The Housing Chronicles Blog: So how does this recession compare to others?

Sunday, December 7, 2008

So how does this recession compare to others?

"The Economist" has an interesting article entitled "A thoroughly modern recession," and argues that although the current recession is sure to be the longest since WWII, since high interest rates weren't the culprit it has more in common with the downturns of the early 1990s and 2001 than the one largely enabled by the Fed hiking interest rates in the early 1980s. From the article:

Though it may end up as one of the longest recessions, if not the longest, of the post-war era, the current episode still seems to have more in common with the mild downturns of 1990-91 and 2001 than the more wrenching affairs that came before.

As Robert Hall, an economist at Stanford University, notes, earlier recessions, like that of the early 1980s, were caused by the Fed raising interest rates sharply to squelch emerging inflation and holding them high even once the recession began. In the current and past two recessions, interest rates never got very high and the Fed actually began to lower them before the contraction began. In a paper written a year ago
*, Mr Hall described such apparently “causeless” recessions as perplexing...

The paradoxical truth may be that the less volatile business cycle (until recently) encouraged investors to take bigger risks with borrowed money, driving asset prices too high and ending in damaging busts. Some would still blame the Fed, for not deflating asset bubbles with higher interest rates.

In a recent speech, Donald Kohn, the vice-chairman of the Fed, rejected that charge but pleaded guilty to a lesser one: by better controlling inflation, central banks helped moderate the business cycle, which bred investor complacency. They thus “may have accidentally contributed to the current crisis.” The Fed may no longer be the prime suspect for causing recessions; but it is still an accessory to the crime.

Click here for full story.

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