Scott Sumner correctly sees Kocherlakota as supporting Sumner’s view of Fed policy during the financial crisis and its aftermath. Kocherlakota says,
I use the public record to document that, as of late 2009, the FOMC felt that it would be appropriate to use its monetary policy tools to foster a relatively slow recovery in both prices and employment. (The recovery that actually unfolded was slower than the FOMC intended in terms of employment, but close to the FOMC’s intentions in terms of inflation.) I argue that the FOMC’s guarded response can be traced back to its pre-2008 policy framework—that is, to the Taylor Rule. Indeed, because of this baseline “normal” policy framework, the FOMC and many outside observers actually saw the Committee as pursuing a highly accommodative policy.
Read the entire speech, or at least read Sumner’s excerpts from it.
Kocherlakota has lobbed a grenade into the macro establishment’s room. If he (and Sumner) are correct, then history will not be kind either to the Bernanke Fed or to the Taylor rule.
Much as I would love to see those icons brought down, for the moment I am going to stick to my view that the Fed did not set the course for the economy.
I tend to agree with you the Fed is not all powerful here. I think the housing bubble more as a socio-economic reality that American families were over-working themselves to higher monthly payment and an early grave. (Notice the labor participation for 25 – 60 has dropped.) It was a bubble hard to break and if Lehmnan did not cause the Financial Crisis then it was Merrill Lynch or AIG. And some rates changes would have not made much of a difference here.
I tend to think the main thing the US government did on the bailouts was DRAW a distinct bottom on who were winners and losers. (Realize Lehman, Merrill, WaMu, Wachovia all disappeared so there were losers.) So the bailout worked because it was fast, and stopped the panic versus the 1929 – 1932 panics. My reading of The Great Depression was that every time the economy stabilized, another group of banks failed and induced panic.
One of the kaleidescopes I think is whether you think The Fed bears responsibility for letting Lehman go, and then the subesequent panic and/or individual bankruptcies. I do. If one believes they have control over the “rescue” and recovery, I’m not sure how one rationalizes not having control over the runup and the crunch.
Why did they choose a slow recovery? I never saw a reason.
What if slow recovery was in the cards and there was nothing the Fed could do about it? In reality, real wages or family incomes did not increase after 2000 so my simple take is the wage perference for US workers compared to foreign worked disappeared and the housing bubble paper over that reality. (Now foreign workers have caught up we are seeing signs of improvements in 2015.)
Historically speaking the US economy appears to have 20 – 30 years good growth and then a 8 – 10 years ‘recessionary times.’ There was the 1870 – 1893, 1900 – 1929, 1948 – 1973 and 1983 – 2006 growth periods followed by recessionary times of 1893 – 1898, The Great Depression, 1974 – 1982 Stagflation and the 2009 – 2014 Great Recession.
I tend to agree, but the speaker insinuates it was some kind of choice.
I agree to an extent they are not all powerful but neither powerless but would have had to act earlier in terms of limiting bad lending rather than believe interest rates were sufficient. They couldn’t inflate incomes fast enough to sustain that debt.