Alan Blinder, professor of economics at Princeton University. Photographer: JB Reed/Bloomberg

Mark Zandi, chief economist of Moody's. Photographer: Chris Keane/Bloomberg

The U.S. response to the financial crisis probably prevented a depression, slowed a decline in gross domestic product and saved about 8.5 million jobs, economists Alan Blinder and Mark Zandi said.

Policies including the government fiscal stimulus, bailouts of financial companies, bank stress tests and the Federal Reserve’s purchase of mortgage-backed securities to lower interest rates “probably averted what could have been called Great Depression 2.0,” Blinder and Zandi said in a report dated yesterday. Without those measures, the U.S. would have deflation, they said.

Lawmakers are debating the costs and benefits of measures taken by the Bush and Obama administrations including the 2008 taxpayer bailouts of Citigroup Inc. and Bank of America Corp. Obama officials say bailouts helped stabilize the economy while Republicans, ahead of this year’s midterm elections, have criticized the program as benefiting Wall Street bankers instead of ordinary Americans.

“Eighteen months ago, the global financial system was on the brink of collapse and the U.S. was suffering its worst economic downturn since the 1930s,” Blinder and Zandi said in their report. “The Great Recession gave way to recovery as quickly as it did largely because of the unprecedented responses by monetary and fiscal policymakers.”

Report’s Authors

Blinder, 64, a former Fed vice chairman, is a Princeton University economics professor and vice chairman at Promontory Interfinancial Network LLC, a Washington-based banking consultant. He was on former President Bill Clinton’s Council of Economic Advisers. Zandi, 51, is chief economist at New York- based Moody’s Analytics Inc.

If the Bush and Obama administrations hadn’t acted, GDP would have fallen 7.4 percent in 2009 instead of 2.4 percent, the economists said in the report, titled “How We Ended the Great Recession.”

“By the time employment hits bottom, some 16.6 million jobs are lost in this scenario -- about twice as many actually were lost,” they wrote.

The government’s fiscal stimulus alone will boost 2010 GDP by about 3.4 percent and add almost 2.7 million jobs to U.S. payrolls, Blinder and Zandi said.

Bailout Fund

Congress authorized $700 billion for the Troubled Asset Relief Program in October 2008 to prevent a collapse of the U.S. financial system. The program has been criticized by lawmakers from both parties, including Senator Maria Cantwell, a Democrat from Washington state, and Representative Jeb Hensarling, a Texas Republican, for helping big banks more than average citizens.

The TARP “has been a substantial success, helping to restore stability to the financial system and to end the freefall in housing and auto markets,” Blinder and Zandi wrote. The cost to taxpayers will be “a small fraction” of the amount initially granted by Congress, probably less than $100 billion, with the bank-bailout portion of TARP “probably turning a profit,” they said.

Government equity investments in large banks was “a necessary condition for ending the panic and the recession,” Zandi said in an interview today. The Fed’s stress tests on 19 U.S. banks last year “put a nail in the coffin of the financial panic.”

“It’s fair to say this has been very costly,” Zandi said. “There’s no free lunch. We now have a very large fiscal problem we’re going to have to grapple with.”

$250,000 Threshold

To keep the recovery going, President Barack Obama should extend former President George W. Bush’s tax cuts for families making as much as $250,000 a year while phasing in increases for those earning more, Zandi said.

“The recovery is too fragile to digest the higher tax rates at this time,” Zandi said.

Tax cuts enacted in 2001 and 2003 under Bush are scheduled to expire at the end of this year, and an election-year fight looms over whether to continue them. Obama and congressional Democrats want to extend the tax cuts for households earning as much as $250,000 and allow those for wealthier taxpayers to expire.