Friday, October 26, 2012

This time IS different

If we take economists Guillermo Calvo, Fabrizio Coricelli, and Pablo Ottonello's word for it;
The evidence reported in [our] paper suggests that a sharp dosage of price inflation for a limited period of time may go a long way to restoring full employment after financial crises, albeit at the cost of lower real wages. One should note, however, that in the average high-inflation EM [emerging market] episode covered by our sample, inflation spiked up at the beginning of those episodes but later subsided, and did not result in permanently higher inflation.
To which, Bentley's Scott Sumner, has the obvious reaction;
So financial crises tend to lead to slow recoveries only when accompanied by tight money.  One more nail in the conventional wisdom about the recent recession.
That conventional wisdom being, that this isn't a recession caused by overly tight monetary policy.  Most notably, seemingly, promoted by Carmen Reinhart and Ken Rogoff.

Five years after the onset of the 2007 subprime financial crisis:
  • GDP per capita in the US remains below its initial level;
  • Unemployment, although down from its peak, is still hovering near 8%.
Rather than the V-shaped recovery that is typical of most postwar recessions, growth has been slow and halting.
Based on our research (Reinhart and Rogoff, 2009), this disappointing performance should not be surprising. We have presented evidence that recessions that are associated with a systemic banking crisis tend to be deep and protracted, and that this pattern is seen in historical and cross-country comparisons. 
Which circularity in reasoning should be obvious (pace Prof. Sumner).

And, even worse news for Housing Cause Denialists (they know who they are, but prominently include Paul Krugman) who have been at pains to deny that without the policy interventions in the housing market, from the early 1990s (the GSE Act of 1992, HUD's Best Practices Initiative of 1994), none of this would have happened.

Reinhart and Rogoff, after all, do call it the subprime financial crisis, and subprime was a tiny sliver of the overall mortgage market before the federal government launched its assault on traditional home lending.  So, the stage should never have been set for the tight monetary policy that Prof. Sumner has been railing against since 2008.

No comments:

Post a Comment