Asking The Wrong Question

David Leonhardt at the NY Times wonders if Helicopter Ben and Timmy have turned the economy around.

What if in the end they got it right?

What if, amid all their missteps and all the harsh criticism, the people in charge of battling the worst financial crisis since the Great Depression — Ben Bernanke, Timothy Geithner, Lawrence Summers, Henry Paulson and the rest — basically succeeded?

It is clearly too soon to know for sure. But the evidence is now pointing pretty strongly in one direction: history books may conclude that the financial crisis of 2008 turned out to be far less bad than it could have been and that Washington deserved much of the credit.

The Labor Department announced Friday that the economy lost fewer jobs in July than in any month since before Lehman Brothers collapsed last fall. Credit markets no longer look anything like they did after Lehman’s collapse and are in considerably better shape than just a few months ago. Stocks are up almost 50 percent from their March low. “It’s over,” the economists at Barclays Capital declared Friday, referring to the Great Recession.

The news has been good enough that the Obama administration spent Friday trumpeting its record. More telling, however, is the fact that even Nouriel Roubini, the prophetically pessimistic economist who saw the crisis coming (and doesn’t think the recession has yet ended), is now praising policy makers. He recently urged that Mr. Bernanke be reappointed as Federal Reserve chairman, saying he helped avert a “near depression that seemed highly likely after the financial collapse last fall.”

It's the wrong question to be asking, of course. It's not "Did Team Obama Featuring Hank Paulson get it right?" so much as the real question:

"How much time have they bought us before the next crisis?"

Yes, the solution that was arrived at, pumping massive amounts of cash into the system, the banks, and the hedge funds, did prevent a systemic crisis in 2008 and early 2009. But the fundamental issues that created the crisis still exist. It's going to take years for all this to work through the system, and our consumer-driven economy is going to be limping along for a very long time. Housing and commercial real estate will continue to be major problems, and along with it unemployment. The trillions we're on the hook for should things continue to go bad will eventually bust the economy.

Sometime soon, we'll arrive at another point like last September.

The things that could prevent another systemic crisis are not being done. Real reform in the financial sector is not taking place. Instead, the Fed has simply shifted the liability to banks not deemed Too Big To Fail and to the taxpayer. A total of 72 banks have gone under in 7 months in 2009. Many, many more will follow as the fundamental problems that affected larger banks and were swept under the rug spread to commercial real estate and prime mortgage markets, affecting smaller banks that don't have the political clout on Capitol Hill.

Fannie and Freddie are still losing billions of dollars. Our financial system only still exists because it continues to be propped up by dollars created through Helicopter Ben's Magic Printing Press. They did what they had to do in order for America and the world to survive.

But in the end, all they have really done is kick the can down the road. We don't know how far that can has gone, maybe six months, maybe years, but eventually we will be in the same situation we were in back in 2008...only much, much worse.

Banks and hedge funds have gone back to the same three-card monte games they were playing before the crash. Everyone's excited that the stock index numbers are all going up. We're re-inflating the same Bush Boom Bubble from 2003-2007. Everyone is convinced glory is just around the corner.

It's not. This bubble too will burst, and I think it will erupt sooner rather than later. The growth patterns predicted by the Dow and S&P 500 are simply unsustainable given the fact we're still losing hundreds of thousands of jobs. People don't have houses to use as ATMs anymore and consumers are cutting back on spending across the board, trying desperately to get out of debt. That same debt fueled the growth we saw in the first part of this decade. It's used up, gone, kaput. Time to pay the piper.

Jobs will continue to disappear. Rearranging the deck chairs on the Titanic will not create real economic growth. We're heading into multi-year doldrums at best. At worst, the bottom falls out again.

We have been saved from systemic collapse. But at what future cost?