How Likely Is Another Great Recession?
If you only have time for one post today, make it David Beckworth's very important post showing that the Fed is edging in the direction of level targeting, indeed something not too far away from NGDPLT.
Tyler Cowen recently linked to my previous post:
5. Is another Great Recession just around the corner? Well, is it?
I'm not sure what qualifies as a "Great Recession". I suppose 1893-97, the 1930s, the 1980-82 double dip, and 2007-09 are the most plausible candidates, at least since 1860. So perhaps once every 40 years or so.
So let's suppose I'm right that the "housing bubble" did not cause the Great Recession. In that case, the fact that we are having another housing price boom is not particularly worrisome. It doesn't increase the odds of another Great Recession. So let's say the odds are roughly 1 in 10 that another Great Recession will occur in the next 4 years, based on past performance.
Can't we forecast better? I'm not sure, as the additional information we have cuts both ways.
- Perhaps the slowness of the recovery makes it more likely that the expansion has more room to run. Or perhaps we've learned something from the previous debacle. Australia hasn't had a recession in 27 years; no reason we can't beat the record of the previous US expansion, which was 10 years.
- On the other hand, big recessions are more likely at the zero bound, and we are likely to hit the zero bound again in the next recession. So perhaps another Great Recession is now more likely than usual.
If I had to guess, I'd say point #1 is slightly more persuasive than point #2, but I don't have a high degree of confidence. Where I am confident is in stating that the housing bubble did not cause the Great Recession, and thus, the current housing price boom (very similar to 2001-06) does not make another Great Recession highly likely in the near future. Unless I'm mistaken, the bubble-mongers should be predicting another Great Recession in the near future.
PS. I am amused to see commenters say, "It wasn't the price bubble, it was blah, blah, blah." Deep down they know that the bubble theory is wrong, and they are looking for a way out. Unfortunately, that's rewriting history. At the time, people were saying the problem was the price bubble. They were saying that those prices were obviously unsustainable. (Even though Canada, Australia, Britain, New Zealand, etc., did sustain them.) Kevin Erdmann has convincingly shown this "unsustainable" view is wrong, and more importantly, he did so long before prices had recovered. I'd have more sympathy for the other side if in 2012 they had not said "prices were obviously crazy in 2006," but rather had said, "Prices in 2006 might be rational at a given interest rate, and hence if rates stay low and rents keep rising I would expect prices get right back up to bubble levels."
PPS. My opponents are like astrologers. When I say to an astrologer, "OK, lets take data on a million people, based on the sign they were born under, and correlate it with personality data. It's an easy test." They respond, "It's more complicated than that, there's all sorts of other factors to consider." Well I'm a Libra, and we don't believe in those sorts of excuses.
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Comments (7)
Same with Canada and UK, though excesses are not as high there as in Australia.I agree that the higher interest rates popped the bubble in the US. Now, guess what, the still near record low global rates along with trillions in QE have kept the Aussie bubble and the others alive so far. Significant parts of the PBoC's credit expansion games flow almost directly to Australia.So I actually agree with you that interest rates will be killing them ultimately - or simply time. A bubble only knows two conditions, after all: expansion and bursting. They cann't expand for ever. But blaming interest rates as the culprit for killing bubl..., sorry, supposedly "suatainable", i.e. "healthy" real estate markets is ridiculous. Too much debt (credit bubble) is the cause, higher interest rates are just the catalyst.
While I do not question the usefulness of these concepts for guessing what the FED may do next, that's about their only practical and use.
Read James Montier's outstanding pieces on the "idolatry of interest rates". I have linked the PDFs elsewhere yesterday, but a quick Google search will easily lead you to them anyway.
so here again, corrected:GDP is in itself a deeply flawed and highly questionable concept as even its creator admitted. To specifically target it strikes me as just another variant of ivory tower voodoo. Much like most of the other variables that central bankers and most economists are so fond of, but which may not even exist in reality, like this ominous "natural rate of interest". A non-observable, not quantifyable and hence pretty arbitrarily defined level of interest rates that is supposed to do all sorts of wonders to the economy.While I do not question the usefulness of these concepts for guessing what the FED may do next, that's just about their only practical use.
Read James Montier's outstanding pieces on the "idolatry of interest rates". I have linked the PDFs elsewhere yesterday, but a quick Google search will easily lead you to them anyway. I wonder whether the world would not be much better off, economically , in the long run, if central banks stopped tampering with interest rates all the time. But of course, their actual, major task has nothing to do with the well-being of society as a whole and everything to do with keeping governments afloat and safeguarding the interests of the super rich and the big commercial banks.I find it stunning that so many economists don't even get that basic fact .