Wednesday, January 14, 2009

Has the Financial Bailout Worked?

. Wednesday, January 14, 2009

The most obvious answer would seemingly be "no". After all, equity markets have not recovered their lost value, and the recession is still spreading throughout the real economy. The Obama administration is planning a $700bn stimulus package to create jobs, and monetary policy has fired just about all its bullets without making too much of a dent.

But a deeper look gives some reasons for optimism. First, the banking industry appears to have been stabilized. There is still some restructuring going on, of course, and that will no doubt continue for quite some time. But the TED spread (a measure of how risky inter-bank lending is perceived to be) is back to relatively low levels, and there are other signs that credit markets have begun to thaw, and we may have escaped a liquidity trap. In short, the TARP program has improved conditions in the banking sector, if only by preventing further collapse.

Of course it is still too soon to tell how everything will play out, but in just two or three months ago we were concerned about the collapse of the entire global financial system, and doomsday scenarios were not considered impossible or even especially unlikely. As we sit now, we are more concerned with getting the real economy moving again, the coming structural adjustment, and trade policy. I do not mean to diminish these other issues, but they are more indicative of a typical -- if deep -- recession than of a Global Financial Armageddon. And keep in mind that TARP has only used about half of the $700bn, which now looks as if it will be repaid to the U.S. Treasury with interest, so there is still some flexibility for the Fed and Treasury as we move forward.

And, as a recent WaPo editorial reminds us, this has benefits for everybody living inside this country, plus many more living outside of it. It's too early to do a celebratory lap, but so far TARP seems to be working.


Has the Financial Bailout Worked?
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