Wider Confidence Lifts Economy From Winter's Deep, Dark Freeze

By Neil Irwin and David Cho
Washington Post Staff Writers
Thursday, May 21, 2009

The financial system, frozen solid for the past nine months, is in a spring thaw. And it's happening even though many of the Obama administration's major rescue programs have yet to get off the ground.

The improvement reflects the combined impact of a wide range of actions, many of them taken with little public attention, according to government officials and private economists. But more important than any single program, the sources say, is a deepening confidence from financial markets that the government is prepared to take aggressive action -- a confidence that Obama officials have repeatedly worked to cultivate in speeches and public appearances.

Since early this month, major banks have raised or said they would raise $56 billion in private capital -- the type of surge that Federal Reserve Chairman Ben S. Bernanke said in March would signal the financial system is recovering. The premium that banks charge to lend to one another, another sign of the system's health, is at its lowest level since the financial crisis began in 2007, based on one key measure.

The Standard & Poor's 500-stock index is up 34 percent since March 9, and a measure of stock market volatility this week hit its lowest level since the financial crisis deepened in September, indicating that investors think the market's wild gyrations will be more subdued.

Stabilization of the broader economy has helped the financial sector right itself. In minutes released yesterday from their April policymaking meeting, Fed leaders said the economy could begin to pull out of the recession later this year.

But they and private economists caution that the unemployment rate is likely to remain elevated through at least 2011, that people could continue to pull back on spending as they save more and borrow less, and that businesses must grapple with a glut of investments from the boom years.

"The feeling is that for now we've avoided the Great Depression," said Anil Kashyap, an economist at the University of Chicago Booth School of Business. "But the real economy is still in pretty bad shape."

The relative improvement has come despite sluggish progress in some of the more high-profile government efforts to revive the financial system and the economy.

The Fed's $1 trillion program to support consumer and small-business lending has deployed less than one-fiftieth of that amount. An Obama administration plan to buy troubled assets off the books of banks is roughly six weeks from operating, Treasury Secretary Timothy F. Geithner said yesterday in congressional testimony. Aid to small businesses and homeowners facing foreclosure has not yet flowed in large volumes, nor has money from the government's economic stimulus plan, passed in February.

Still, government officials and private economists say, there's a sense that the government is attacking the crisis from all directions.

"They're doing a whole bunch of things in a lot of different markets to provide support," said Desmond Lachman, a resident fellow at the American Enterprise Institute, a Washington think tank. "And markets look forward, and to some degree improve in anticipation of measures that are to come."

The idea of trial-and-error, and rolling out many different policies before the details can be figured out, has been a guiding element of the Obama administration's strategy.

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