The Housing Chronicles Blog: Economists debate depth of downturn

Thursday, August 7, 2008

Economists debate depth of downturn

A v-shaped recession? U-shaped? How bad will it be? Will it turn into a depression? At this point, a depression is unlikely, at least according to a group of economists contacted for a story in the New York Times (via

Even if the economy continues to deteriorate, economists generally agree that the United States is not heading for another Great Depression. Not only are the conditions far less dire, eight economists said in interviews, but the government is playing a heightened role in trying to cushion the impact of the housing downturn, losses at financial institutions and rising unemployment.

“The government is larger now and it acts as an anchor,” said Richard Parker, senior fellow at the Shorenstein Center at Harvard. “During the Great Depression, the government had neither the means nor the capability to serve as a backstop.”

But the economists — who range from academics to policy researchers, liberals to conservatives — disagreed about just how bad this economic slowdown, led by the worst housing slump since the Depression, could be...

Most of the economists who were interviewed blamed Alan Greenspan, the chairman of the Federal Reserve from 1987 to 2006, for his unwillingness to clamp down on either the technology stock bubble or the run-up in housing prices.

“The Fed isn’t the whole story, but it’s a big part of it,” said Gerald P. O’Driscoll Jr., who was vice president of the Federal Reserve Bank of Dallas from 1982 to 1994 and is now a senior fellow at the Cato Institute, a libertarian research organization in Washington. “It allowed these absolutely insane bubbles to happen. The lesson is, you can’t let these bubbles continue unabated with no policy making.”

But the economists said others were to blame, too: investors, banks and rating agencies, as well as the current chairman of the Federal Reserve, Ben S. Bernanke, and the Clinton and Bush administrations...

The economy’s woes might have been preventable, the economists all agreed, if the actors involved had made more realistic assumptions about the future. And about the laws of gravity.

“People are way too willing to extrapolate from history,” said Jan Hatzius, chief domestic economist at Goldman Sachs. “If it’s 2005, you can’t look at a 40-year run of data and say, ‘It must be a law of nature that housing prices never fall.’ ”...

All the economists agreed that regulators should have been looking more closely at Fannie and Freddie.

“Everybody turned a blind eye,” Mr. O’Driscoll of the Cato Institute said. “The Fed deliberately and consciously refused to regulate the mortgage industry like it was supposed to have done. I’m not a big fan of government regulation, but sometimes the government can do something to help — and in those cases, it has to.”

Ah, the power of 20/20 hindsight.

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