Here we go again

During the Great Recession, most people thought that bank failures were due to subprime loans. Actually, the vast majority of bank failures were caused by bad commercial loans (linked to falling NGDP.)

This time around, there will be lots of bankruptcies caused by disruptions in trade associated with the coronavirus. Then there’ll be lots more caused by tight money (i.e. low NGDP.) I predict that this financial crisis will be misdiagnosed just as was the 2008 crisis. I predict that people will assume it’s just C19, and ignore the role of falling NGDP.

I predict that just as in 2008, people will not even understand that monetary policy is highly contractionary.

I predict that just as in 2008, the Fed will fail to adopt level targeting and a “do whatever it takes” approach to QE.

I predict that the economy will fall below the Fed’s 2% inflation target, even though inflation should rise during an adverse supply shock.

I predict a fiscal stimulus package that will be just as ineffectual as the 2008 and 2009 packages.

I predict bailouts of politically influential failed companies (as during the Great Recession), rather than monetary stimulus that aids all companies.

And everything will be worse in Europe, just as during the Great Recession.

To be fair, the real shock this time is far, far bigger, more than 10 times bigger. Monetary policy can avoid making it worse, but (unlike in 2008-09) cannot prevent a severe recession. The sad thing is that we aren’t even doing the minimum, we are not going to avoid making it much worse. Right now, it looks like a highly contractionary monetary policy is causing 2021 NGDP expectations to plunge, and making the debt crisis far worse than it needs to be. Let’s hope for a medical miracle.

And hope that all of my predictions turn out to be false.

PS. Here’s another prediction. In a few weeks, people are going to start touting the Chinese model. Don’t believe the hype. Look to the democratic countries of East Asia—those are better models for how to handle an epidemic.

China is a polarizing country. People regard it either a some sort of economic miracle or a house of cards that’s about to collapse. It’s neither. It’s just another country.

PPS. A comment on this tweet:

Actually, China did not manage to contain the virus in one province. With the except of Tibet and a few other places, it spread all over the country. Many provinces had roughly 1000 reported cases. (And undoubtedly additional unreported cases.) This is good news; it suggests that even nationwide epidemics can be controlled.



43 Responses to “Here we go again”

  1. Gravatar of Sean Sean
    20. March 2020 at 12:26

    In all fairness the FED is acting extremely fast. The problem I think is all the money managed on very tight risks limits blowing out of the market. That destroyed a ton of financial fire power lately.

    But everything I see they are indicating a”whatever it takes” mentality.

    We did like 140 billion in QE today. Similar amount yesterday. I haven’t seen the schedule for tomorrow yet. Probably a similar amount.

    They are coming fast and hard. Many magnitudes faster than 2008. Eventually some of the other financial structures quit blowing up faster than the FED can print money.

  2. Gravatar of Mike H Mike H
    20. March 2020 at 12:47

    Scott, sorry if this is too off topic, but I have a personal question.

    I’ve been thinking about refinancing my mortgage for a while. The adjustable rates are as low as possible because we’re at the zero bound, but there’s also a 3 or 5 year period fixed rate to get through, which are currently rising (they’ve risen 0.2% this week). In fact, the banks seem to be so inundated that it might not even be possible to refinance right now.

    Given how much we’re mucking this up, how long do you expect us to be at the zero bound this time?

    Should I expect the fixed rate portion to drop back down, or is money so tight that the ship has sailed and I should just go for as short of a fixed rate as possible whenever?

    You’re probably not a mortgage rate forecaster, but I thought I’d try…

  3. Gravatar of David Tomlin David Tomlin
    20. March 2020 at 12:53

    “inflation should rise during an adverse supply shock.”

    I was thinking the opposite. Falling supply, yes, but less economic activity also means falling velocity of money.

  4. Gravatar of Gene Frenkle Gene Frenkle
    20. March 2020 at 12:54

    I think any theory of 2008 must explain why every major economic indicator from 2001-2007 was below average except corporate profits. So that means Fortune 500 CEOs had access to cheap credit but passed on it…and then it ended up in the hands of the least qualified investors.

  5. Gravatar of Rajat Rajat
    20. March 2020 at 13:22

    Very depressing, Scott. The root of the problem is that there seems to be a huge reluctance by central banks to embrace both (i) level targeting and (whatever it takes asset purchases). I can’t help feeling that this is one of those occasions where the personality of the chief matters a lot. We don’t need a deliberative or academic-type of person. We need a free-thinker. But central banks don’t choose or get free thinkers as leaders.

    Off-topic, but the Australian RBA has this week adopted ‘yield curve control’. This means they will buy ‘whatever it takes’ 3 year bonds to hit a yield target of 0.25%. This seems to send a signal to the markets that the RBA expects weak growth for at least 3 years. The AUD rose a few percent after/since the announcement – which is consistent with a hawkish interpretation – but I suppose some of this could be related to overall market sentiment towards commodity economies. Any thoughts?

  6. Gravatar of Rajat Rajat
    20. March 2020 at 13:23

    Urrgh! Meant (ii) Whatever it takes asset purchases.

  7. Gravatar of anon/portly anon/portly
    20. March 2020 at 13:26

    Since the last post was titled “The Good, the Bad and the Ugly,” you missed your chance to title this one “Duck You Sucker.”

  8. Gravatar of Christian List Christian List
    20. March 2020 at 13:39

    Well, the tweet is a touch right. I think at one point, the Chinese sent more than 30,000 medical staff to Hubei, roughly two-thirds were sent to Wuhan.

    This is something the West is probably not capable of doing.

    The EU is not sending any significant aid to Italy right now, and certainly not any medical staff. If aid comes to Italy right now, it comes from China. The Italians won’t forget who helped them and who didn’t. In the EU, everyone is currently fighting for themselves.

  9. Gravatar of MJ MJ
    20. March 2020 at 13:51

    Seems like there is at least widespread agreement on level targeting inflation, or is this not the case? And if there is agreement on level targeting, what is preventing the Fed from enacting? Would this require congressional approval?

  10. Gravatar of John Arthur John Arthur
    20. March 2020 at 14:18

    For China, they heroically shut down their entire economy to fight the pandemic. The Democracies of East Asia did not, but had a far less intrusive regulatory state that was able to push for quick ramping of testing and mask production. That is why they have done so well
    Western Europe and America had intrusive regulatory states and did not shut down their economy to fight the pandemic. That is why they did worse, but the economic hit to them will not be as bad as China I feel.

    As for the China Model, I think that people misunderstand China. Before widespread global information of how different countries operated, China’s centralized government made them the poorest people on the planet. Once the CCP centralized government started adapting reforms that Democratic countries created, like adopting Taiwan’s land reform or America’s capitalistic structure, they started to boom. China is just more or less copying successful democratic countries, and their ideas. Before those ideas, their model of government was probably the worst in the world, especially when considering their long-standing culture and civilization.

  11. Gravatar of John Arthur John Arthur
    20. March 2020 at 14:28

    The Nowcast by the federal reserve gives us a good look into how the economy is operating, and how bad are the current shutdowns to growth. The Nowcast operates on a quarter by quarter basis, and like their cousins at the GDPNOW at the AtlantaFed, is really accurate at predicting growth, only off by .2-.3% percentage points.
    The nowcast was predicting growth at 2% QonQ this quarter in late Feb, but shaved it to 1.4% QonQ, that is a .6% reduction in roughly 1/3rd a quarter. That means that the US economy is probably contracting 1.8% QonQ, and 7.2Year on Year. Of course, it is probably worse than that, but that gives us a useful data point.

  12. Gravatar of P Burgos P Burgos
    20. March 2020 at 15:04

    Does China use NGDP level targeting? I doubt that they will have a recession.

  13. Gravatar of DF DF
    20. March 2020 at 15:45

    Last decade: China has lifted more people out of poverty than any country in history!

    This decade: China has thrown more people into poverty than any country in history!

  14. Gravatar of ssumner ssumner
    20. March 2020 at 16:07

    Sean, I am much less optimistic.

    Mike, Sorry, I have no ability to forecast interest rates.

    David, What happened to velocity during the two 1970s oil shocks? I think it went up.

    Rajat, The RBA has been very disappointing, actually ever since the new governor took over. The 2% to 3% target range for inflation has been ignored for years.

    MJ, No, it would not require Congressional approval. Indeed the mandate refers to “prices” not inflation, so price level targeting is closer to the mandate.

    John, I don’t trust those forecasts for Q1.

  15. Gravatar of Benjamin Cole Benjamin Cole
    20. March 2020 at 16:49

    Unfortunately, Scott Sumner’s gloomy assessments may be correct.

    Send in the choppers. Send in waves of choppers. Send in fleets of choppers.

    Let me get this straight: By government ukase, we tell people they cannot work, or operate businesses. So people cannot pay the rent, make the house mortgage, make the car payment, medical insurance, keep payroll paid, pay off corporate bonds.

    Some professional economists propose debt bondage for people thrown out of work or whose business have been destroyed. They can borrow the money from the government that has economically destroyed them.

    Some contend the Federal Reserve can print unlimited amounts of money for helicopter drops on Wall Street, but not one penny for people who have been thrown out of work, or, say, restaurant owners thrown into a financial abyss.

    Suppose we lose $9 trillion in GDP output in the next several years, and we save 90,000 lives by the government reaction to COVID-19.

    That is $100 million dollars per life saved.

    You say my math is off? Well, I might have underestimated lost GDP.

    Or, suppose we save 180,000 lives. Then it’s a bargain. Only $50 million dollars per save life.

    When hysteria becomes public policy… and married to orthodox monetary policy… well, two poisons do not make an elixir.

  16. Gravatar of Thaomas Thaomas
    20. March 2020 at 16:59

    What is your theory about why the Fed will not at least meet it’s own inflation target?

  17. Gravatar of Benjamin Cole Benjamin Cole
    20. March 2020 at 17:16

    Add on. Yes, it’s non-PC to say it but the lives saved by shutting down commerce will be those of the elderly. And possibly elderly who are smokers.

    It’s probably too easy a characterization, but we did we just tank the global economy on behalf of elderly smokers?

    How many life years did we save?

  18. Gravatar of P Burgos P Burgos
    20. March 2020 at 18:12

    @B Cole

    The summaries of epidemiological modeling I have seen are that half the population would be infected and at least 1% of those infected would die. So that is around 1.7 million premature deaths if we do nothing. Granted if you are correct about the economic cost, that is still 5 million per life saved.

    Of course, if we do nothing, we will likely get a much higher fatality rate as a whole lot of nurses, doctors, and EMTs will get sick and die and the health system will be totally overwhelmed. I think the case fatality rate in Hubei was closer to 4%, and maybe really higher given the oddities of how China does death certificates. And that isn’t counting excess mortality due to a lack of medical care for things like strokes or heart attacks.

    So it is totally reasonable to presume that it could be more like 2% of the population whose premature deaths will be avoided, which bring the cost down to 1.5 million per life, which seems a lot more reasonable of a cost to bear.

  19. Gravatar of Esteban Esteban
    20. March 2020 at 18:23

    Do you know the Fed’s plan to become technically competent by making sure market inflation expectations don’t deviate too far from 2%?

  20. Gravatar of Esteban Esteban
    20. March 2020 at 18:25

    The economy already has fallen far below the 2% inflation mark. Does the Fed not know about investor market indicators that always tell a most accurate story?

  21. Gravatar of ssumner ssumner
    20. March 2020 at 18:39

    Ben, You said:

    “Some contend the Federal Reserve can print unlimited amounts of money for helicopter drops on Wall Street,”

    Actually, I don’t see anyone proposing that. More lies from Ben?

    Thaomas, An excessively contractionary monetary policy.

  22. Gravatar of Benjamin Cole Benjamin Cole
    20. March 2020 at 18:55

    So here is the plan

    1. Collapse the global economy on behalf of elderly smokers.

    2. Engineer huge helicopter drops for Wall Street to preserve asset values for shareholders and bondholders.

    3. Proposed debt-bondage for employees, employers and taxpayers.

    By the way, Greta Thunburg is sometimes chided for not balancing costs and benefits. We have just made me Thunberg look like a hard-headed bean-counter.

    P Burgos: you are calculating that we may save the premature deaths of 1.8 million elderly smokers? And that will only cost $5 million dollars per life (temporarily) saved?

    Another oddity: the hysterical police-state overreaction shutdown model was first pioneered by… The Communist Party of China. Western nations have mimicked.

    American “libertarians” are reduced to equivocating.

    We would be better off giving $1 million to survivors of every person that dies from COVID-19. That would be $1.8 trillion.

    If financed as a helicopter drop, I would imagine about half of it would end up on Wall Street and half of it being spent. That’s not a bad idea at all.

  23. Gravatar of Benjamin Cole Benjamin Cole
    20. March 2020 at 19:36

    Headline op-ed New York Times:

    “This Is the One Thing That Might Save the World From Financial Collapse”

    Something about the Fed pumping trillions into global dollar-asset markets. It “might” save the world from financial collapse. ‘Might”

    But we will save the lives of elderly smokers!

  24. Gravatar of dtoh dtoh
    20. March 2020 at 19:53

    IMHO, an economic recovery plan should target the individuals and firms who have been affected. One approach would be to do it with a) an expansion unemployment benefits b) carry-back of losses for businesses, c) checks to SMEs, and d) high inflation.

    I agree with Benjamin Cole’s comments on debt bondage. Making small businesses go into debt to make their employees, landlords, creditors, and suppliers whole has to be the second dumbest idea I have ever heard.

    The most absolutely incredibly dumbest idea I have ever heard is Benjamin Cole’s other idea to just let the elderly die. It’s economically flawed, impractical and ethically unpalatable.

  25. Gravatar of Matthias Görgens Matthias Görgens
    20. March 2020 at 20:49

    Gene, that inflation should rise during an adverse supply shock is more a normative statement than always a descriptive one.

  26. Gravatar of Benjamin Cole Benjamin Cole
    20. March 2020 at 20:53


    I am glad I am able to ascend and descend to such extremes, but…

    Children catch COVID-19 and sneeze once, it that. Like a cold, maybe less.

    If elderly smokers die from catching a cold…did they die of old age and self-abuse, or did they die from catching a cold?

    Some 600,000 people die from cancer in the US, every year, much of it caused by carcinogens. Should we collapse the economy to rid the environment of carcinogens?

    Are you proposing we “just let cancer patients die,” and do nothing?

    Nothing about this hysterical over-reaction to COVID-19 makes sense. Yes, hospitals may become overcrowded for a while. Set up tents.

    I no longer want to see anybody criticize Greta Thunberg. We have just proved we are willing to wreck entire economies and financial systems…to save a minute portion of the public, and those largely being elderly smokers.

    BTW, I am 65, the usual circle of friends and family for someone in my age group.

  27. Gravatar of dtoh dtoh
    20. March 2020 at 23:21


    1. Your GDP loss numbers are way off… probably by a factor of at least 4 or 5.

    2. Your fatalities are way off. If nothing is done to slow the disease, the numbers are much higher.

    3.You haven’t subtracted out the medical expense (5 x $200k for 2 weeks in ICU) for the 5 patients who survive for every 1 patient who dies.

    4. You haven’t subtracted anything for lost output from sick workers and dead workers.

    So taking that into account, here’s roughly what you’re proposing. I give you $200k but you have to draw a ticket. 1 in 5 tickets is black. 1 in 20 is red. The rest are white. If you draw a black ticket you have to kill one of your parents. If you draw a red ticket, you have to kill a spouse or a child.

    Who TF would possibly take that bet? No one! Which is why policy makers would never adopt it and even if they did, the vast majority of people are rationale and would stay at home anyway.

  28. Gravatar of Benjamin Cole Benjamin Cole
    21. March 2020 at 00:38


    1. I hope my GDP numbers are way off. However, they may be way off on the optimistic side. You are aware that after 2008, GDP recovered slowly, and on a lower level and trajectory than before. Marcus Nunes and others have pointed to losses of about $1 trillion a year ever since from baseline. That is more than $10 trillion. And we never shut down the economy back then. I am positing a total of $9 trillion in lost GDP. Sounds high, but maybe not.

    But we could do a Greece. Go down 25% and stay down. Why or why not? Well, true we have our own currency. But we must be willing to print money, take on some inflation but we have central bankers in charge. They are talking about targeting 2% inflation. Even now.

    And who will invest anymore knowing that any virus globally can kneecap investors? The new ground rules are we will shut down the works on a cold virus. The fear-mongers rule. What I see on TV should be outlawed, and I am a lifelong free-speech fanatic.

    2. Okay ,say I posit a “do nothing” policy means about 1.8 million US dead from COVID-10 in combination with old age and smoking. I think that is a very high estimate, as death rates are vastly overstated. The Wuhan numbers were based on known cases, and with a large dollop of old male smokers showing up. In any event, “doing nothing” and sending $1 million for each death to survivors would cost $1.8 trillion. That would be the best $1.8 trillion every spent, if it obviated a global and deep recession—from which recovery is uncertain.

    3. Why not 90,000 dead from COVID-19 in the US, even with a do-nothing policy? Maybe that is low. But remember, only about one-half of the population can become infected before the virus starts to trail off, due to herd immunity. Let us say 900,000 die. Then I estimate we are giving up $10 million in GDP for every life saved (generally older smokers).

    3. You realize that 600,000 people will die of cancer this year in the US. And next year, and the year after, and so on. So, call it 2.4 million deaths in the next four years. Cancer deaths will dwarf deaths from COVID-19, and much cancer is caused by carcinogens. So…COVID-19 victims are elevated, but not cancer victims. No national boo-hoo for cancer victims?

    No drawing of tickets to which cancer victims die as we are unwilling to clean up the environment?

    If this virus affected children, I would all in. Shut down the military, take the money and spend it on hospitals, tax all income above $200k a year, live in isolation chambers until the vaccine comes in. No sniveling.

    BTW, it looks like chloroquine works. We just have to accept some death rate for elderly smokers.

  29. Gravatar of Todd Kreider Todd Kreider
    21. March 2020 at 03:15

    The mortality numbers from Italy and Iran as those countries look to be following China’s taper off path looks like the death toll in the U.S. will be on the low side of the estimate – tens of thousands of deaths. At least those are clues.

  30. Gravatar of Christian List Christian List
    21. March 2020 at 04:51


    in your scenario, who treats the cancer patients that you seem to care so much about? You still don’t understand that your way is much worse for the economy, not to mention for the people.

    You shouldn’t put all the blame on Western governments either. It was mostly private companies that went out of business first. Why do you think they did that?

    Imagine a big volcanic eruption, the whole ground is lava, and you blame the people for not continuing to go to work. It’s not the people Ben, it’s the lava. Stop blaming the people.

    You’re one of those people who takes the wrong turn on the highway and then listens to the radio: “Look out, there’s a ghost driver on the freeway!” And your reaction is: “One!? No, hundreds!”

  31. Gravatar of Christian List Christian List
    21. March 2020 at 05:03

    What I see on TV should be outlawed, and I am a lifelong free-speech fanatic.


    this is just gold. I bet you can’t even see the irony in that. Weren’t you the clown who accused others of betraying their principles in the corona crisis? And now you won’t even allow free speech because you don’t like the messages on TV. You aren’t even a clown anymore, you are the entire circus.

  32. Gravatar of Michael Rulle Michael Rulle
    21. March 2020 at 10:03

    Your predictions are scary and believable. It is exasperating. There are too many “experts” out there who KNOW the Fed is out of ammo—-which is itself is a non-sequitur.

    I am sure you have thought of ways to get the Fed to change. Wouldn’t it be great if Christine Romer, Bernanke and Yellen could start agreeing with you and speaking out. Even Paul Krugman, maybe especially Krugman, would help.

    I don’t know what to say—-but it is disheartening to the extreme.

  33. Gravatar of Tom Brown Tom Brown
    21. March 2020 at 10:15

    Italy reports 793 dead in the last 24 hours. The numbers of overnight mortalities there are still increasing. Total dead already exceeds what China is reporting. Soon they will have more cases as well. Their mortality rate is approaching 10%.

    Mortality rate in the US is so far more like 1%.

    Of course the number of dead reported will always lag the number of infections (making the mortality rate look smaller) and the number of infections will always be undercounted (making the mortality rate look higher). We won’t really know until this is all over with.

  34. Gravatar of ssumner ssumner
    21. March 2020 at 11:37

    dtoh, Agree on unemployment comp. and inflation, haven’t studied the other issues.

    Are you sticking with your prediction that Italy will be similar to Hubei, adjusted for age? 793 more deaths today, and the death rate is soaring.

    Todd, Italy’s getting worse.

    Ben, You said:

    “BTW, it looks like chloroquine works.”

    Tell that to the Nigerians that you and Trump poisoned.

  35. Gravatar of agrippa postumus agrippa postumus
    21. March 2020 at 12:08

    nothing is but what it is not.

  36. Gravatar of Benjamin Cole Benjamin Cole
    21. March 2020 at 17:26

    I poisoned Nigerians? I feel bad. I like Nigerians, they seem to be outgoing people.

    I once joked around in an airport for a couple of hours with a Nigerian woman, awaiting our flights.

    I hope it wasn’t her that I poisoned.

    I am surprised though. Nigerians have been taking chloroquine for malaria for generations….

  37. Gravatar of dtoh dtoh
    21. March 2020 at 18:01

    >> I’m no expert, but I think it’s worth taking a look at the recent scientific papers on chloroquine and Covid-19

    Just a thought

  38. Gravatar of dtoh dtoh
    21. March 2020 at 18:39


    You asked;

    “Are you sticking with your prediction that Italy will be similar to Hubei, adjusted for age? 793 more deaths today, and the death rate is soaring.”

    You’re parsing my words like CNN parses the President’s words. Saying “I suspect” is not the same thing as saying I predict.

    That said, with 3x the number of old people, one would roughly expect 3x the number of deaths. So we will see. Hopefully the Italians will get this under control soon.

    As for Cholorquine…

    1. I would look at the scientific data before going to far out on a limb if I were you. The Chinese certainly believe it’s efficacious.

    2. 100 million Nigerians get malaria every year. 300,000 die from it. Do you seriously think 22 cases of Covid-19 and Trump’s comments caused Nigerians to go out and ingest large quantities of Chloroquine?

  39. Gravatar of dtoh dtoh
    22. March 2020 at 00:29

    Benjamin Cole,

    Here is a link to an article (lots of data) supportive of your argument.

  40. Gravatar of Esteban Esteban
    22. March 2020 at 07:36

    The Fed has 2% inflation level target. They just don’t do it.

  41. Gravatar of ssumner ssumner
    22. March 2020 at 10:33

    dtoh, Well, 2.5X as many deaths. And some people under 70 also die.

    Do you still “suspect” that this will occur?

    Not that it matters to me, as the relevant comparison is between Lombardy and Wuhan, or Italy and China.

    You said:

    “I would look at the scientific data before going to far out on a limb if I were you.”

    It was a joke. I have absolutely no opinion on the product, and have never offered any opinion. If you think I have, please cite it. Otherwise, don’t say I’m going out on a limb.

  42. Gravatar of dtoh dtoh
    22. March 2020 at 15:04


    I don’t know if the number is 2.5x or 3x. I used 3x because I suspect the numbers are more skewered if you look at the relative percent of the population that is over 80 years old instead of just the percentage that is over 65. I don’t know the right number might be 2x. It might be 4x.

    Yes I do still suspect (but less strongly) that the age adjusted fatalities will be comparable.

    You accused Trump of killing Nigerians, and also said, “I can’t believe that Nigerians of all people would fall for an American scammer,” I think most people would not read that as joke and also assume that you believe there is no evidence for the efficacy of chloroquine as a Covid 19 treatment.

  43. Gravatar of Lorenzo from Oz Lorenzo from Oz
    24. March 2020 at 20:40

    Well, the Spanish flu was followed by a severe recession, followed by the roaring 20s …

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