WESTBROOK — Economics is widely known as “the dismal science” because economists tend to have a negative outlook on society and human behavior. If you pay attention, you’ll notice that forecasts for the U.S. economy amid COVID-19 are only getting darker.
Don’t get me wrong: COVID-19 is wreaking economic havoc and will continue to do so for months to come. My concern is that economists are exaggerating the long-term forecasts of the economic downturn. There is no doubt we are in the midst of a sharp decline, heralded by the quickest 30 percent drop in the S&P 500 ever recorded. But the notion that we’re entering a depression not only puts undue pressure on the fragile, damaged confidence of the American consumer but also is largely unfounded.
Let’s look back at our country’s only true depression, the Great Depression, and the response from one of the world’s most powerful financial institutions: the Federal Reserve.
The Great Depression was the longest economic downturn in the history of our country. Unemployment neared 25 percent and stayed above 14 percent for 10 years. Causes of the Great Depression are disputed, but most can agree it started with the stock market crash in 1929 and lasted through the early 1940s. Looking at the response of the Fed in 1929 should give people hope that we’re not hurtling toward another decade-long depression.
After the stock market crash, the Fed essentially sat on its hands, having little desire to inject money into the economy. Intellectuals have argued for years over the reasons why the Fed didn’t act after the crash and the ensuing run on the banks, but there is general agreement that the Fed’s inaction had a long-lasting impact on the economy and on consumer confidence.
In the midst of a crashing stock market and widespread panic, the Federal Reserve didn’t fulfill its role as a lender of last resort. Instead of expanding the money supply and providing much-needed liquidity to the economy, the Fed shrank the money supply in a time when Americans were panicking.
People (literally) ran to the banks to withdraw their money before someone else could (similar to the 2020 Toilet Paper Panic). Consumers did this out of fear that banks would become insolvent, thus fulfilling their own self-fulfilling prophecy. Within three years after the crash, “the money supply fell by 30 percent,” according to Federal Reserve historian Gary Richardson, which left banks begging for cash. Congress also played a role in the downturn by implementing protectionist policies and raising tax rates.
It’s unfair to say the Fed was the only driver of the Great Depression; many factors were involved. But their role had long-term consequences.
How does this compare to the Fed’s actions in 2020? The difference is night and day.
The Fed is willing to spend at least $4 trillion (yes, “trillion”) throughout the pandemic, and potentially more. (As a comparison, the historic stimulus package for the 2008-2009 Great Recession was roughly $800 billion.) The Fed’s spending spree is being used to prop up the American economy through a number of complex stimulus actions. The Fed has agreed to purchase bonds and mortgage-backed securities, support small business and much more. Normally the Fed will put a cap on spending during economic downturns, but in regard to the current crisis, it has promised to continue buying “in the amounts needed to support smooth market functioning,” according to a Federal Reserve news release.
The Fed has no intention of letting the country slip into another depression.
The current stimulus packages are historic and the long-term impact will be discussed for decades. Across the political spectrum, Americans will opine about the role of the Fed and whether it should hold such power and spend such money. But for now, this money will likely keep us out of a depression.
In an era when Congress can’t agree on the color of the sky, there has been remarkable, bipartisan support for the efforts of the Federal Reserve. There is little doubt we’re entering a painful recession, but there is hope that current policies will quell concerns over a depression and restore consumer confidence.
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