I agree with Paul Krugman on the early 80s but disagree with his characterization of the current slump.
The early-80s slump was brought on by a huge rise in the Fed funds rate, which left lots of room for cuts, and was driven by a deep slump in housing, which meant that there was lots of pent-up demand when rates fell again. The 2007-? slump was brought on by the bursting of a housing and debt bubble, and left the Fed largely pushing on a string.
So, on some level it depends on what you mean by “bursting of the bubble.” However, if you were just talking about a collapse in housing prices that left US households underwater and unable to obtain credit then I think that’s wrong.
A Minsky moment could have proceeded in the United States without a downturn of this magnitude, even with the Funds rate already so low.
What would have happened – and what was happening from 2006 – late 2007 was that the dollar was falling fast enough to outweigh the collapse in construction.
And, of course that would have been markets at work perfectly since it would have driven down US consumption and up US tradable output. There would have been a general decline in living standards but little rise in out-and-out unemployment.
Instead, we had a global financial crisis that resulting in a soaring dollar, collapsing demand around the world and the inability for the US to pay down its external debt for lack of a channel.
Thus the (too) slow process of trading private debt for public debt began.
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Friday ~ January 27th, 2012 at 12:32 pm
rjs
you’re both wrong…it was OPEC that done it…
Friday ~ January 27th, 2012 at 5:01 pm
Lord
Lacking the collateral as well as the desire to obtain credit. You seem to think the Fed could have prevented housing prices from falling, which is what would have been necessary to prevent a financial crisis. With enough inflation it may have increased wages enough to pay for that debt but it would have been difficult to do so so quickly to accomplish that. Without that prices fall and debts go bad. It is hard to see how there could not have been a financial crisis with so much debt going so bad. I agree that a lower dollar was a step in the right direction, but probably not enough without inflation to raise those wages to support the debt or buying of mortgage securities on such a fast and large enough scale to lower the debt service against income by half and prevent prices from falling (which would have kept the dollar falling).
Friday ~ January 27th, 2012 at 5:31 pm
Axel
“Instead, we had a global financial crisis that resulting in a soaring dollar, collapsing demand around the world and the inability for the US to pay down its external debt for lack of a channel.”
Can’t there be any (causal) link between US real estate bubble burst and the global financial crisis ?
So, what are the causes of the financial crisis in your opinion?
(hint: answer could mention unsustainable credit growth, subprime, real estate price decline, shadow banking system and financial leverage, monetary policy, emerging economies sticking to a $ peg and savings glut)
Or may be you think financial crisis are without cause ?