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Don’t Look Back in Anger at Bailouts and Stimulus By Alan S. Blinder And Mark Zandi

The Wall Street Journal Oct. 15, 2015 6:32 p.m. ET

Former Federal Reserve Chairman Ben Bernanke in an Oct. 6 interview on the Fox Business Network. PHOTO:

RICHARD DREW/ASSOCIATED PRESS

Without the emergency measures of 2008-09, the U.S. economy would be far worse off today.

The publicity surrounding former Federal Reserve Chairman Ben Bernanke’s memoir prompts a look-back at the stunning array of policy responses promulgated by the Fed, Congress and two administrations to avert catastrophe during the financial crisis in 2008-09. This is important because many of these initiatives haven’t aged well in the eyes of politicians and the public.

TARP, fiscal stimulus, quantitative easing and auto bailout remain dirty words to many people who increasingly blame them for prolonging the Great Recession and the slow pace of recovery. But in a study released Thursday for the Center on Budget and Policy Priorities, we found the reverse to be true: These extraordinary policies ended the crisis and jump-started an economic recovery that is stronger in the U.S. than in most countries.

Specifically, we estimate that:

• The peak-to-trough decline in real gross domestic product, which was barely more than 4%, would have been close to a stunning 14%.

• The contraction would have lasted three years, more than twice as long as it did.

Don’t Look Back in Anger at Bailouts and Stimulus By Alan S. Blinder And Mark Zandi

The Wall Street Journal Oct. 15, 2015 6:32 p.m. ET

• More than 17 million jobs would have been lost, about twice the actual number.

• Unemployment would have peaked at just under 16%, rather than at 10%.

• The federal budget deficit would have ballooned to $2.8 trillion, equal to 18% of GDP, compared with its actual peak of 10%.

• Today’s economy would be far weaker than it is—with real GDP about $800 billion lower, 3.6 million fewer jobs, and unemployment still at 7.6%.

The overwhelming nature of the fiscal and monetary policy responses is the main reason we didn’t suffer a much-worse fate. Yet history is in danger of giving the powerful 2008-09 responses a misguided Bronx cheer.

Start with TARP. The Troubled Asset Relief Program was deeply unpopular in part because it was so large—a $700 billion bailout fund—and aimed primarily at “Wall Street.” It felt wrong to bail out guilty parties, and many Americans still feel that way. But TARP’s huge scale helped restore confidence and stabilize the financial system. One result: Treasury never needed to deploy the full $700 billion.

Wall Street bailouts will never be popular. But one lesson from the financial crisis is that, however distasteful, stabilizing the financial system is a critical first step toward stabilizing the economy. If households and businesses cannot get credit, the economy will suffocate.

Of course, Wall Street should pay for its errors and for the assistance it receives. But TARP accomplished precisely that. While shareholders in financial institutions suffered huge losses, taxpayers made a tidy profit on the deal.

Bailing out and Chrysler was a tougher call, since it seemed a stretch to argue that the auto industry’s collapse posed an existential threat to the broader economy. Yet the weak economy in 2008-09 was ill-equipped to withstand another body blow. Without the rescue, the auto makers probably would have been liquidated, costing the economy millions more lost jobs.

Critics are right to worry that bailouts for Wall Street and car companies exacerbate so-called moral hazard, which could lead to excessive risk-taking in the future. But moral hazard must not be viewed as a show stopper. Rather, bailouts pose trade-offs—trading the potential costs of moral hazard in the future against mitigating a catastrophe now.

That is why it was important, after the crisis passed, to install new policies that limit the potential for subsequent opportunistic behavior. Doing so was one of the guiding principles of the Dodd- Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010.

Fiscal stimulus—tax cuts and government spending increases that jump-started the recovery— wasn’t much more popular than TARP in some quarters. But it was no coincidence that the Great Recession ended in June 2009, just four months after the Recovery Act’s nearly $800 billion-plus stimulus package was passed.

Don’t Look Back in Anger at Bailouts and Stimulus By Alan S. Blinder And Mark Zandi

The Wall Street Journal Oct. 15, 2015 6:32 p.m. ET

Logic dictates that the size of any stimulus be proportional to the expected decline in economic activity—which was enormous in the Great Recession. The Recovery Act and other stimulus measures were costly to taxpayers, and thus much-maligned. But the slump would have been much deeper without them.

The Federal Reserve has also come under attack for its unprecedented actions, especially its quantitative easing or bond-buying programs. Yet QE lowered long-term interest rates and boosted stock and housing prices—all to the economy’s benefit. Yes, QE has possible negative side-effects, but for the most part they have yet to materialize.

Policy makers who botched the regulatory job before the crisis and shifted to fiscal restraint prematurely in 2011 can hardly be considered flawless. Yet one major reason why the U.S. economy has outperformed the plodding European and Japanese economies is the timely, massive and unprecedented responses of U.S. policy makers in 2008-09. So let’s get the history right.

Mr. Blinder is a professor of economics and public affairs at Princeton and a former Federal Reserve vice chairman. Mr. Zandi is chief economist at Analytics Inc.