Tax revenues this year will surpass pre-great recession levels for the first time. But has the economy truly healed?
Recently, The Economist published an article entitled “A History of Finance in Five Crises.” The authors argued that financial institutions and fiscal policy evolved in spurts following economic hardship. Our current financial system is a result of decisions made during times of recovery that were reassuring in the moment but had unintentional long-term consequences.
Alexander Hamilton, the first Secretary of the Treasury, made a decision to bail out the brand-new Bank of the United States in 1792. This decision led to the creation of the New York Stock Exchange when investors adjusted to new regulations. British financing of new Latin American states and the fall of the Spanish Empire in the 1830’s created the Royal Bank of Scotland, the first megabank. In 1857 the American railway bubble burst and for the first time international markets as well as domestic ones were rattled by this industry. A run on trust funds in 1907 led to the creation of a ‘lender of last resort’ or the Federal Reserve in 1913. The Great Depression’s monetary policy firmly entrenched the role of the Federal Reserve as the curator of U.S. economic stability. The great recession shook our economy and we are now in the process of determining what the new economy will look like.
How then is our economy different after the collapse of 2008? The biggest difference is the increased role of governments as a lender. The bailout of the big banks pumped 29 trillion dollars into the global economy but the low cost of that debt has only created stronger conduits of reliance between the private and public financial institutions designed to pass on benefits to the American citizen. Did the steadying hand of government intervention create an economy that relies on government support?
Lending and bailouts were crutches to help the system to get back on its feet but continued low interest rates and other measures put forward by the Federal Reserve designed to stimulate investment have continued to this day. Steps need to be taken to strengthen the economy and not just help it recover.
A sign of lingering challenges is the 2014 reaffirmation of the downgrade of the Federal Government’s credit rating. A credit rating is given by independent private evaluators to indicate an institution’s ability to pay back debt. In 2011 the designation AA+ (excellent) replaced the highest possible AAA (outstanding) rating.
The rating agency S&P explained their decision: at the time of the downgrade: “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.” S&P expected the recovery of the economy to be faster and they felt steps being made by Congress were indecisive and ineffective.
Private creditors use ratings, and it is these ratings that investors use to decide the amounts of U.S. Treasury debt to buy. If another recession were to hit, it could be much more difficult to raise money to bail out banks, fund the increases in welfare programs or offset decreases in tax revenue because people may be a little more wary of lending money to the government.
Our most recent midterm elections have brought many new faces to Congress and it will be interesting to see if we can reverse the trend of brinkmanship and form an effective government. Eventually we want the credit rating of the Federal Government to rise back up. But that will take a tremendous effort from both sides of the aisle. We are still recovering from the great recession and the decisions we make now will set the pattern for decades to come. Let’s work together and design an economic system that incorporates lessons from the past about the influence of unintended consequences.