Late in December, when inspiration for new articles runs dry, we journalists love getting boozed on "SOMETHING of the Year" spirits. So here's an aperitif to cap off 2009. What was Obama's most important economic decision of the year? Noam Scheiber has an answer. Passing the $787 billion stimulus package? No. Picking Tim Geithner? No. Taking over General Motors? Heavens, no.
It was ... the stress tests?
Here's Noam. Per usual, this is clear-headed, straightforward thinking and you should read the whole article. For my two cents, Dan and I have said for a while that one of the most important things the government did early when the recession was still mostly a financial crisis was we stood behind the banks and essentially said: Armageddon will not happen, and we have the trillions to back that promise up. The Federal Reserve opened wide its balance sheet to buy bad assets. The Treasury swung open its doors with hundreds of billions of dollars of TARP to throw at struggling banks. We put AIG and Citi on government crutches. We arranged a semi-forced marriage between Merrill Lynch and Bank of America. These steps told investors that the United States was not in the business of managing large-scale nationalization or allowing large-scale bank failure. We were in the firefighting business.
The stress tests, whether they were honest or not, were the damage report. They told investors that the house that was once on fire was going to stand. When history judges this year, it will probably characterize the bailouts as a double-edged sword. On the one had, the government's implicit guarantee to save Wall Street probably averted a depression. On the other hand, by setting a floor on bank losses we deepened our troubling tradition of moral hazard, which encourages top tier bank institutions to bet big, knowing the government will have to bail them out if they lose. But those implications are next year's debate. This year, I agree with the Noam that the stress tests are something to be thankful for.