Some folks have argued that given the Republican’s Obama-must-fail strategy and the Conservadems desire to punish working families, there’s no way Obama could have prevented the economy from going off the cliff. Brad DeLong has published a great, depressing talk that’s a center-liberal economist perspective on what Obama could’ve done despite these obstacles.
Although a big government stimulus s was going to be almost impossible to pull off, at the beginning of his administration Obama had a number of other tools at his disposal that didn’t require the Congress’ or Senate’s approval.
The Federal Reserve could act in an extraordinary manner by engaging in “quantitative easing” policies….
The Federal Reserve could engage in open-mouth operations and state that it is raising its targets for the price level and the inflation rate. Such announcements would lead investors to expect that their holdings of safe high-quality nominal assets would be subject to a small inflation tax. That would diminish their demand for such assets in their portfolios–and as a consequence increase their demand for currentlyproduced goods and services instead. Once again, not as powerful as conventional open-market operations in normal times. But also not chopped liver….
The Treasury could engage in targeted nationalizations to keep the inability of firms to get credit on usual terms from causing mass layoffs and bankruptcies and shutdowns that are unnecessary in the long run. The U.S. government did this with Fannie Mae, Freddie Mac, AIG, GM, and Chrysler–other financial bankruptcies were forcibly merged into stronger firms–but it could have done more….
The Treasury could use its resources to take private risk onto its balance sheet when it thinks markets have overshot and risky assets are undervalued–thus hopefully making money as the world’s largest hedge fund and adding to the risk-bearing capacity of the market.
The Treasury can reorganize mortgages by providing liquidity and a little up-front cash in exchange for principal writedowns–thus making the riskiest part of the financial asset structure less risky….
these tools are applications of Walter Bagehot’s rule: the principal that the way to deal with a panic in which nobody is sure if contracts will be honored is for the government to make sure that contracts are honored by lending freely to anybody who asks. (But, Bagehot wrote, the lending should be “at a penalty rate”–financiers should never profit from the fact of government assistance to stem the panic. That is the second part of Bagehot’s rule.)
Delong was convinced Obama would do at least some of this:
10% unemployment seemed, to me, politically unthinkable. 10% unemployment for any substantial period of time seemed, to me, doubly politically unthinkable….
The correlation between economic growth and electoral success not just at the presidential level but at the congressional-midterm level is well known. The correlation is strong. The difference between a rapid recovery and a jobless one is worth 20 seats in the House of Representatives in midterm elections. Every pollster knows about the correlation between economic growth in the two and three quarters before an election and electoral success in it. So if there is one thing that the policy and the political and the message staffs in the White House should be able to all agree should not fade to the backburner, it is the macro recovery situation.
But that’s not what happened: Continue reading