How likely is another Great Recession?

If you only have time for one post today, make it David Beckworth’s very important post showing that the Fed is edging in the direction of level targeting, indeed something not too far away from NGDPLT.

Tyler Cowen recently linked to my previous post:

5. Is another Great Recession just around the corner?  Well, is it?

I’m not sure what qualifies as a “Great Recession”.  I suppose 1893-97, the 1930s, the 1980-82 double dip, and 2007-09 are the most plausible candidates, at least since 1860.  So perhaps once every 40 years or so.

So let’s suppose I’m right that the “housing bubble” did not cause the Great Recession.  In that case, the fact that we are having another housing price boom is not particularly worrisome.  It doesn’t increase the odds of another Great Recession.  So let’s say the odds are roughly 1 in 10 that another Great Recession will occur in the next 4 years, based on past performance.

Can’t we forecast better?  I’m not sure, as the additional information we have cuts both ways.

1. Perhaps the slowness of the recovery makes it more likely that the expansion has more room to run.  Or perhaps we’ve learned something from the previous debacle.  Australia hasn’t had a recession in 27 years; no reason we can’t beat the record of the previous US expansion, which was 10 years.

2.  On the other hand, big recessions are more likely at the zero bound and we are likely to hit the zero bound again in the next recession.  So perhaps another Great Recession is now more likely than usual.

If I had to guess, I’d say point #1 is slightly more persuasive than point #2, but I don’t have a high degree of confidence.  Where I am confident is in stating that the housing bubble did not cause the Great Recession, and thus the current housing price boom (very similar to 2001-06), does not make another Great Recession highly likely in the near future.  Unless I’m mistaken, the bubble-mongers should be predicting another Great Recession in the near future.

PS.  I am amused to see commenters say, “it wasn’t the price bubble, it was blah, blah, blah.”  Deep down they know that the bubble theory is wrong, and they are looking for a way out.  Unfortunately, that’s rewriting history.  At the time, people were saying the problem was the price bubble.  They were saying that those prices were obviously unsustainable.  (Even though Canada, Australia, Britain, New Zealand, etc., did sustain them.) Kevin Erdmann has convincingly shown this “unsustainable” view is wrong, and more importantly he did so long before prices had recovered.  I’d have more sympathy for the other side if in 2012 they had not said “prices were obviously crazy in 2006”, but rather had said, “prices in 2006 might be rational at a given interest rate, and hence if rates stay low and rents keep rising I would expect prices get right back up to bubble levels.”

PPS.  My opponents are like astrologers.  When I say to an astrologer, “OK, lets take data on a million people, based on the sign they were born under, and correlate it with personality data.  It’s an easy test.”  They respond. “It’s more complicated than that, there’s all sorts of other factors to consider.”  Well I’m a Libra, and we don’t believe in those sorts of excuses.



10 Responses to “How likely is another Great Recession?”

  1. Gravatar of Tom Brown Tom Brown
    1. March 2018 at 09:53

    “Well I’m a Libra, and we don’t believe in those sorts of excuses.” 😂

  2. Gravatar of Rick G Rick G
    1. March 2018 at 10:32

    Just because big housing market fluctuations shouldn’t be causally related to recessions under good monetary policy doesn’t mean they aren’t caudually related under bad monetary policy. If the fed reaction function is dumb, then yes a housing bubble does make it more likely that we will have a recession. So the only question is: is the fed reaction function smarter than in 2008?

  3. Gravatar of collin collin
    1. March 2018 at 11:42

    Of course the slowness of the recovery makes a significant difference in the next Recession timing. What was the longest Growth period in the US? Well it 1990 – 2000 we did not have a recession and really the unemployment did not reach a high point until summer of 1992. (FYI Poli Sci Prez. models should use changes in unemployment not economic growth rates on reelection of incumbents.) Otherwise, saying it was just the housing bubble prices alone does not explain the entire Great Recession. It seems better include the quality of Mortgage debt grew worse and banks ignored their Risk departments. So not only were the houses underwater but also the banks balance sheet. Note the number of new houses is still nowhere 2005 levels and consumer & bank balance sheet still seem relatively in tact as the US single home mortgage levels are growing at 3% clip the last several years. (Note January home sales are down.)

    Anyway, I am still on record that the next recession is Fed induced variety like 1957ish levels. Not historical big but we feel it for 12 – 18 months. (Given Trump steel tariffs he is begging for higher inflation.)

  4. Gravatar of ssumner ssumner
    1. March 2018 at 12:13

    Rick, What makes you think the rise in house prices caused the subsequent decline? Are you predicting a house price collapse over the next few years?

    Collin, The point is that people who blamed it on the housing price bubble were wrong. Other theories such as too much homebuilding were also wrong.

  5. Gravatar of Christian List Christian List
    1. March 2018 at 15:39

    A normal recession seems likely, simply because the US seems to have a normal recession about every ten years. A Great Recession seems to occur when the Fed is reacting incorrectly to a normal recession. I assume this makes a Great Recession hard to predict.

  6. Gravatar of Dan W. Dan W.
    2. March 2018 at 13:57


    You yourself know high prices are not the problem, but rather the debt and debt financing incurred to support the high prices.

    When assets are traded on a cash basis there may be a winner and a loser but on net there is no aggregate change in wealth. When debt is used to borrow money to bid up prices, then wealth can be destroyed. For when a person borrows to bid on an asset, and overpays, the subsequent decline leaves the person unable to sell the asset to pay off the debt. And if the person’s income was exaggerated to acquire the loan, then the reversal in price proves the person does not have the income to make debt payments.

    The loan goes bad and, when the risk of the loan is incorrectly priced, this catches many off guard and leaves many afraid to be left holding the bag. Furthermore, the decline in confidence in loan quality freezes financial markets. No one wants to be stuck with the rotten potatoes of bad debt, so the market for anything but secure assets dries up.

    Capitalism is a confidence game. Your monetary theories are well and good but they are inadequate if they dismiss the important of financial integrity, and the consequences of that integrity being shattered.

  7. Gravatar of ssumner ssumner
    3. March 2018 at 15:27

    Dan, Yes, I know that high asset prices are not a problem, it’s the rest of the world that was wrong about 2006. They are the ones who said a crash was inevitable, because it was a “bubble”.

  8. Gravatar of Bob Murphy Bob Murphy
    3. March 2018 at 17:42

    Scott, a few points:

    1) Yes I think another crash is coming.

    2) In 2012 I was saying, “House prices in 2006 were crazy, and now the Fed is blowing up more bubbles.” I don’t see why that’s problematic.

    3) Are you saying that people who think home prices were overvalued in 2006 must also be committed to the proposition that the correct rate of appreciation in home prices is 0%?

    4) Suppose there’s a big crash within the next 3 years. You’re not going to say, “Holy cow everybody, I apologize for being so snarky.” So all of this blogging seems like heads you win, tails the bubble-mongers lose.

  9. Gravatar of ssumner ssumner
    3. March 2018 at 20:43

    Bob, At least you are consistent. I can respect that. It’s the people who said 2006 was a bubble but don’t say 2018 is a bubble that have me puzzled.

    Why aren’t all these people predicting another crash?

    I’ve consistently said that I am unable to predict recessions; I don’t think anyone can. The burden of proof is on those who think they have a “model”. So what does your model say now?

  10. Gravatar of Scott Sumner Slips Scott Sumner Slips
    5. March 2018 at 16:58

    […] to know if they think another crash is coming? (My answer is “yes,” and Scott at least concedes I am being consistent–he probably thinks I’m […]

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