These days, it’s easy to be confused about the economy.On the bright side, the stock market rallied more than 25 percent from the dark days of early March. Credit markets eased. The April jobs report was less bleak than anticipated, and the government’s “stress tests” of major financial institutions delivered relatively benign results, allowing many to issue new common stock to beef up balance sheets.
At the same time, retail sales dropped in April. Foreclosures and unemployment rose. The bank stock offerings caused indigestion as they competed with existing shares for investor capital. Chrysler filed for bankruptcy protection, and General Motors might soon follow. The stock market dipped a bit this week, and money managers sounded more notes of caution.
Amid the cacophony of mixed signals, where do we stand?
One simple answer is: a lot better off than we could have been. Last fall, Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson were staring at the real possibility of a worldwide banking collapse setting off Great Depression II. Now that threat has greatly receded and the falling economy appears to be stabilizing. Barring the unexpected--a pandemic, war or terror attack--recovery could begin this year.
For much of this, we can thank that much-maligned institution known as government. After slashing interest rates to near zero, the Federal Reserve invented creative new ways to go on the offensive, pouring money into lending markets for everything from mortgages to corporate finance.
The politicians, too, deserve some credit. In October, a Republican president and a Democratic Congress pushed through an unpopular but necessary bank rescue program. That plan, implemented on the fly by two administrations, has its faults but has helped stabilize the financial system that is the economy’s lifeblood. This year’s stimulus measure reinforced the social safety net and, though slow to disperse funding, might act like a time-release medication.
Now, however, another difficult phase is approaching. The Fed and the Obama administration have rightly been hitting the accelerator. To avoid calamitous inflation and surging interest rates, both will have to ease up as the economy recovers.
For the Fed, this “exit strategy” will involve moving rates back up again, unwinding its investments and pulling out of credit markets as private investors get back in.
For the Obama administration and Congress, the pivot from fiscal stimulus to restraint will be even more difficult. It involves getting control of the wealth-devouring health care system, shoring up Social Security and Medicare, slashing government borrowing, raising revenue, restraining government spending, and shifting to an economy built more on savings and investment and less on consumption--all with the government already $11 trillion in debt.
In recent years, Washington has been incapable of making these sorts of tough choices. Many necessary steps will be attacked as threatening the recovery. By the time it’s over, saving the banks and staving off economic calamity might look like the easy part.
The above is an editorial of USA Today.
