The Big Lie: Recoveries following financial crises induced recessions are slow

John Taylor doesn´t agree and cites a paper by Bordo and Haubrich. He puts up this revealing chart showing growth in real output in the first four quarters of recoveries.

In other writings, Taylor argues that what´s keeping the economy ‘tied down’ is bad economic policy which is causing uncertainty. I prefer to think it´s mostly bad monetary policy. So I check how nominal spending (NGDP), something closely controlled by the Fed, behaved in the two years following the year of the recession through that are identified by Bordo & Haubrich as ‘financial crises recessions’. I leave out the 1914-16 recovery because that was mostly due to WWI spending and distorts the comparison.

I also note by a dashed line the cumulated real growth after the recession ended in 2009. It´s easily the weakest real and nominal recovery of all. Taylor correctly notes that after the 1990/91 recession recovery wasn´t strong due to the fact that the recession was very shallow, so there was not much ‘catch-up’ to do.

The Fed can make the speed of the nominal recovery be pretty much whatever it wants – with much being translated into a real recovery. More, it could well have avoided the depth of the fall. But it´s nice to have a popular excuse for why recovery is progressing at a snail´s pace.

Update: Scott Sumner says:

The central bank determines the total level of spending.  No society can ever run out of the ability to manufacture more spending, unless the central bank runs out of paper and ink.

In an op-ed at the WSJ Michael Bordo summarizes his research with Haubrich:

There’s a belief among policy makers that serious recessions associated with financial crises are necessarily followed by slow recoveries—like the one we’ve experienced since mid-2009. But this widespread belief is mistaken. To the contrary, U.S. business cycles going back more than a century show that deep recessions accompanied by financial crises are almost always followed by rapid recoveries.

From Dean Baker, a great quote pertinent to the topic:

We are so far lost in economic debates that we are not even at the point of arguing whether the earth goes around the sun of vice-versa. We can’t even agree that the sun rises in the east.

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5 thoughts on “The Big Lie: Recoveries following financial crises induced recessions are slow

  1. I think it’s entirely the wrong question to ask regarding recoveries considering that the deflationary recession in 1920-21 didn’t include a financial crisis, but had many of the other features of what’s described in bubble theory. It followed an inflationary period with “artificially” low interest rates. There was a stock market crash and constraints on credit availability. Unemployment rose to 11.4% with a 10% decline in RGDP. But the banks kept humming along. Perhaps the correct question to ask about recoveries is what happens when the Fed doesn’t do its job, causes a financial crisis, still doesn’t get what its supposed to be doing and instead would rather crucify mankind on the cross of a 2% inflation ceiling.

  2. “In other writings, Taylor argues that what´s keeping the economy ‘tied down’ is bad economic policy which is causing uncertainty. I prefer to think it´s mostly bad monetary policy”–Nunes.

    What John Taylor is saying is that he doesn’t like Obama. That’s fine; I just wish he would say that. Taylor never said “uncertainty” kept Japan from growing, He said it was bad monetary policy and advocated and supported QE.

    I will be interested in what happens to the John Taylors of the world when and if Romney gets elected. I expect Taylor will start talking about the need for “growth policies” including a growth monetary policy.

    I wish Taylor, and all safely ensconced economists of all stripes, would remember that a downward squiggle on an econ chart represents millions of unemployed, millions of small business failures, and difficult straits for millions more. Taylor, safely ensconced at Stanford, can advocate monetary suffocation until he gets Romney in. But others less well situated are paying a huge price for this monetary asphyxiation.

  3. Good post. Interesting pdf. But the quote from Sumner, “The central bank determines the total level of spending” is pushing on a string. Pushing new money into excess reserves is not the same as spending. Sumner confuses “spending” and “printing”, as many people do.

  4. Pingback: The Big Lie: Recoveries following financial crises induced recessions are slow « Economics Info

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