Reading further into Class of 1957-Garff B. Wilson Professor of Economics Christina Romer’s final speech as a cabinet-rank member of the Obama administration, here we have the best short account I have seen of the Obama administration’s economic policy decisions in the winter of 2008-2009.
Despite the fact that we were in uncharted territory, the new economics team back in December 2008 was painfully aware that the economy was facing a terrible downturn and that we were fast approaching the edge of a cliff. At a meeting we had with the President-Elect in Chicago in mid-December, I began by saying: “The economy is very weak and deteriorating fast.” The weekend before the meeting, the team had sent a memo to Rahm Emanuel echoing this sentiment and laying the groundwork for a larger stimulus package. Whereas most analysts and Congressional policymakers had been contemplating a stimulus of $500 billion or less, we urged that it grow substantially because of the severity of the downturn….
The American Recovery and Reinvestment Act was passed less than a month after the inauguration. The legislation was large, well diversified, temporary, and fast-acting. Many would have liked to make it a more iconic bill — a moon shot that concentrated spending on a single activity, such as building a nationwide smart electrical grid or a comprehensive high-speed rail network. But, as happened with many decisions, pragmatism won out. We agreed that many of the things that would improve the economy fastest were unglamorous measures, such as state fiscal relief and tax cuts for working families. Because the final bill was a mixture of hundreds of measures, many of which don’t come with Recovery Act signs or easily identifiable links to the Act, it has been hard for people to see what the Act has done. But it is precisely because it works through existing programs and spreads funds widely that it could get out quickly and reap large benefits….
Our policies for financial stabilization were similarly pragmatic. One of the first things the President-Elect did was work behind the scenes to ensure that Congress did not block the release of the second tranche of TARP funds. By December 2008, TARP and keeping financial institutions from collapsing were already deeply unpopular. But the President-Elect understood that it was irresponsible to be standing at the edge of a cliff without the safety net that the additional funds would provide…. The Financial Stability Plan was forged over the next few months. We opted for continued system-wide support through bond guarantees and joint credit provision plans with the Federal Reserve, but not an aggressive Federal takeover of troubled institutions. The stress test formed the centerpiece of the response. Implemented as scientifically as possible by the Federal Reserve and the other regulators, it was designed to give an honest accounting of the state of our largest financial institutions, and to determine what further actions were needed to ensure solvency and stability….
These unprecedented, pragmatic policy actions have made an enormous difference. On the financial side, the stress test reassured investors and set off a wave of private capital-raising that was exactly what the system needed. Credit spreads — an indicator of perceived risk — have returned almost to pre-crisis levels. And while credit remains tight for consumers and small businesses, lending standards have stopped tightening and are gradually starting to loosen. Large firms are able to borrow at favorable rates and get the credit they need for investment and day-to-day operations. And the financial industry has paid back U.S. taxpayers at a rate few thought possible….
For the real economy, the turnaround has been dramatic. Real GDP went from 7 falling at an annual rate of nearly 6 percent at the end of 2008 and the beginning of 2009 to growing steadily over the past four quarters. Likewise, employment went from falling at a rate of 700,000 jobs per month to growing at the beginning of 2010. These swings from horrifying negatives to positives are a testament to the speed and effectiveness of the policy response…