits and stock market returns in the succeeding dozen years or so.

“A mostly monetary stimulus left behind most of the American population,” observes investment manager and financial commentator Barry Ritholtz. “The top 10% of America owns 89% of the public traded equities; there are 82.51 million owner-occupied homes. This means that the Federal Reserve response benefited somewhere between the top 10 and top 25% of Americans.”

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It also points to how the sluggish post-2008 recovery rewrote the political texts on economic stimulus. More precisely, it revived the orthodoxy that had governed U.S. economic policy from the New Deal through the 1960s, ending with Reagan conservatism in the 1970s — that government has the responsibility to maintain the economy, especially by supporting spending by households, when business withdraws.

Trickle down does not work.  It makes things worse, but the people on the top of the heap would rather have more relative to the ordinary person and less total, because they are psychopaths.

Bail out the people, and jail the bankers.