Month: December 2009

Is Keynesian Stimulus Working?:
By Chris Edwards

In his Brookings Institution speech yesterday, President Obama called for more Keynesian-style spending stimulus for the economy, including increased investment on government projects and expanded subsidy payments to the unemployed and state governments. The package might cost $150 billion or more.

The president said that we’ve had to “spend our way out of this recession.” We’ve certainly had massive spending, but it doesn’t seemed to have helped the economy, as the 10 percent unemployment rate attests to.

It’s not just that the Obama “stimulus” package from February has apparently failed. The total Keynesian stimulus is not measured by the spending in that bill only, but by the total size of federal government deficits.

The chart shows that while the federal deficit (the total ”stimulus” amount) has skyrocketed over the last three years, the unemployment rate has more than doubled. (The unemployment rate is the fiscal year average. Two months are included for FY2010)

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The total Keynesian stimulus of recent years has included the Bush stimulus bill in early 2008, TARP, large increases in regular appropriations, soaring entitlement spending, the Obama stimulus package from February, rising unemployment benefits, and falling revenues, which are “automatic stabilizers” according to Keynesian theory.

The deficit-fueled Keynesian approach to recovery is not working. The time is long overdue for the Democrats in Congress and advisors in the White House to reconsider their Keynesian beliefs and to start entertaining some market-oriented policies to get the economy moving again.

Does CRA Undermine Bank Safety?:
By Mark A. Calabria

A recent policy forum here at Cato discussed the role of the Community Reinvestment Act (CRA) in the financial crisis. While the forum focused on the federal push for ever expanding homeownership to marginal borrowers, the analysis did not touch directly upon the question of whether CRA lending undermines bank safety.

Fortunately this is a question that one economist at the Federal Reserve Bank of Dallas bothered to ask. While his research findings were available before the crisis, they were clearly ignored.

In a peer-reviewed published article, appearing in the journal Economic Inquiry, economist Jeff Gunther concludes that there is “evidence to suggest that a greater focus on lending in low-income neighborhoods helps CRA ratings but comes at the expense of safety and soundness.” Specifically he finds an inverse relationship between CRA ratings and safety/soundness, as measured by CAMEL ratings.

In another study Gunther finds that increases in bank capital are associated with an increase substandard CRA ratings. Apparently bank CRA examiners prefer that capital to be lend out, rather than serve as a cushion in times of financial distress.

Given the current attempts in Washington to expand CRA, it seems some people never learn. One can always argue over how CRA should work, but the evidence is quite clear how it has worked, once again proving: there’s no free lunch.

Those who cannot remember the past are condemned to repeat it; but what about those who willfully ignore the past?