Double-Dip Recession
LewRockwell.com
The case fora secondary recession rests on several factors: a double-dip decline in the residential real estate market, the accelerating decline in the commercial real estate market, the unresolved losses in bank balance sheets, the narrow focus of the profitability(earnings),which has been limited to bailed-out banks, and the threat of rising long-term interest rates, i.e., a decline in the bond market.
All of these factors are known to the investment community, yet they have not persuaded stock market investors that there is any threat to corporate profits. So, either the negative factors are minor issues or else the optimism of stock market investors is an example of the same sort of stock market boom let that took place in 1930. It collapsed in 1931.
Then there is the question of the possible responses of the Federal government and the Federal Reserve System if the real estate market resumes its downward path, taking down the economy with it. What is the condition of the government's took kit of anti-recession policies? I think this question is the crucial one.
A SHOTWAD
Most people have forgotten the series of events from February 2008 toFebruary2009. This began with President Bush's signing into law the stimulus bill of 2008. It amounted to about $150 billion. The President announced this at the signing:
The bill I'm signing today is large enough to have an impact,amounting to more than $152 billion this year, or about 1 percent of the GDP.
The government hopes the measure, which will send most Americans tax rebate checks by May, will either prevent a recession or make one relatively brief.
The economy was already in a recession, and had been ever since December 2007.This fact had not yet been determined by the National Bureau of Economic Research's committee.
The stimulus had no visible effect on the economy. The recession escalated. In March, Bear Stearns almost went bust. It was saved only by the New York Federal Reserve Bank, which provided a $29 billion loan-guarantee to J. P. Morgan, which then absorbed Bear Stearns.
Then came the collapse of Fannie Mae and Freddie Mac in early September. Treasury Secretary Paulson announced the nationalization of the two busted lending firms.
Lehman Brothers Holdings went bankrupt a week later. Then came October's crisis.Congress in October passed the $700 billion Emergency Economic Stabilization Act, which funded the Troubled Asset Relief Plan (TARP) in order to bail out the largest banks. It did so over the objections of voters.
In February,the new Congress passed the $787 billion American Recovery and Reinvestment Act of 2009. Obama signed it.
The government's three spending packages were traditional Keynesian responses to the recession. They involved massive Federal budget deficits.
From mid-September until mid-November, 2008, the Federal Reserve System pumped in over$1.4 trillion of new money to save the financial markets:from $1.05trillion to $2.5 trillion. The chart is here.
This kept the capital markets from locking up. This huge increase represented a doubling of the monetary base. This was the largest increase in the monetary base in American history.
This was not specifically a Keynesian policy. It was simply a wild increase in the monetary base as a way to bail out the economy. If you read any textbook account of Keynesian policies, you will find nothing about Keynesian theory and the need to double the monetary basein a period of eight weeks.
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