What should congress do about the recession

It appears that the current economic expansion will become the longest in U. Gross domestic product growth will be well above 3 percent in ; unemployment is under 4 percent, and wage growth is finally exceeding inflation. However, with the wild market swings rounding out the year, it pays to be cautious.

Although most economists predict the United States will continue growing at a slower pace through , a few are more worried. Given that the actual start of most recessions comes as a surprise, policymakers need to remain vigilant, especially since the global economy has several weak points that threaten continued growth. Some of these threats date back to before the Great Recession of , when regulators merely patched over several serious structural issues rather than exerting political capital to actually solve them, something I laid out in a paper recently published by The Harvard Law School Forum on Corporate Governance and Financial Regulation.

These threats include a potential collapse of the Chinese debt bubble, the questionable long-term durability of the eurozone, an increasingly isolated international community and rising dollar-denominated debt in the developing world. Low interest rates preclude the Federal Reserve from lowering rates as far or as fast as in , and a sharply higher debt-GDP ratio will constrain fiscal policy. It is worrisome that, a decade after the Great Recession, we are still adjudicating disputes over the distribution of liabilities between those who made reckless loans and the bond insurers that ended up paying the bill.

A good example is the ongoing legal battle between Bank of America and bond insurer Ambac. During the run-up to the crash, Countrywide Financial Corp. The problem with such actions is that, until we adjudicate a clear allocation of the liabilities from the last crisis, investors cannot have a clear picture of the health of individual institutions or predict their potential liabilities in the housing finance market in a future crisis. Throughout the s, in an effort to maintain employment and investment, the government-controlled banks provided credit at below-market interest rates to some large firms and no credit to others.

Even the privatization of banks in the early s and the reforms following the crisis have not been effective in producing a banking system that provides substantial credit at market interest rates to firms in Mexico.

The result has been an economic disaster for Mexico: Between and , Mexico experienced no economic growth and has grown only modestly since then. Timothy J. Kehoe and Gonzalo F. The government should not take over the banks except for the purpose of liquidating them as Chile did.

Banks that are teetering on the edge should be pushed over rather than assisted. This will ensure that only the strong survive, and the banking sector will thereafter be run prudently, to the general benefit of all. The opposite course rewards incompetence and causes economic malaise.

Instead of allowing vagrancy and tent cities to spring up, the government should operate camps for the destitute. Democracy within the camps should be encouraged, but inspectors should ensure that high standards of morality, cleanliness and order are maintained. Legislation governing the running of these camps should be puritan. Conviction for infringement of the rules should result in a transfer to a regular poor house or prison.

This regime may sound harsh, but the alternative is the squalid filth and crime of Hooverville tent cities. People will only despair if inflation, high taxes, and socialism prevent them from working their way out of a hole. Good, honest people only resort to crime if they or their loved ones are starving and unable to find shelter from the elements. Likewise, good, honest nations only resort to appointing dictators when they have been starved and sorely abused over a long period of time by monetary chaos, high taxation, and a breakdown in the rule of law.

When confronted by a depression, the government must neither lend, nor borrow, nor print money, nor tax and spend to stimulate, but instead should devote its meager resources as tax revenues will be down to:.

If these steps are taken, very quickly real growth, not fictitious capital, will provide employment to every person who wants a job. There will then follow a long period of high growth in living standards. The proof of this lies in the German post-war experience. How government should deal with recession by Matthew Bransgrove Oct 9, Money.

Recessions are good Recessions are necessary to enable businesses and individuals to reconnect with reality and to address inefficiencies and misallocation of capital. The benefits of recessions include: Fictitious capital is revealed for what it is; Loss-making companies are liquidated and further waste is terminated; Unwanted houses stop being built; The price of housing becomes static as a multiple of average incomes and even goes down; The proliferation of brokers, scheme promoters, and financial charlatans of every type is collapsed and instead they have to find productive and honest work;6.

Henny Penny The collapse of a force-fed credit bubble is not a catastrophe. Should the government encourage the people to consume? Should the government hand out money? The worst thing a government can do is hand out money. This is because: If the money comes from taxation, it will cause unemployment as businesses are obliged to cut wages and payrolls in order to make the sums add up; If the money comes from the printing press, it will cause monetary inflation, which causes unemployment; If the money comes from central bank debt instruments, it will prevent the credit market from recovering, stifling investment and trade and so causing unemployment; If the money comes from government borrowing, it will divert available capital from the private sector and increase the burden of taxes to service the debt.

Should the government invest in infrastructure? Should the government nationalize banks? What should the government do? Conclusion When confronted by a depression, the government must neither lend, nor borrow, nor print money, nor tax and spend to stimulate, but instead should devote its meager resources as tax revenues will be down to: Maintaining the legal framework law courts and police ; Deregulation and reducing the size of government; Ensuring people are not forced to resort to crime camps for the destitute ; Ensuring the military is sufficiently resourced to deter external aggression; Reducing taxes.

Many people feel that there was no oversight and that the banks just used the money for executive bonuses. In this case, people thought banks should not have been rescued for making bad decisions based on greed. The argument goes that, if we had just let the banks go bankrupt, the worthless assets would be written off. Other companies would purchase the good assets and the economy would be much stronger as a result.

In other words, let laissez-faire capitalism do its thing. The result was a market panic. It created a run on the ultra-safe money market funds, which threatened to shut down cash flow to all businesses, large and small. In other words, the free market couldn't solve the problem without government help. The other problem is that there were no "new companies," i. Even Citigroup—one of the banks that the government had hoped would bail out the other banks—required a bailout to keep going.

Letting the major banks go bankrupt would have left the American economy with no financial system at all. It might have led to the next Great Depression. President Obama was dealing with more than just the recession as he looked toward the mid-term elections. He launched sorely needed but sharply criticized healthcare reform.

That and new Federal Reserve regulations were designed to prevent another banking collapse. They also made banking much more conservative. As a result, many banks didn't lend as much, because they were conserving capital to conform to regulations and write down bad debt. But bank lending was needed to spur the small business growth needed to create new jobs. The bill stopped the bank credit panic, allowed LIBOR interest rates to return to normal, and made it possible for everyone to get loans.

Without the credit market functioning, businesses were not able to get the capital they need to run their day-to-day business. Without the bill, it would have been impossible for people to get credit applications approved for home mortgages and even car loans. In a few weeks, the lack of capital would have led to a shutdown of small businesses, which couldn't afford the high interest rates. Also, those whose mortgage rates reset would have seen their loan payments jump.

This would have caused even more foreclosures. The Great Recession would have become a depression. The cause of the meltdown was the deregulation of derivatives that was so complicated that even their originators didn't understand them. Banks became so quick to resell mortgages on the secondary market that they felt immune to the dangers of taking riskier and riskier mortgages.

Other aggressive moves by banks to sell more collateralized debt obligations CDOs and corporations to sell more asset-backed commercial paper helped to push the economy toward a bubble. These derivatives were designed to increase liquidity in the economy, but that liquidity drove housing prices and debt to unmanageable levels.

The U. That gives us hope because we learned more about how the economy works and became smarter about managing it. Without that knowledge, we would be in much worse shape today.

Yale School of Management. Bureau of Labor Statistics. Accessed May 12, CNN Money. Center for American Progress. The New York Times. Congressional Budget Office. Council on Foreign Relations. Economic Stimulus Plan. ABC News. Making Home Affordable. Housing Wire. Small Business Administration. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content.

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