This post is in response to the question “How did the federal and state governments respond to the recession and do you believe they did enough to save the economy?” posed by @newtonquach
2008 Financial Crisis
The Great Recession, lasting from 2007-2009, was caused by the housing market bubble bursting leading to increases in unemployment and foreclosures and an overall decrease in wealth for U.S. citizens (Field). The main causes of this economic downturn in the housing market were, because of the prosperity of the decades before, many felt more comfortable assuming risks when borrowing or lending money to invest in property (Field). However, when the money borrowed could not be paid back to the lender this left many businesses who had been using these “subprime mortgage” practices in debt (Field).
Government Response
The shock of this economic downturn left many businesses owing more money than they could pay back. To try to restore equilibrium to the economy, and prevent the crash from getting even worse, the government stepped in. The Federal Reserve, FDIC, and the U.S. Treasury began to provide assistance to companies affected by the recession by lending them money (“Assistance Programs”). The overall assistance cost throughout the three government entities was nearly $3 trillion U.S. dollars (“Assistance Programs”).
The Effect of Government Action
While government “bailouts” for private firms were a widely criticized move, according the to St Louis Fed “the assistance programs of the Federal Reserve and FDIC have earned significant profits, and the Treasury’s programs—except for those related directly to the housing markets—are projected to incur no more than small losses” (“Assistance Programs”). Additionally, allowing companies to continue operations helped prevent job losses by employees of the companies that were going under.
My Thoughts
While I am not the biggest fan of the idea that the government got to choose which institutions got to be bailed out, I do believe the action they took was necessary (“Assistance Programs”). Additionally, I believe that their actions were a reasonable amount of policy, as the result of their assistance programs did get them the outcome they wanted—a recovering economy—while also being able to eventually cover the initial costs (“Assistance Programs”).
Overall, while we may never fully know how the economy could have recovered on its own without government interference, the amount of policy that the government enacted was a reasonable effort to soften the impact of the 2008 financial crisis as it gave industries the ability to rebuild and restructure in a quicker manner.
Works Cited
Field, Anne. “What Caused the Great Recession? Understanding the Key Factors That Led to One of the Worst Economic Downturns in US History.” Business Insider, https://www.businessinsider.com/what-caused-the-great-recession. Accessed 7 Sept. 2021.
“Assistance Programs Following the Financial Crisis” | St. Louis Fed. https://www.stlouisfed.org/publications/regional-economist/january-2011/a-closer-look-brassistance-programs-in-the-wake-of-the-crisis. Accessed 7 Sept. 2021.
This represents both the 'unseen' and the 'unrealized' effects of government intervention (the subject of last week's reading assignment). The sad result of this reality is that people strongly in favor of government bailouts can 'see' the positive result they want to see; similarly, those strongly opposed to such bailouts will 'see' the negative results they expect to see.
Such is the nature of government policies at the federal level. It is nearly impossible to objectively assess whether a given federal policy was or is 'good' or 'bad'.
That is why I emphasized in class a couple weeks ago the need for a return to federalism, where the vast majority of all government policy-making (and legislation) occurs at the state level.
That way, if a state enacts bad policies, there's a good chance that other states have enacted different policies, and we are much more likely to be able to assess what's 'good' versus what's 'bad'. Furthermore, there will be some policies that are 'good for me' but 'bad for you' and vice versa. Federalism allows me to migrate to the state where policies are 'good for me' and you to do the same (i.e. different states, vastly different policies, both citizens happy).
Heavy-handed actions by the federal government are a recipe for disaster, sooner or later, imho. (And, again, disaster for me might be the opposite of disaster for you. However, sometimes 'my people' will be in control of the federal government and sometimes 'your people' will be in control. Thus, on net, heavy-handed federal actions are eventually a disaster no matter what policies one favors.)
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Wow that is good news, noted