This month marks the two year anniversary of the recovery, with the recession that began
on December 2007 having ended on June 2009. There´s certainly not much to celebrate given that the economy is still in the doldrums.
Many errors were made. Not “rescuing” Lehman certainly increased anxiety and the volume of resources to prop up the financial system. The wrong NK idea that monetary
policy was powerless at the “ZLB” diverted efforts to Fiscal Stimulus with the negative effects of the strategy now very much apparent. Most important of all, the Fed “got it all wrong”
Ezra Klein has a nice piece today on “What the Fed got Wrong”:
You could take Jon Hilsenrath’s article on the GOP’s mounting opposition to the Federal Reserve as a lesson in the downside of extraordinary measures, and thus reason for the Fed to avoid doing more, both now and in the future. But you can also take it in exactly the opposite direction: as a lesson in the downside of policy failure, and a reminder of what happens when you do more without doing enough.
As Binyamin Appelbaum writes today, “a number of studies have concluded that the Fed’s efforts have had only a modest impact on the economy.” And that’s not a modest impact on a normal economy. It’s a modest impact on the worst economy since the Great Depression. The anger at the Fed isn’t coming because people have suddenly developed strong and nuanced views on quantitative easing. It’s coming because people are angry about the state of the economy, and the Fed is one of the major forces in the economy. The way to have avoided it wouldn’t have been to do less, but to do better, which would’ve meant doing more.
A growing number of economic policymakers — former Fed vice chairman Alan Blinder, former CEA chair Christina Romer, former associate director for the Fed’s monetary affairs division Joseph Gagnon — believe that would’ve been, and in many cases, still is, possible. They argue that the bank’s underwhelming impact on the recovery is evidence not of the Fed’s inability to more effectively fight the recession, but its unwillingness to do what was needed to fight the recession. Larger and more aggressive asset purchases, price-level targeting, and various other dips into unconventional measures were and are needed. But all that would’ve been economically more effective and politically easier a year ago, or even two years ago, than it is today. Today, the Fed is under intense criticism, which limits its freedom of action. Having not done enough, they’re now unable to do more.
Let´s travel back 30 years and see what a real “celebration” looked like and compare with
the pitiful situation at present.
The first batch of figures show what happened to nominal spending and real output in the
seven quarters after the deep recession of 1981-82 (when unemployment peaked at 10.8% (higher than in this recession) and in the seven quarters following the “great” recession of 2007-09.
The nominal quantity over which the Fed has strong influence has remained euphemistically timid this time around!
The next figures show Krugman´s favorite measure of what he calls “our torrid affair
with the potential for a lost decade”.
By this time around 30 years ago, the employment population ratio had surpassed its level just prior to the start of the recession. At present the economy remains “deep inside the hole”. Seems clear that this has a lot to do (“it ain´t mostly structural”) with the Fed keeping a lid on nominal spending growth!
The last figures show inflation expectations over the two recoveries. Thirty years ago
inflation expectations went up significantly during the first seven quarters of recovery. Nominal spending “obliged”! Note that three years later, just as the “Great Moderation” was gathering steam, inflation expectations were on the way down (and kept on falling). This time around they have mostly come down – just the opposite of what´s needed!