Free Markets, Free People

Did the Fed cause the recession to be bigger and deeper?

That’s what a former member of the Fed claims.  James Pethokoukis has the story:

But a book by Robert Hetzel, a senior economist at Federal Reserve Bank of Richmond, says it wasn’t Bushonomics or greedy bankers or broken markets that caused the Great Recession. In The Great Recession: Market Failure or Policy Failure, Hetzel pins the blame squarely on the Federal Reserve and Team Bernanke.

Oh, the downturn first started with “correction of an excess in the housing stock and a sharp increase in energy prices” — the housing bust and the oil shock. Indeed, those two things were enough, in Hetzel’s view, to cause a “moderate recession” beginning in December 2007.

But only a moderate one. It was the Fed’s monetary policy miscues after the downturn began that turned a run-of-the-mill downturn into a once-in-a century disaster.

Said Hetzel:

A moderate recession became a major recession in summer 2008 when the [Federal Open Market Committee] ceased lowering the federal funds rate while the economy deteriorated. The central empirical fact of the 2008-2009 recession is that the severe declines in output that in appeared in the [second quarter of 2008 and the first quarter of 2009] … had already been locked in by summer 2008.

Anyone.  What has been blamed for the “Great Depression”?

The irony here, of course, is that Federal Reserve Chairman Ben Bernanke is a much-noted student of the Great Depression and of the work of the late Milton Friedman whose landmark book, A Monetary History of the United States, pinned the blame for the Great Depression on a too tight Fed. As Bernanke told Friedman and his co-author, Anna Schwartz, on the economist’s 90th birthday a decade ago, ”You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

But if Hetzel is right, the Fed blew it again.

Irony?  Yeah, supreme irony.  Unfortunately, the irony impaired left won’t get it (or choose not to) because it isn’t at all as useful politically in “blame the GOP” statements like Obama is fond of:

But I just want to point out that we tried their theory for almost 10 years … and it culminated in a crisis because there weren’t enough regulations on Wall Street and they could make reckless bets with other people’s money that resulted in this financial crisis, and you had to foot the bill. So that’s where their theory turned out.

As an aside, speaking of reckless bets with other people’s money, see “Nevada’s epic “green energy” failure” below.  The bets this administration has made in those sorts of areas can be characterized as nothing less that “reckless”. 

However, more to the point, if this theory by Hetzel were to be more commonly known, it would destroy the meme that it was 10 years of Republican economic malfeasance, loose regulation and Wall Street greed which caused the downturn.  And of course anyone who has taken the time to actually look into the downturn already knows that’s not the case.  But putting the blame on the Fed, where it may indeed belong, would remove a key talking point for Obama.

So I look for this theory to be roundly ignored by the left.


Twitter: @McQandO

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42 Responses to Did the Fed cause the recession to be bigger and deeper?

  • “it would destroy the meme that it was 10 years of Republican economic malfeasance, loose regulation and Wall Street greed which caused the downturn. ”
    Hell, ya can’t punish the rich if they didn’t do anything wrong…..well, you can….but it’s even better when you can blame them first.

  • We have always had depressions and recessions in all modern economies.
    There was never a GREAT depression until there were vast powers to manipulate the economy…vested in the name of “controlling” the pain of a downturn.
    Compare and contrast the sharp downturn at the dawn of the 1920s, and the “do no harm” response by Coolidge to the Great Depression which resulted only a little more than a decade later from the machinations of the FDR “brights”.

  • Left-wing economists generally agree with this scenario—the only point of disagreement with the Right is the cure.

    • Well yes, but spoiled children believe in Santa Claus and lefties are still trying to spend, regulate, borrow, and tax their way into prosperity.

      • I seem to remember the surplus of the Clinton years. I also seem to remember going to war and cutting taxes.I also seem to remember that tax cuts create jobs.I disagree with everything about this article. The right has taken a country with a surplus gave it away to the rich and now because they have squandered BILLIONS on protecting their corporate Masters and have sold the American People down the river.They whine at first that the will be a QE and then cry when they don’t. The financial “experts have been crying wolf for the last three years. The only thing I see is a 40% increase in the stock market, unemployment is down,Osama Bin Laden is dead and Obama is going to win by a landslide. Obama 2012!!! Power to the 99%

    • Uh, no they don’t … but don’t stop that from keeping you from claiming that’s so. Btw, who is it that’s asking to have the Fed audited? And who is resisting that call?

      • The “left” economists work off a static model, which like their postmodern basis, doesn’t model reality like a supply-side/dynamic model does.
        The dynamic model requires a lot more brainpower to comprehend; the static model merely requires barfing back the statist  talking points.

    • Much of the left doesn’t know what the left-wing economists say, then, because the overwhelming majority of the left blames the recession on Bush and the big, bad banks.

    • Yeah. The left believes in homeopathic economics; too much government is cured by more government. The right believes in less (minimal) government, a policy which has produced  economic growth for millenia.

  • I like to bash the Fed as much as any Libertarian, but I am highly doubtful of this scenario. I don’t think the policy was very restrictive, and not for very long. At any rate the main culprit for deepening this recession, is to me, not monetary policy but fiscal policy. The regime uncertainty introduced by Team Obama as well as talking down business, energy, and profits are what made this a depression instead of a recession.

    • I certainly think that Team Obama’s policies has kept it there, but I’m not so sure it’s what got it there. I think there’s some validity to the Fed scenario.

      • What…?, the Fed pumping money into the economy, money that had no better place to go other than the RE market which created the bubble? The bubble that was exacerbated by the CRA as manipulated by the 1995 Clinton HUD?

  • “But only a moderate one. It was the Fed’s monetary policy miscues after the downturn began that turned a run-of-the-mill downturn into a once-in-a century disaster.”

    Good call, give up on the failed (and factually incorrect) arguments that the downturn was caused by the government, CRA, Fannie Mae and Freddie Mac, and Barney Frank, and start a new argument that it was just made worse by government.

    The Fed does have some of the blame for the depth of the crisis, but here’s the thing. The credit bubble was so precarious because the massive number of sub-prime ARMs in the market and trillions in unregulated and very poorly vetted securitized instruments , that normal small actions by the fed (like the slight interest rate hikes preceding the collapse) had massively magnified effects on the market. had the fed know this would be case, they would obviously acted differently, but then if the fed had known, it would have meant that they were engaging in legitimate oversight of that market, and would regulated this potentiality out of it.

    The fed’s policy was essentially laissez faire, they believed in the power if the market. I think what they did not count on was an anomaly caused by a large element of the market being unregulated, and more and more money was funnelled into that market component. it is probably fair to say that of the investment market as a whole were as unregulated as the derivatives market, then money would not have been concentrated there, but the question is whether regulation provides the foundation of market confidence or not.

    Macroeconomics being what it is, hindsight is far from 20/20, it’s a significantly better view than we had before the crisis, and we can second guess actions taken at the time with information we have now but was not available then, and cast blame. But ultimately, the actual crisis is the cause, the cause of the actual crisis was greed, lack of oversight, and political malfeasance ( I won’t say specifically Republican, because I believe that a great many on both sides of the aisle were co-opted though regulatory capture by the financial sector).

    • ” arguments that the downturn was caused by the government, CRA, Fannie Mae and Freddie Mac, and Barney Frank, and start a new argument that it was just made worse by government.”
      Well, I suppose we could go with the theory it was all caused by greedy rich people and ‘unrestrained’ markets, that seems to be playing well in Democratic gatherings round he country.

    • Again, we’re talking about what kept us there … CRA is definitely a culprit in what got us there.

    • The fed’s policy was essentially laissez faire,

      Credibility just cratered.

  • Same bullshit…different day.
    Still arguing against the obvious facts.
    And always in support of the Collective.

    • “And always in support of the Collective.”

      There is always a collective, the word is virtually synonymous with society. Just because your collective like to take people’s money and redistribute to rich people doesn’t make it less of a collective. And you can whine all day that you don’t support these things personally, but the party you support has consistently done this, as a collective, with most Americans paying, for the benefit of few Americans.

      Republicans actively supported the existence of too-big-to-fail banks (TBTF). These TBTF banks operate with an implicit subsidy from the government. Lenders expect the government to step in to back up these banks debt if they fail, as happened on a massive basis in 2008. As a result, TBTF banks can borrow money at lower interest rates than would be possible in a free market.

      Drug patents and extensions supported and protected by Republicans raise the price of prescription drugs by close to $270 billion a year above their free market price.

      Republicans support the concept of tens of throusands of armed federal officers for border security. More feds with guns is more big government.

      Republicans support empowering the government to require that people that recieve money from the government be subjected to drug tests. More power equals bigger government. It’s easy to say if people get welfare, we have a right to test them, but the law of unintended consequences should tell any proponent of smaller government that government doesn’t give up power. So what’s next? Anyone that get’s a government benefit at all? Social Security? Medicare? Government contractors? Why stop at drug, why not obesity, do people have Big Mac in their bloodsteam?

      Republicans don’t want smaller government, they just want it big in some slightly different ways than Democrats.

      Republicans are the biggest proponents of valuing income differently, not by amount, as a progressive tax code does, but by source, as in capital gains from letting your money make you money is better for big government than being paid for one’s efforts directly.

      Who have been the biggest proponents of defense spending insanely far beyond the vision of the Founders who opposed having even a standing Army and now it is 55% of discretionary spending, and Republicans want MORE. 

      Why do you think government gets bigger faster when Republicans are in charge if they are for smaller government?

      The main difference, if you look at the actual record, is that Republicans tax less, but spend more. 

      • THE Collective has a meaning.  Look it up.
        And, the rest is more of the same bullshit you always spew.
        But why should you break type?

      • your first paragraph was pure Marxist bullcrap so I stopped reading there. You really got to get your head out of Mother Jones or Das Capital and read something by a real economist or historian sometimes.

      • Can you give us some basis for your bogus BS other than crap you’ve barfing back from Pelosi, Reid and Wasserman?

      • “Just because your collective like to take people’s money and redistribute to rich people”
        Oh, dude, are you FRACKING SERIOUS!
        If you can even write those words, you’re a poser, which others have said, but I mean, come on, redistributing to the RICH?   You think that’s what it’s about around here, in any way shape size or form?   Seriously?
        Jesus,  pay attention, grow up.

      • I will give you a tremendous help today Cap –  because even though you come here, and read here, and even comment here, it’s pretty plain none of it is sinking in. (and other than the entertainment I’m not sure why you bother) it’s pretty obvious you’re NOT paying any attention to the majority of posts or the majority of comments.
        THIS IS NOT A REPUBLICAN WEB SITE. (shouted bold italicized underline, and if I could reverse video blink it, I would).
        Republicans just happen to be the guys who AREN’T Democrats, and don’t want us in hell by noon (they’ll settle for 3:00 PM, with martinis to be served at 3:15).
        Republicans are the lesser of two weevils.
        Now go dance the ” my ignorant marxists crony Democrats are better than your evil crony Republicans” dance somewhere else.


          Sure, I’ll go along with that. It’s an anti-Democrat website aggresively sugegsting that people vote for someone that isn’t them…

          It could be any of the thousands of… oh wait, the other party.

          Now go dance the ” my ignorant marxists crony Democrats are better than your evil crony Republicans” dance somewhere else.”

          See, that’s the thing, I know Democrats suck, you just really don’t understand how much Republicans suck. They differ, as I said, only in the margins. You people seem to think that because they honestly and truly are committed to taxing less that this somehow enhances liberty, but spending is taxation if only deferred taxation. When Bush ran up a $5T defecit, I was in here telling you that means higher tax rates down the road, we are down the road, we are looking at the higher tax rates, and you still don’t get it as you scream, it’s the Democrats! 

          If you want lower spending, tie spending to taxes, and make people of influence pay. People of influence will change it. But as long as they can lobby the government just have their burden lessened without having to address the total fiscal clusterf*, that is what they will do.

          Both sides do essentially the same things, lie, cheat, steal. I just spend more time pointing out the Republican lying, cheating, and stealing, because you don’t need a primer on Democrating malfeasance. They both have their clients, and they both serve their clients, and for the Republicans, super high earners who don’t want to pay taxes are their clients. Democrats have unions who want what they want. None of that serves the interests of Americans, even though you appear convinced that lower taxes (regardless of spending) for the super rich, will somehow translate into American jobs. Job creators are not stupid, they don’t create jobs because they have extra money lying around, they create jobs because they see demand and an opportunity. For the past couple of decades, the opportunity has been mostly increasing profits by lowering production costs, sending jobs overseas. We are cannibalizing our own economy. Sending the jobs that American consumers HAD to foreign countries is kind of like slaughtering the milk cow. You eat steak for a awhile, but then you starve.

          • Same bullshit, reiterated.
            You STILL ignore the FACT that too much power concentrated in government is the root problem.
            You ALSO try the de minimis LIE that this is about money alone.  It isn’t.
            One side of this (ours) believes in the Constitutional concept of LIMITED GOVERNMENT (maximizing individual liberty).
            The other side (yours) are pom-pom girls for STATISM (minimizing individual liberty).
            Within that conflict are dozens of issues that delineate where our society will go.

          • The difference is the Republicans do it SLOWER.
            So SLOWER is what I’m after if it’s all I can get until I can find a way to replace them.
            “They both have their clients, and they both serve their clients, and for the Republicans, super high earners who don’t want to pay taxes are their clients.”
            I’m not defending my own vast fortune here, because I don’t have one.  I wrote one of my usual long tirades in response to that – you know what, it’s useless.     You’re driven by ‘the rich’ and maybe envy and maybe a good hearted, but misguided, view that it’s okay for you take and spend other people’s money on what you consider good causes.

          • Here, an approved New York times article on one of those rich Republican self serving bastards…
            Got any stories like the about Prince Obama?  No…and you know why, there AREN’T any.

      • “your collective like to take people’s money and redistribute to rich people”
        You actually believe the rich got rich by taking money from the poor. I really can’t think of anything more insulting to say to you.

      • If I ever gave you the benefit of the doubt as to your intelligence or knowledge (and I have), that doubt has been removed by the list of idiotic statements you just made. You are indeed an ignorant moron.

        • Well Tim, here is the funny thing, you (all) will immediately assume that any problem is created, caused, or exacerbated by government. On a lot of these things, I agree. But there is one problem that you (all) seem to absolutely absolve the government of ANY responsibility. The increased concentration of wealth in this country.

          The difference between you and me, is that I see how the government through thousands of little policy tweaks and few big policy shifts, has actually created this problem. Wealth, in a capitalist system will ALWAYS be concentrated, and it should be, there is a reward for being the most successful. BUT, if the policy creates an environment where wealth continues perpetually toward greater and greater concentration, it dooms the society. Through most of the modern era, the top 1% owned around 30% of all wealth and about 12% of all income, during that period, as productivity rose, so did the income and wealth of everyone else (that’s a rising tide). But in the last 25 years, something has changed, the top 1% now earn about 25% of all income and own about 42% of all wealth. During this same time, everyone has seen their wealth and income remain stagnant. People make the mistake of thinking this is too much wealth for people to have for no reason other than envy, or conversely, that no matter what people’s income or wealth is, they earned it and there can be no problem, that is the essence of a capitalist system.

          There is a problem, and it has nothing to do with envy or capitalism. Just as a government policy that prevented people from acquiring wealth would doom a capitalist system, a policy that causes the concentration of wealth and income is unsustainable and will eventually doom a society. Ultimately, wealth concentration is worse for those with the wealth, because they have more to lose when the inevitable collapse comes to pass.

          It is ironic that with all the rewriting of American Great Depression history, from every side, that people forget that the welfare state policies of that time were a response to very real threat of a socialist revolution in America. Aspects of socialism were embraced in order to protect capitalism.

          The occupy movement was a foreshadowing, nothing that will change anything, and nothing even really politically coherent, but it is the canary in the coal mine. Let me give you some simple math. If 99 people were allowed to own nothing and one person owned everything, how long would that one person be able to hold on to it? So what if one person owned half of everything? Three quarters?

          I don’t know the magic (or should I say tragic) number, but there is a point of wealth concentration that people will not stand for. It’s what the brought the Czars down, and countless other aristocracies, monarchies, oligarchies. Noting this fact is not socialist, and failing to note it is not defending capitalism.

          We are at 42% now and rising, because of government policies (yes, another failure of big government), so at what point do you become concerned? Or is this particular failure of big government just something we’ll have to die over?

  • McQ, F*ck you!

    • OOOh. Mr. Spock is green with envy at such a literate, cogent, rational, and logical argument. Bravo! I look forward to  further disquesitions from you. I shall even take notes, hoping that I can use some of your gem-like bon mots in my own writings. 

      • I personally look forward to the video of him saying that to McQ’s face and the consequent ass-waxing.

        • Settle down boys, he’s a mildly retarded friend of mine who is having a little fun at his own expense.

          • In real estate it’s “location, location, location”. In conversation or discussion it’s “context, context, context”. That’s what those little yellow smiley things are for. You know, “Smile when you say that, pardner!”.

  • Hetzel’s theory that the Fed put the “Great” into this recession is actually a back door defense of the Fed, and the notion that the Fed can ever really know what it’s doing. It also takes the focus off of Obama, who did everything he could to jam up the gearbox of the economy as it tried to recover. Robert Higgs has it right. The extended non-recovery was and is continuing to be caused by “regime uncertainty,” which is a way of saying that the current administration has done things that make it difficult to impossible for business to make plans and enter into contracts, and so they are sitting on cash. I don’t want to say that the Fed has helped things. The Fed is never much of a help and can be an incredibly detrimental force. But it’s not responsible for this mess. Obama is, and it has been deliberate. The plan was and it remains “ruin and dependency,” and that’s what you’ve got, until there is nothing left to depend on.

    • I look at the gutting of welfare’s work requirement, the 4x increase in 5 years in taxpayer transfers to illegal aliens, the vast expansion of Federal payments to households, and it all adds up to one thing.
      Cloward-Piven has been implement, with the devastating admixture of crippling the productive capacity of the producers.

      • It only took a few turns of the screw to bring on the war between those who vote for a living and those who still work for a living. Stanley Kurtz’s new book, “Spreading the Wealth,” which I have not yet read, reportedly details Obama’s extensive plan to transfer wealth from the suburbs to the cities. He has that all set up and ready to go. It won’t revive Detroit, of course, but it will further enrich the nomenklatura. That’s the point, to scavenge the meat that’s left on the bones. The big hit, of course, was Obamacare: Adding a third massive entitlement program to the two existing massive entitlement programs already veering toward insolvency, with trillions upon trillions of unfunded liabilities. This is a numbers game, and Occam concludes that by the numbers this is a blow to the neck of America, meant to break and destroy it.