I write to you from the UK where I’ve been talking a lot about the policy responses to the global downturn, known in the US as the great recession. In a word, I’d say that many in the political, economic, and investment community are still trying to figure out why it’s been so difficult for almost any of the advanced economies to shake the residual gravitational pull of those bad old days and just get back to a real, bona fide recovery, where output gaps close and we make consistent progress toward full employment.
Yes, European and US austerity are excellent candidates for answering that question, but that just raises the question of why policy makers keep getting this wrong. And then there’s the fact that central banks, especially the US Fed, but also the ECB, have been moderately to aggressively applying stimulative monetary policy. And yet, here we remain.
At any rate, I’ve got to run and can’t get into this too much right now—more to come, for sure. But I did want to note that the IMF recently hosted this high-powered panel on the macroeconomics of crises. Larry Summers’ comments, which start a bit before minute 46, and have deservedly gotten a fair bit of attention, are very much in the spirit of this question.
Though he does so in less than plain language, Summers asks why, after such a deep recession with such a robust response, particularly in terms of reflating credit markets, do we remain in such a slog? His answer—not unfamiliar—is that the interest rate is bound by zero and the equilibrium rate—the one needed to close the gaps—is well below that.
And yet, neither fiscal nor monetary authorities seem willing to try to get us there.
Like I said, more to come, but take a listen.