Free Markets, Free People

Robert Hetzel


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.

~McQ

Twitter: @McQandO