James Bullard makes some good bullet points in a PowerPoint presentation:
Recessions are dated only long after the fact by an unofﬁcial “NBER dating committee.”
The recession during this period was later dated as beginning in December 2007.
Incidentally, this is 10 months before Lehman-AIG.
However, during 2008 there was a debate as to whether the U.S. was in recession or not.
Based on the data at the time, the outcome of that debate was far from clear.
The real GDP data suggested that Fed easing had mitigated thecrisis up to mid-2008 and that the U.S. had perhaps avoided recession.
As of early August 2008, the growth picture for the U.S. economy according to available real-time data was relatively good.
In particular, estimates of real GDP growth were modest but positive for 2007 Q4, 2008 Q1, and 2008 Q2.
There was no recession according to the conventional deﬁnition of two consecutive quarters of negative GDP growth.
As of July 10, 2008, forecasts for the second half of 2008 were for continued modest growth.
According to today’s data, real GDP growth in the ﬁrst quarter of 2008 was steeply negative, but this information was not available at that time.
There was a good case to be made that the “muddle through” scenario, which had apparently been correct for an entire year, would continue through the end of 2008.
That’s right. As late as August 2008 both markets and economists thought we would avoid a recession. The collapse occurred in the second half of 2008. Then he makes a point I’ve been trying to get across for 5 years:
My argument is that the economy slowed substantially during the summer of 2008, greatly exacerbating the ﬁnancial crisis and leading many ﬁnancial ﬁrms to fail.
This slowing of the economy, however, was not readily apparent during the summer of 2008.
This is a crucial point. Because the collapse of GDP was not known in real time, economists assume the post-Lehman intensification of the crisis was an exogenous shock, and causation went from financial crisis to subsequent recession. Good to see a top Fed official recognize the reverse causation.
However I don’t like this:
But the rate cuts of early 2008 evidently did little to prevent the ﬁnancial panic, and may have exacerbated the situation to some degree … a point to which I will now turn.
I hate to see policymakers create ad hoc theories that are not consistent with market reactions. The markets reacted very negatively to the smaller that expected rate cut of December 2007. Bullard should stick with the tried and true—cutting the fed funds rate creates more AD than not cutting the fed funds rate target. And more AD makes the crisis smaller.
Nick Rowe has a new post providing a partial defense on Mandel’s claim that a lack of goods innovation is the real AD problem. I actually had thought of the same possibility as Nick, but didn’t discuss it. The idea is that less innovation creates saving, which reduces velocity. The reason I did not discuss this possibility is that if this is what Mandel had in mind, then he should not have responded to Matt Yglesias’s argument as he did. Yglesias was essentially arguing that too little stimulus is the real problem. If Nick Rowe’s interpretation of Mandel is correct, then too little policy stimulus is the real problem, as you’d want the Fed to offset any fall in velocity. But I now regret not discussing that possibility. It didn’t seem like the issue Mandel was getting at, but if Nick Rowe thought it was, then it is certainly possible I was wrong.
Tyler Cowen links to a blog post by Daniel Davies. I disagreed with everything in the post, from beginning to end. But it all seems to boil down to this:
- So there is a structural shortage of domestic demand
There can’t be a structural shortage of demand, because demand is a nominal concept. I wasn’t familiar with Mr Davies so I checked a few of his other posts. Yup, he’s a very smart guy, much smarter than me. So take this for what it’s worth. Demand is fundamentally a nominal concept. I don’t think any of the factors mentioned by Mandel, Davies, Tyler Cowen or anyone else matter for demand in a world where the inflation target is 5%. Not even a tiny bit.
They matter a lot for secular RGDP growth stagnation, but not for demand. And I still don’t think most people get that point. The real problem is nominal. Not China, not Germany, not lack of innovation, not income inequality, not debt, not housing, not banking, not deregulation, not current accounts, not fiscal policy, not serial bubbles, not wage stagnation, not anything real. The real problem is not enough NOMINAL GDP, hence tight money.
(Oddly, I think Paul Krugman agrees with me on this point, but I can’t quite be sure.)
PS. Don’t worry George; I don’t support a 5% inflation target.
PPS. Of course there is also the “Great Stagnation.” But that’s a different problem.