Like an old story in a classic movie, the economy grows slowly. The old excuses, however, don’t apply.
Real gross domestic product (GDP) for the United States rose 2.8 percent in the final quarter of 2011, above the 1.8 percent reading for the third quarter. However, 1.7 percent growth for all of 2011 is well below what our economy experienced in previous economic recoveries. Real GDP is now back to pre-recession levels, but when we account for population growth our standard of living is still lower than before the recession in 2007.
It’s easy to point blame for the slow recovery back at the financial crisis. Many economists say “aftershocks” from the 2008 financial market meltdown make banks reluctant to lend, which in turn makes it hard for small businesses and new companies to get capital.
Particularly vulnerable to the banking issues are construction firms in the housing industry. While there has been a steady increase in housing starts, both here in Idaho and around the nation, housing prices and firm profits remain deeply depressed.
It’s time to stop blaming the financial crisis. It’s as if everyone is still watching Inside Job, which documents the events surrounding the upheaval in financial markets throughout 2008.
With excellent cinematography, a moving soundtrack and good writing, the producer tells a good story and is deserving of the Academy Award.
It wouldn’t be a good story without a greedy villain with many vices. According to producer Charles Ferguson, our villains are rogue Wall Street bankers and the government officials who failed to regulate them properly. The bad guys of Inside Job steal from the unsuspecting public and use the ill begotten wealth to live an extravagant and sinful life.
Inside Job just doesn’t tell the whole story.
While criticizing Fed governors for poor oversight, the film ignores the Fed’s monetary policies that first fueled speculation in the housing market. There is no discussion of the negative real interest rates the Fed put in place between 2003 and 2007.
The Fed is still at it. Following their January meeting, the Federal Open Market Committee announced they plan to keep interest rates near zero for the next two or three years.
Matt Damon, the narrator of Inside Job, repeatedly claims that deregulation and loose oversight caused the crisis. But one of the most prominent interviewees in the film, Eliot Spitzer, says directly that the regulators had the power to prevent it all along.
Inside Job shouts for more regulation we apparently don’t need. The multiple layers of banking regulation make the financial system even more susceptible to failure and restrain credit to private businesses.
Perspective is also important here. GDP per capita may still be low, but by September 2010 inflation-adjusted personal consumption in the U.S. returned to its pre-crisis level. It took less than two years for the U.S. consumer to recover after supposedly the worst financial crisis of all time.
Perhaps this wasn’t such a crisis after all.
There were many problems in the financial sector that led up to the volatile markets and deep recession of 2008 and 2009. The crisis itself, however, is over and well past.
We can’t watch old movies for answers to economic issues of today.
PETER CRABB Professor of finance and economics at Northwest Nazarene University in Nampa