my point here is not to parse the details of economic policy over the last seven years. Instead, it is to say that I agree with Furman (and many others) on a fundamental point: The US and the world economy was in some danger of a true meltdown in September 2008. Here are a few of the figures I used to make this point in lectures, some of which overlap with Furman’s figures. The underlying purpose of these kinds of figures is to show the enormous size and abruptness of the events of 2008 and early 2009–and in that way to make a prima facie case that the US economy was in severe danger at that time.
Taylor highlights the fall in house prices, the drop in bank lending, and the rise in the TED spread. However, if you look at just these indicators, the crisis ended relatively quickly. But employment just kept dropping (long after the official end of the recession). So it looks to me like the policies had a neutron bomb effect. The buildings (banks) were left standing but the people (workers) died.
As Taylor says, these are points that are not going to be settled. In my terminology, there are many frameworks that can be made consistent with observed economic performance. Some of these frameworks will be consistent with policies having made a positive difference, and others will not.
It was just a regular bomb.
https://research.stlouisfed.org/fred2/graph/?g=1Smm
https://research.stlouisfed.org/fred2/graph/?g=1SmI
The recession officially ened in late 2009 and the unemployment hit peak 2010. (With some census offsetting.) So it is impossible to believe but the job market bounced back quicker from the recession than either the S&L or Dotcom bust recessions when the unemployment hit 2 or 3 year after the recession.
Several other Points:
1) Deflation was much bigger 2009 than shown because CPI only uses rents in the basket (and higher in 2001 – 2006). So a lot of families are better off today than under the 2003 – 2006 Bush boom when people over working themselves to high payment and early grave.
2) The secondary drag on employment (after construction) was public payrolls. With Obama and Republican Governors, Obama will be the only President whose term showed a decline in public payrolls.
3) The big question is the US labor supply forever smaller portion and how will companies deal with a sudden skilled labor shortage.
The events of 2008 were a financial liquidation, similar to that of LTCM but on a much larger scale. One difference is the “losers” in 2008 included consumers who owned real estate that fell in price – the LTCM collapse only directly hurt those invested in or who had pledged capital to LTCM. With so many more “losers” in 2008 the financial crisis evolved into an economic disruption.
The real-estate bubble greatly distorted the economy. The US consumer borrowing against home-equity and the appeal of purchasing real estate that always appreciated in price created a surge of economic activity. Now that stimulus is gone. For even though the Case-Shiller index shows a bounce in home prices the consumer enthusiasm is lacking. It’s not the same this time and it won’t be for a long while. Consider that the Case-Shiller index shows home prices still above the long-term trend, suggesting that future appreciation in home equity will be muted, if not negative!
The government response and central bank intervention to 2008 has left the misallocation of capital unresolved (contrast that to LTCM where positions were closed and the fund liquidated). In particular the government’s response has artificially inflated asset prices. This has the direct impact of lowering future returns on equity and diminishing real economic growth.
What should have happened? The best answer is the government should not have allowed the distortion to have occurred in the first place as there is no easy way to fix a problem of this size. What we do know is the actions taken in 2008 and 2009 were sufficient to stop the financial collapse but they have left the economy in a less than optimal condition.
You had me, and even had me thinking “I don’t have to say it this time.” But then you said something about us knowing something.
I do not agree. The economy was still getting a good deal of Boomer leveraging in the 00’s. Now the Boomers are gone. That means the economy is indeed better than you think. The failure to mention the great Boomer deleveraging by people is BAD. Either you get it or you don’t. In a time of free flowing capital and government retreat in terms of investment, demographics mean even more.
To me it is not that hard. The economy had a heart attack in 2008. Everything stopped. Panic. People generally honored commitments they had made, but would not make any long term commitments. First, in 2009 people went back to buying norma things, like TVs. Then by 2010, people got back to buying cars.
But he government decided it needed rules to keep this from happening again. Dodd Frank happened. Tied hand of banks. Bank regulators and DOJ decided banks must be punished. Banks reacted predictable, restricting credit to economy. Safety net was expanded, so incentives to work were reduced. So labor force has not expanded. Additional regulation on business let to stall in productivity. Economic growth was much less than the normal bouncy back from a deep recession.
What is the mystery?
Another point in above comment. From Coyote Blog,
“I would argue there has been a fundamental shift in the economy over the last 4 years, …… I would summarize the sift as follows:
10 years ago all of my company’s free capacity was used to pursue growth opportunities and refine operations. Over the last 4 years or so all of our free capacity has been spent solely on compliance.”
That really helps productivity.