ONE DIFFERENT WAY...:

Could this time have been different? (Ezra Klein,, 10/08/2011, Washington Post)

Christina Romer had traveled to Chicago to perform an unpleasant task: she needed to scare her new boss. David Axelrod, Barack Obama's top political adviser, had been very clear about that. He thought the president-elect needed to know exactly what he would be walking into when he took the oath of office in January. But it fell to Romer to deliver the bad news.

So Romer, a preternaturally cheerful economist whose expertise on the Great Depression made her an obvious choice to head the Council of Economic Advisers, gathered her tables and her charts and, on a snowy day in mid-December, sat down to explain to the next President of the United States of America exactly what sort of mess he was inheriting.

Axelrod had warned her against pulling her punches, and so she didn't. It was not a pleasant presentation to sit through. Afterward, Austan Goolsbee, Obama's friend from Chicago and Romer's successor, remarked that "that must be the worst briefing any president-elect has ever had."

But Romer wasn't trying to be alarmist. Her numbers were based, at least in part, on everybody else's numbers: There were models from forecasting firms such as Macroeconomic Advisers and Moody's Analytics. There were preliminary data pouring in from the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Federal Reserve. Romer's predictions were more pessimistic than the consensus, but not by much.

By that point, the shape of the crisis was clear: The housing bubble had burst, and it was taking the banks that held the loans, and the households that did the borrowing, down with it. Romer estimated that the damage would be about $2 trillion over the next two years and recommended a $1.2 trillion stimulus plan. The political team balked at that price tag, but with the support of Larry Summers, the former Treasury secretary who would soon lead the National Economic Council, she persuaded the administration to support an $800 billion plan. [...]

[T]he Cassandras who look, in retrospect, the most prophetic are Carmen Reinhart and Ken Rogoff. In 2008, the two economists were about to publish "This Time Is Different," their fantastically well-timed study of nine centuries of financial crises. In their view, the administration wasn't being just a bit optimistic. It was being wildly, tragically optimistic.

That was the dark joke of the book's title. Everyone always thinks this time will be different: The bubble won't burst because this time, tulips won't lose their value, or housing is a unique asset, or sophisticated derivatives really do eliminate risk. Once it bursts, they think their economy will quickly clamber out of the ditch because their workers are smarter and tougher, and their policymakers are wiser and more experienced. But it almost never does. [...]

The basic thesis of "This Time Is Different" is that financial crises are not like normal recessions. Typically, a recession results from high interest rates or fluctuations in the business cycle, and it corrects itself relatively quickly: Either the Federal Reserve lowers rates, or consumers get back to spending, or both.

But financial crises tend to include a substantial amount of private debt. When the market turns, this "overhang" of debt acts as a boot on the throat of the recovery. People don't take advantage of low interest rates to buy a new house because their first order of business is paying down credit cards and keeping up on the mortgage.

In subsequent research with her husband, Vincent Reinhart, Carmen Reinhart looked at the recoveries following 15 post-World War II financial crises. The results were ugly. Forget the catch-up growth of 4 or 5 percent that so many anticipated. Average growth rates were a full percentage point lower in the decade after the crisis than in the one before.

Perhaps as a result, in 10 of the 15 crises studied, unemployment simply never -- and the Reinharts don't mean "never in the years we studied," they mean never ever -- returned to its pre-crisis lows. In 90 percent of the cases in which housing-price data were available, prices were lower 10 years after the crash than they were the year before it.

...would have been to just take that trillion dollars and retire close to half of all the consumer debt in the country.



Posted by oj at October 10, 2011 6:37 PM
Tweet   

Follow @brothersjudd