The Bailouts and the Economy
A Panel of Expert Economists was asked whether they agreed with:
Because the U.S. Treasury bailed out and backstopped banks (by injecting equity into them in late 2008, and later committing to provide public capital to any banks that failed the stress tests and could not raise private capital), the U.S. unemployment rate was lower at the end of 2010 than it would have been without these measures.
The vast majority either agreed or strongly agreed. None disagreed.
One expert cited this paper as providing support. Another expert cited Friedman and Schwartz, and “a Central Banker who’d read it and had the courage to act on it.”
Interestingly, nobody said, “This is a really difficult and important question. We should do the best we can to come up with an answer.” (Maury Obstfeld comes the closest.)
Also, nobody gave what I think of as the Scott Sumner answer, “We used to believe that employment depended entirely on the path of NGDP relative to trend. We used to believe that this path could be controlled by the monetary authorities, regardless of what is going on with individual banks. I have not changed my beliefs, even if everyone else has.” (Those are my words. Scott, feel free to correct me if I am misrepresenting your views. [update: Scott says that he would take out the word “entirely” but otherwise likes the post])
The fact that mainstream economists regard the question as settled is what leads me to expect a lot of research into how a financial crisis and de-leveraging cause macroeconomic distress. It’s not in the textbooks. Anyone can do handwaving. We’ve seen some papers come out in the the last few years. I expect to see many more.