When the economic meltdown occurred eight years ago the government used the crisis as an excuse for interventions that included huge bailouts and significantly increased deficit spending. These radical interventions were justified by the threat without them significantly greater economic damage would occur. While even in hindsight it is difficult to determine the validity of those claims, there is enough history to understand that the interventions created long-term negative consequences to the economy.
A recent posting by Van R. Hoisington, Lacy H. Hunt, Ph.D. titled A Weak Finish to a Disappointing Year shares details about some of the consequences from the governmental and Federal Reserve’s interventions. They include:
- “Surely the economy would be kick-started by: three rounds of quantitative easing and forward guidance; a record Federal Reserve balance sheet; and an unprecedented increase in federal debt from $9.99 trillion in 2008 to $18.63 trillion in 2015, a jump of 86%. Further, stock prices had gained sufficiently over the past several years, thus the so-called wealth effect would boost consumer spending.”
- “The broadest and most reliable measure of economic performance – nominal GDP – decelerated. The 3% estimated gain registered in 2015, measured by the year ending quarter, was down from 3.9% and 4.1%, respectively, in 2014 and 2013. In fact the gain in nominal GDP in 2015 was less than the gain for any year since the recession.” ….. “All of the above economic measures were expanding at, or near, their weakest yearly growth rates in the final quarter of 2015, indicating that the economy possessed little forward momentum moving into 2016.”
- “Personal consumption, the largest category of nominal GDP, decelerated to an estimated 3% rise in the latest twelve months, down from 4% at year-end 2014, the smallest year end annual increase since immediately after the 2008-09 recession.”
- “The percentage of total auto loans in the subprime category hit a ten-year pre-crisis high in the third quarter, according to the New York Fed”
- “Industrial production slumped 1.4% over the first eleven months of 2015, with a drop of 2% outside of the automotive sector.”
- “Real per capita GDP grew only 1.3% in the current expansion that began in mid-2009; this is less than one half the growth rate in the expansions since 1790.”
As Hoisington and Hunt point out, the evidence points to the failure of the massive spending, bailouts and other unconventional monetary policies including Quantitative Easing (QE). QE has been used multiple times by the United States Europe and Japan. The failure of these policies is evident.
In addition, as a consequence to lose money and QE, there is evidence that capital has inappropriately shifted from productive investments to financial assets. This has created bubbles, including in the equities markets. In addition, that has been growing inappropriately. For example, subprime auto loans are at record highs.
Hoisington and Hunt conclude that: “Debt is only good if the project it finances generates a stream of income to repay principal and interest. There are two types of bad debt: (1) debt that does not generate income to repay interest and principal (Hyman Minsky, “The Financial Instability Hypothesis”); and (2) debt that pushes stock prices higher without a commensurate rise in corporate profits (Charles P. Kindleberger, Manias, Panics and Crashes).
One would expect that governments and central banks would learn from their failed policies. Unfortunately, this seems not to be the case. In fact, there is evidence that they will double-down on the policies. However, their options are limited given the length of time that the low interest rates have been in place in the amount of QE already used. Now there is talk of going to negative interest rates. This illogical approach can only be caused by central banks being ignorant on basic economic principles, or that they are truly so fearful of the alternative. Neither is very promising.