Maybe Geithner And Bernanke Should Ask Why Their “Arsenal” Is So Ineffective In The First Place

Over at the New York Times, there’s a poor, poor pitiful me article explaining that Tim Geithner and Ben Bernanke have little in arsenal to fight new crisis.” Here are some key excerpts:

Geithner and Bernanke could speak with authority. As two of the architects of the United States’ own financial rescue starting in 2008, they had eschewed half-measures, instead marshaling hundreds of billions of dollars to bail out the banks and successfully head off a new Great Depression.

But as the pair again donned the cloak of crisis fighters, their efforts underscored what’s changed in the last three years. The men, battle-hardened and more experienced, now have little more than the power of persuasion. No longer can they muster the same range of policy tools and supporters they had in 2008 should the European crisis become an even greater menace to the U.S. economy.

…When the financial crisis hit in 2008, Bernanke was a relatively new Fed chairman, and Geithner was his chief emissary on Wall Street as president of the Federal Reserve Bank of New York. Along with then-Treasury Secretary Henry M. Paulson Jr., whom President George W. Bush tapped to lead the rescue, they organized the massive and unpopular bailout that helped stem a rapid financial decline.

Today, Geithner’s options are constrained by gridlock in Congress. Any fresh proposals to invigorate the economy would face Republican skepticism.

…Bernanke, 57, meanwhile, has been pushing the Fed to take a series of steps over the past three years to spur economic growth. But he has exhausted the Fed’s usual tools – for instance, lowering interest rates, which are now near zero – and is facing new opposition from members of the Fed’s policymaking committee who are worried about the risk of inflation or new financial bubbles.

Granted, you can make the case that the U.S. has some large structural problems that have started to come to a head and ANYBODY would have difficulty right now. The argument goes like so: The economy was buoyed first by a tech bubble, then a housing bubble and things are bound to settle a bit after that. Consumer consumption has also been a big driver, but the collapse of the housing market and the size of personal debts is forcing people to pay off what they owe instead of buying new things. Additionally, we’re finally getting to the point where the size of the debt and our future Social Security/Medicare obligations are starting to have a negative impact on the economy. So, even if everything was done right, we’d still have a hard time.

That being said, there’s another argument, one put forth by conservative economists, that I find much more persuasive. It goes like so: The government is EXACERBATING our economic problems, not helping to fix them. In other words, Geithner And Bernanke have been making the underlying problems worse, not better.

The super low interest rates, which predate the Obama administration, along with government policies that encouraged bad housing loans, CREATED the housing bubble. Moreover, the freakishly low interest rates risk creating yet another bubble that may pop when interest rates inevitably have to go back up. Additionally, the Feds’ expansion of the money supply is creating inflationary pressure that is driving up gas and food prices needlessly and thereby taking money out of people’s pockets.

Moreover, the bailouts didn’t “stem a rapid financial decline;” they merely helped stretch the pain out by keeping afloat a number of companies that deserved to go under. Additionally, the massive stimulus, the money spent on bailouts, and a new entitlement program, Obamacare, helped send America’s debt into the stratosphere and cost us our AAA rating. If there had been no bailout and no Obamacare, we would still have extremely serious long-term financial problems, but our AAA rating would likely still be in place.

Add to that the corporate world’s fear of what the government will do next, Demonization, tax increases, the ramifications of Obamacare, further government credit rating downgrades, etc., etc., and it’s causing companies to horde cash instead of spending it to create jobs.

In the places where these theories can be tested in the real world, the conservative theories are holding up while the liberal theories are failing. If we could “spend our way to prosperity,” we would have the fastest growth rate in the world. If printing massive amounts of money and keeping the interest rate near zero were the keys to getting the economy going, it would already be on fire.

Maybe instead of trying to figure out how Geithner And Bernanke can go even further, people should start asking if they’re going in the right direction.

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