How the Great Recession Was Brought to an End Or, Alternatively, "Keep Dreaming, Stupid..."
Super economists Alan Blinder and Mark Zandi have released an incredibly bold piece of work actually titled “How the Great Recession Was Brought to an End" in which they insist that government stimulus and the Fed's easiest money policy since Greenspan was furiously trying to reinflate the tech bubble have actually saved the economy.
In case you aren't familiar with their work, Blinder is now a Princeton prof and former Dirty Fed operative while Zandi makes a living as Chief Economist at economic collapse superstore Moody's.
TARP isn't the star of the report, instead credit goes mostly to the Fed's efforts to inject the economy with as much fake money as possible to replace the vaporized capital that started drying up right around 2008 and has continued to evaporate since. Don't worry, that's why we're ready for QE 2.0, 2.1 and 3.0 if necessary. Whatever it takes, right?
Anyway, let's see what these economic rocket scientists have to say, shall we?
The U.S. government’s response to the financial crisis and ensuing Great Recession included some of the most aggressive fiscal and monetary policies in history. The response was multi-faceted and bipartisan, involving the Federal Reserve, Congress, and two administrations. Yet almost every one of these policy initiatives remains controversial to this day, with critics calling them misguided, ineffective, or both. The debate over these policies is crucial because, with the economy still weak, more government support may be needed, as seen recently in both the extension of unemployment benefits and the Fed’s consideration of further easing.
In this paper, we use the Moody’s Analytics model of the U.S. economy—adjusted to accommodate some recent financial-market policies—to simulate the macroeconomic effects of the government’s total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11½% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.
When we divide these effects into two components—one attributable to the fiscal stimulus and the other attributable to financial-market policies such as the TARP, the bank stress tests and the Fed’s quantitative easing—we estimate that the latter were substantially more powerful than the former. Nonetheless, the effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 2%, holding the unemployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls.
Thank God Bernanke saved us from GD II!
While all of these questions deserve careful consideration, it is clear that laissez faire was not an option; policymakers had to act. Not responding would have left both the economy and the government’s fiscal situation in far graver condition. We conclude that Ben Bernanke was probably right when he said that “We came very close in October  to Depression 2.0.”
I threw up a little in my mouth reading this. You may do the same. I find it interesting that Blinder and Zandi don't think a $13 trillion deficit and $2 trillion Fed balance sheet loaded with crap assets are a grave condition for the government's fiscal situation but hey, I'm not the economist.