“Of course, Obama has no chance of getting a second term in this economy,” my friend said definitively.

“And whoever gets elected in 2012 will be a one-term President too.”

Other friends — including some really well-educated ones — seemed to think the economy would come roaring back as soon as Obama took the oath of office. Given the nature of the financial crisis and the housing bust, those were just dreams.

I get a lot of responses to my City Talk columns and blog posts about economic trends (usually local ones in print pieces, broader ones here on the blog), and sometimes I’m viewed as overly optimistic. But several years ago I was seen as “Mr. Doom and Gloom” by many local readers for my many articles both chronicling and predicting housing market woes.

But I just try to go where the arithmetic leads. Things were really bad and getting worse when my friend and I had that memorable lunch four years ago. It looked like things might get catastrophically worse.

Now, four years later, the economy is still very weak but getting better — in some cases quite markedly. I’ve lately been chronicling incredibly positive signs in the sheer number of major investments in Savannah’s greater downtown area.

And, despite a terrible performance in the first debate and a surging campaign for Mitt Romney, Obama is still a slight favorite to be re-elected according to the statistical model of polling by Nate Silver at FiveThirtyEight.

The economy is certainly better right now than I thought it would be at this point in the recovery. Recoveries from financial crises are notoriously choppy and weak. Even if the financial system had not teetered on the verge of complete collapse and even if we didn’t have almost 900 banks still under some sort of FDIC formal action, the overbuilding during the boom years and the bursting of the housing bubble would have been a drag on the economy for many years.

The Obama administration has made some errors, in my opinion, including a few big ones. One huge one that created unreasonable expectations was the claim that the 2009 stimulus package would arrest the unemployment rate at 8 percent. That prediction was made before the President took office and before we knew the full depth of the GDP decline in the last quarter of 2008, but the statement was still laughable, even at the time. I’ll do an entire post about that before the election.

But on the whole, I’m betting that both the Obama administration and the Fed are going to get decent grades from history for their handling of the economy, especially given the entrenched opposition in Congress.

So are you better off than you were four years ago?

Let’s recall where we were four years ago.

The economy entered recession at the end of 2007 (see graph from Calculated Risk) primarily because of the housing bubble bursting — although “deflating” might be a better term given the stickiness of home prices and the poor understanding of the issues in many U.S. metros, including Savannah.

By fall 2008, the economy had been in clear decline for almost a year. In September, Lehman Brothers filed for bankruptcy, which in part led to the full-fledged financial crisis as chronicled in 2010 by Robert Samuelson at The Washington Post:

Consider what happened after Lehman:

— Credit tightened. Banks wouldn’t lend to each other, except at exorbitant interest rates. Rates on high-quality corporate bonds went from 7 percent in August to nearly 10 percent by October.

— Stocks tanked. After its historical high of more than 14,000 in October 2007, the Dow Jones industrial average was still trading around 11,400 before the bankruptcy. By October, it was about 8,400; by March 2009, 6,600.

— Consumer spending and business investment (on machinery, computers, buildings) — together about four-fifths of the economy — declined sharply. Already-depressed vehicle sales fell a third from August to February.

— Employment collapsed. Five million payroll jobs disappeared in the eight months following Lehman’s collapse. The unemployment rate went from 6.2 percent in September to 9.5 percent in June 2009.

In mentioning Lehman, I don’t mean to suggest that there was some easily preventable chain of cause and effect here. In the thorough timeline of the financial crisis created by the St. Louis Fed, there are 21 significant developments in just one month — October 2008.

By summer 2009, a combination of factors — the stimulus plan (more than a third of which was tax cuts, btw), the auto industry bailout, bold moves by the Federal Reserve and the Treasury, and other stimulative measures — ended the economic freefall.

John McCain was promising a stimulus package too, but a smaller one. It’s also likely that his administration would have taken a more hands-off approach as major corporations verged on failure. Almost certainly, that approach would have led us to a far worse spot than where we are right now.

I don’t know how the collective memory of the 2007-2009 recession and the broader understanding of the difficulty of recovering from a financial crisis will impact November’s vote.

But I can virtually guarantee that — at best — we’ll still have the sense of shaking off a sluggish recovery when 2016 rolls around. That’s going to be the case no matter who wins. And it won’t be such a bad place to be, considering the alternatives.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committeeâ€s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

Check out this graph from Calculated Risk:

Note that after every hint or announcement of more Fed action, the S&P came off a recent low. In some cases, that stock surge was sustained; in others, it was not sustained. Today, after the Fed announcement, stocks surged.

I don’t know if that surge will continue — I was even surprised to see such a jump today, given that the markets had largely priced in (or so I assumed) additional Fed action.

But maybe the stock increase was related to the slow improvement that now seems to have taken hold and which has led the Fed to raise its estimates of GDP and reduce its estimates of unemployment over the next couple of years. As Calculated Risk notes in tables in a great post today, the Fed now sees GDP between 3.0 and 3.8 for 2014, unemployment between 6.7% and 7.3% for 2014, and core inflation just 1.8% to 2.0% in 2014. That indicates that the Fed still does not see any imminent threat of inflation.

There are a couple of downsides to the continued policy of driving down interest rates, especially the fact that such policies hurt savers. But the strong actions today will almost certainly help boost the economy — likely more than many analysts are willing to say. That’s the gist of another post by Bill McBride at Calculated Risk this afternoon.

With the nation still so far below maximum employment and with inflation still so subdued, it’s great to see the Fed take stronger action today. The Fed’s dual mandate is to control prices and maximize employment; many Bernanke and company are now finally treating those two elements with equal concern.

The Fed has a dual mandate: to maximize employment and to keep inflation in check.

John C. Williams of the Federal Reserve Bank of San Francisco recently made these remarks:

Maximum employment is a moving target that depends on how efficient the labor market is at matching workers with jobs. Itâ€s not a number you can measure directly. Economists fiercely debate what it might be. Expressed in terms of the unemployment rate, I estimate that maximum employment is currently around 6¼ percent.6 The current unemployment rate is far above that level, which means we are far short of maximum employment by any reasonable measure. Whatâ€s more, with the economyâ€s recent loss of momentum, job creation will barely keep up with labor force growth. As a result, I expect little progress toward maximum employment over the next year or more.

The second part of the Fedâ€s mandate is price stability. As Iâ€ve noted, our policy body, the Federal Open Market Committee, has specified that a 2 percent inflation rate is most consistent with maximum employment and price stability. Over the past year, prices rose 1.5 percent, according to the Fedâ€s preferred measure of inflation. Falling commodity prices, a rising dollar, and subdued labor costs suggest that inflation will fall to around 1¼ percent this year and then rebound somewhat to about 1¾ percent next year.

What does this mean for the Fed? We are falling short on both our employment and price stability mandates, and I expect that we will make only very limited progress toward these goals over the next year. Moreover, strains in global financial markets raise the prospect that economic growth and progress on employment will be even slower than I anticipate. In these circumstances, it is essential that we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates.

From Mangee’s column today:

Given such projections by the people who ultimately decide on monetary policy, how can the Federal Reserve just sit on its hands with so many people entering long-term unemployment? Wouldnâ€t helping to put hundreds of thousands of people back to work take precedent over the possibility of a slight increase in the price level, one that appears far from certain and perhaps even desirable?

You’ll hear folks say that the Fed has done all that it can do, but it hasn’t. The bank needs to be even more aggressive. Given so much slack in the economy, we’ll have plenty of warning if inflation starts to rise; the Fed will can easily respond as needed.

We’re spending too much time worrying about speculative negative results of Fed action while tolerating current conditions that should be intolerable.

The Fed has already taken other actions over the last 4 years to try to bolster the economy.

Here’s how my Armstrong colleague Nicholas Mangee explained it in a recent Savannah Morning News column:

From 2008 through 2011, the Federal Reserve embarked on a series of financial market operations to try to rejuvenate an economy grasping for air. Massive amounts of reserves were injected into the commercial banking system. These policies, known as Quantitative Easing (QE) I, and II, and Operation Twist (a term from a similar policy enacted in 1961) consisted of purchasing hundreds of billions of dollars worth of mortgage-backed securities and treasuries from major federal agencies like Fannie Mae and Freddie Mac and other financial intermediaries.

Unlike QE I and II, Operation Twist involved re-shuffling the Fedâ€s balance sheet by which short-term treasuries were sold in exchange for assets with greater maturities, such as mortgage-backed securities. These assets were bought in order to lower medium to longer-run interest rates, the only existing yields not near zero.

By purchasing the toxic assets that so many financial firms were caught holding when the music stopped on the great credit expansion of 2003 through 2007, the Fedâ€s balance sheet and bank reserves expanded to historically unprecedented levels.

From 1984 through 2008, the average amount of commercial bank reserves held with the Fed was approximately $20 billion. By the end of 2011, that amount skyrocketed to $1.53 trillion. Even though commercial banks are required to keep a portion of reserves on site with the Fed, almost all of these new injections of liquidity were excess reserves allowed to be loaned out at will.

Calculated Risk has a succinct QE Timeline in this post. He also puts those dates into this graph of the S&P 500. It speaks for itself.

And contrary to what you might be reading or hearing, the Fed’s actions over the last few years have not damaged the economy. We have not seen runaway inflation: in fact, we still need higher inflation. We have not seen investors run away from U.S. debt: the dollar is still — even increasingly — regarded as one of the world’s few safe havens.

And by not using all the tools in its toolbox, the Fed is virtually assuring that the American economy will remain weak for years, probably until the end of this decade.

For a broader but still concise summary of the Fed’s actions over the last few years, check out an April column by my Armstrong colleague Nicholas Mangee: What the Federal Reserve has (has not) done

Today’s economic projections after the latest round of Fed meetings are, in a word, dismal. They show continued growth and continued declines in unemployment — i.e., no recession — but with a growth so slow that millions of Americans will remain un- or underemployed. Many Americans already have a tenuous hold on their standing in the middle class; millions more will fall out of it if the Fed doesn’t do more.

Here are the projections in graph form that the Fed released today. There’s obviously a considerable range of uncertainty in these forecasts, in part because of the potential catastrophe in Europe and other external events, but note that the best case scenarios are weak. To a large extent, these weak forecasts are still rooted in the housing crisis, which I last discussed at length here.

From the Fed:

And those projections in table form:

So absent Fed action, the best estimates right now are for GDP growth to remain below 3% into 2014 and for the unemployment rate to stay above 7% into 2015.

The Federal Reserve has a dual mandate: to control inflation and to maximize employment. Both those goals are currently significantly below the Fed’s targets.

Check out Calculated Risk for a broader discussion and additional links. He expects QE3 to be announced on August 1.

So there wouldn’t be any additional money injected into the economy in the short run, thus perhaps/maybe/possibly shielding the Fed from some of the concerns over the first two rounds of quantitative easing (QE1 and QE2), which seemingly helped buoy stocks and lower interest rates.

The rationale for doing something is pretty straightforward, as the WashPo piece notes:

The willingness of Fed officials to embark on this effort to lower interest rates reflects their serious concern about an economy that is on a knifeâ€s edge. Economic growth has been so weak in recent months that there is risk of a vicious cycle of falling incomes and employment — unless the Fed gives the economy a nudge.

In theory, if the Fed buys longer term securities, that will push more long term investors elsewhere — into the stock market, into mortgage backed securities (which would have the effect of reducing mortgage interest rates even more), or into corporate bonds (which would make it even easier for corporations to borrow and invest).

The WashPo adds:

The idea of shifting the composition of bonds the Fed already owns — sometimes known as a “twist” operation — is not without downsides, however. Interest rates already are very low, and pushing them down further may not have much effect. One major aim would be to encourage people to refinance their mortgages, freeing up money to spend on other things and foster economic activity. But with so many people owing more on their homes than the homes are worth, relatively few are in a position to take advantage of lower rates to refinance.

At the same time, by shifting from short-term bonds to longer-term ones, the Fed would face a greater risk of losing money when it is time to sell them. Just as for an individual investor, a 30-year bond is a riskier investment for the Fed than a two-year bond.

Frankly, even though I think QE2 had a pretty big effect, I’m not sure this move would be big enough to provide the kind of help the economy needs. Still, it might be the extra push needed to keep us out of another recession at a time when we haven’t come close to recovering from the one that technically ended in 2009.