George Soros on the Real Danger to the Economy
The Republican opposition has been highly successful in turning “stimulus” and “bailout” into dirty words that cannot be used. The opposition narrative blames the crash of 2008 and the subsequent recession and persistent high unemployment on the ineptitude of government and claims that the 2009 stimulus package was largely wasted. There is an element of truth in this interpretation but it is far too one-sided. The crash of 2008 was primarily a failure of the financial markets and the fault of the regulators was that they failed to regulate.
Without a bailout, the banking system would have stayed paralyzed and the recession would have been much deeper and longer. It is true that the stimulus was largely wasted in the sense that most of it went to sustain consumption but that was owing to time pressure. What the government had to do in the short run—keep the economy from collapsing—was the exact opposite of what was needed in the long run—correct the underlying imbalances, particularly between consumption and investment. Confining the initial stimulus to government investment would not have worked because it would have been too slow.
Where the Obama administration did go wrong, in my opinion, was in the way it bailed out the banking system. It helped the banks make their way out of a hole by supplying them with cheap money and relieving them of some of their bad assets. This was a purely political decision: on a strictly economic calculation it would have been better to inject new equity into the balance sheets of the banks. But this would have given the government effective control of a large part of the banking system. The Obama administration considered that politically unacceptable because it would have been called nationalization and socialism.