I’m putting this in GQ because I’m looking for either facts or educated speculation, not guesses and certainly not debate.
I’m wondering if there is any reasonable consensus among those who can be termed experts in such things as to what most likely would have happened if the US Federal government had totally stayed out of the “financial crisis”. If it had not done any stimulus, not bailed out any banks, not bailed out any auto-makers, etc., just sat back and stayed out of it completely, basically just doing business as usual.
I do realize that “no one knows” is the only 100% correct answer to the question “What would have happened?”, so pointing that out is not helpful. But again, I’m asking if there is any reasonable agreement among experts as to the likely consequences, both short and long term.
I’m afraid you’ll find it impossible to have a GQ discussion on this as it is technically complex, touching on many people’s ideologies and the data itself are unclear. This is not a subject susceptible to a GQ answer.
However, it would be GQ friendly to observe that a large number of specialists in financial sector economics felt around Fall 2008 there was a serious danger of a system wide (internationally, not just the USA) collapse. Probably the majority of specialists viewed this as a serious danger. Beyond this type of observation, you stray beyond the factual into speculative and debate.
To the greatest degree possible, this is what I think would have happened. First, you would have seen a lot more short-term pain. Second, it would show a much stronger potential to bounce back.
The reason is that government intevention kept a lot of bad pratices in the game, kept bad companies in the game, and thus far has not actually shown the results they wanted. Well, that’s not entirely true -they got the results they wanted for themselves. The Fed was afraid of a changed financial landscape and acted to preserve what it knew rther than risk the unknown.
Likewise, we’ve “bailed out” huge companies with public funds (and it ain’t all loans, either). This has some very obvious advantges. It has a lot more improtant hidden disadvantages. Sure, it saves obvious jobs now, but it’s fundamentally saving loser companies from being broken up and restructured into somthing valuable. GM, for example, is less valuable than the sum of its parts - you could build two or even three companies from its remains, which would be smaller but leaner and meaner.
This makes a lot of uncertainty in the marketplace. Companies get nervous, and hold back even more than they otherwise would. They see the Fed putting a trillion bucks into the market (not to much effect on credit) and fear what might happen down the line. They don’t know and can’t predict what it will do to their business, so they shy from risk.
Looking from a very high level I tend to view the question as really being: if there was no intervention would the system have gone unstable and chaotic, or would it have mearly gone into a deep sharper deline - much as the bandit above suggests. Noone really knows, and noone will.
But you might charaterise the intervention of the worlds governments as being, to some extent hedging. The social as well as economic costs of the system truly breaking down would have been enormous. At some point we reasonably expect that a government will act to avoid these risks. It is a hard call. If the world’s economic experts had reached a concensus that the risk was 50/50 should they intervene, or let the system ride it out? Most people would be pretty nervous with 50/50, and expect intervention. How about 80/20? 20/80? Of course we didn’t even have that. Just a risk that was “bad.” One of my favourite aphorisms is that it is easy to make good decisions when given good or perfect information. The mark of a great leader is the ability to make good decisions when given incomplete information. Sometimes greatness simply means making a decision. Many times dithering has brought the worst possible outcome.
It is always worth keeping in mind that this isn’t a US problem. All of Europe, Asia, even down here in Oz. We all got hit, and all our governments got involved in some form of rescue. How bad things got are very varied. How well we weathered thing is also very varied. Here in Oz we have been shielded by our primary resources sector, which continues to dig stuff out of the ground and ship it overseas. Which is nice, but means we also can avoid hard choices, which isn’t so good.
I tend to agree with the bandit above on the issue of avoiding hard choices. I worry that this one has been too easy, and that it will simply encourage another round of bad behaviour. It has been observed on a number of occasions that once a group knows that the government will bail them out, they act with much less responsibility. That is almost the story ofthe last 50 years.
However, one thing that people often have a hard to time coping with is the reality that there is usually no right answer. There are a whole raft of possible answers, which can be quite contradictory, depending upon which cost functions you use.
The credit system would have collapsed. So what? Bankers would have gotten their due. So what?
What they should have done instead was do about 500 programs of the size of Cash for Clunkers and not a soul would be talking about bankers they would be so busy arranging car loans, furniture loans, appliance loans, candygram loans …
Yes, I thought I made it clear in the OP that I know there can’t be any “right” or factual answer to the question “What would have happened?”, and that I’m not asking that particular question.
The specific question I’m asking is: Is there anything close to agreement among the experts? Sure, the experts are speculating; sure, there will be differences of opinion among the experts. But what I’m wondering is, among the opinions and speculations of the financial experts, is there any kind of consensus? Is there some large number whose opinions and speculations are in general agreement? Or does it just end up that most “liberal” experts say the government’s actions avoided catastrophe, and most “conservative” experts say that we would have been better off without the government’s actions?
So what? How about a global depression? How about no credit for anyone but the most rich and most stable investors? It would be the death of capitalism as we know it. Youre talking 50% unemployment, if not more. The US, and probably the west as well, would have become a third-world economy where only the superich can afford anything and the other 97% lived on the poverty level. The government would quickly reform into a oligarchy to only serve their needs.
Well, that was the fear. I think it completely ridiculous. Ultimately, wealth is founded on production, which is still vailable. Credit is still wire-tight despite the government largesse. Most financial companies would still have stayed float - the early dead would be cannibalized to feed the later ones.
What we would have seen a very painful adjustment period. This can be eased by a generous but temporary unemployment and more Small-Biz grants, as well as tax relief for people who just lost their jobs (so they can recoup more of payments previously made). Surviving financial co’s would have had a field day of acquiring valuablerassets, and their payments would have gone a huge way towards paying off the debts fo the fallen. Right now they have massive amounts of capital… but they have no reason to lend.
Of course, a major part of this would be to tighte credit slightly but loosen government requirements, particularly for small businesses.
But, as per the OP, what if the government didn’t do any of that? If they’d “just sat back and stayed out of it completely, basically just doing business as usual”: no new policies whatsoever. What then?
I watched a PBS frontline documentary where the former secretary of the treasury was saying something along the lines of ‘If we don’t get the capital injections now, there won’t be an economy left by Monday.’
I think if Governments did nothing, there would be at least 50% more foreclosures around the world than their is now, people would be scrambling to pay off more of their debt than they are now and more open to living within their means, there’d be more of an impetus to find credible solutions to get rid of the toxic debt rather than relying on the government to bail them out, and afterwards, there would be a more risk adverse culture than there is now as the shock of the recession would ingrain in them a sense of responsibility, but maybe that’s wishful thinking.
You’d get a very unpleasant depression, which always has a substantial human cost. Now, I’m not at all convinced the crisis would be worse than what we have now. Government intervention in crisis situations to “stabilize” things both tends to become permanent and has a nasty habit of institutionalizing failure over success. Ultimately, the system would invetably work its kinks out if left alone. The failures would die, the successful would go on to become stronger.
Now, understand that I am not against government intervention per se. I think that governments should be frugal as a policy because it lets them become mroe flexible when necessary, and because real national needs change much faster than government can manage.
Now, to be really literal about the OP, it would have become a huge mess. The issue was not that more houses would have been foreclosed (as a failed bank isn’t going to be taking action quickly) but that the people who’d bought slices of prepackaged mortgage properties would have had a terrible time reclaiming their property from defaulters. I would reccomend setting up a special court to adjudicate claims temporarily. It could legally and rightly been federal, since the subprime mortgage contracts were inherently carried out across state lines.
Remember, the people who lived in these houses and defaulted didn’t own them. The banks did. When home values crashed, people preferred to walk away from the loss. I don’t blem them for it and even have sympathy, but it also wasn’t their property and they knew that going in.
The economy was on the verge of collapse. Screw the houses, screw the banks collecting on their lost property (the foreclosures), that was nothing. The commercial paper market almost completely crashed. Without this, many major corporations would have ceased to exist in days. We almost also lost the ability to use letters of credit as people were on the verge on not taking them. Without these, no trade is possible and the entire economy would have collapsed overnight. No more food on the shelves of stores. No more gas at the gas station. Sure, we would have pulled it together sooner or later, but it would have been much uglier than anyone that has contributed to thread so far is predicting.
If I have more time I will come back and try to help fight the ignorant opinions being spouted as certainties in the thread. Hopefully someone with more education in the matter will come along shortly. (Hellestal, are you out there?)
There can’t be a stable consensus about something for which the data is unclear and still not finalised. That is why you’re asking a question that at this time is impossible to answer in a GQ fashion (bloody hell, even for the Great Depression it would be difficult). Nevertheless, I would hazard the opinion that most specialists in financial crises - economists and the like specifically looking at such things - are in favour of intervention when things look at as bad as they did in September 2008. The head of the US Central Bank (and former head) are hardly leftists, but the current head took action and Greenspan has spoken in a supportive way as I recall. I believe that tells you a great deal. Of course they may be wrong.
While true, at the same time in instances of a general crisis as was clearly building in the fall of 2008, with a general bank and liquidity collapse coming, you’d have a lot of collateral damage among otherwise healthy and successful firms.
Economic history teaches that merely having means of production isn’t enough to avoid economic collapse. Otherwise, Germany would have been just fine c. 1925.
The financial system would have fallen apart and things would be tailspinning into another depression. The stimulus and the car company bailouts were less important than the government bailing out the financial system. If that hadn’t happened even large multinationals would have been unable to get enough credit to carry on operations and there’d be mass layoffs which would obviously slash demand, causing further layoffs, mass unemployment etc. Even with all the government spending and bailing there’s no absolute guarantee that we’re going to avoid a deflationary spiral as there’s plenty of deflation happening in economys around the world. But we’ve probably avoided the worst although it looks like no measures have been taken to prevent the same thing happening again and lots of things the government is doing are actually going to encourage another meltdown at some point in the future.