Not everybody agrees on the causes of the Great Recession, but there is one verity that we all typically hold to: as the collapse really hit back in 2008, the United States stepped in big time to bail the financial system out.
Look at the charts, and you see what appears to be overwhelming evidence. A tripling of the money supply. TARP loans at $800 billion. (Nominal) interest rates lower than ever. Budget deficits past $1 trillion. All these things materialized in late 2008, just as the economy lunged into “freefall”—another security blanket of those who think they know the general outline of things in the annus mirabilis of 2008.
Here and there, voices have pointed out inconvenient facts. John B. Taylor, the Stanford economist, for example, has been mentioning for years now that the housing bubble popped in early 2007. The vaunted Case-Shiller index sure shows as much. It was in full-fledged decline throughout 2007, at no perceptibly greater rate than in 2008.
The next point Taylor will make is the obvious one: there was no Great Recession in 2007. Not even at the end: though the “official” dating of the recession now begins with December 2007, by the old simpliste definition of two consecutive quarters of negative growth, recession did not come till summer 2008.
Therefore, as Taylor will further query, could it be that some satisfactory policy of addressing the gathering housing-cum-financial crisis was in place in 2007, and then got yanked away in 2008? If you look at the apparent “root cause”—major decline in the housing market—that bogeyman was there in force in 2007, but all year the economic expansion begun earlier in the decade was still going on in its uninterrupted way.
Toss in other contrarian voices like Steve Hanke of Johns Hopkins and Robert Mundell of Columbia, and another inconvenient fact comes to the fore. One of the sharpest episodes of compressed appreciation of the U.S. dollar in all of history was the “freefall” period of the Great Recession. Over the eleven months following April 2008, until March 2009, the dollar shot up 25% against major currencies. The most arresting case was the euro. It went down 22% against the greenback in three months, from July to October.
Ever-stronger dollar is great, right? How was that a problem?
When the dollar suddenly goes up by 25%, a number of crucial things are implied, the first being that people are dumping all other currencies, indeed all other assets, to get the dollar. Remember the gold and oil prices of this era? They blew past the Case-Shiller decline (of 20%) and collapsed by 30% and 80% respectively. All that money wasn’t heading to enterprises, either, as would be healthy, but to cash and the ersatz cash that are U.S. treasuries.
If cash appreciates at 25% all of a sudden, cash becomes king. “Aggregate demand,” investment, and all the rest goes in the bin.
That’s the market for you, you might say. Currencies are a market, just like anything else. Because of the actions of millions of tiny agents, forex traders and the like, who collectively are the market, the dollar went way up. The poor economy got caught in the crossfire.
Except that’s not how it works. The value of the dollar against major currencies is a principal focus of the U.S. Treasury. That Department maintains a most formidable array of cash stashes and other facilities that enable it to set the dollar’s various exchange rates, especially in the short term.
As for the Federal Reserve, the official word is that it has nothing to do with exchange rates. That’s malarkey. Without question, the Fed conducts operations with an eye on things like exports, which is another way of saying it targets exchange rates. Moreover, inflation was sharply negative by the fall of 2008, making the real federal funds rate something on the order of 7%. This was the highest it had been since the recession of 1981-82 that clocked the Rust Belt. No wonder General Motors went bust in this latest bout.
So it seems that federal policy was rather near the center of morphing a manageable crisis into a catastrophic one. What if, back in ’08, the dollar had appreciated by only a tad, say 5%, and real lending rates were not beyond punitive, and then things stuck at a new close par for the duration? There would have been no pronounced push into Treasuries and cash.
It’s not hard to imagine this scenario. The dollar-euro, dollar-yen, dollar-pound sterling, dollar-major world currency rates, if stable, will lead to stable (and low) commodity prices, as will interest rates within norms of keeping businesses alive. This presumes that the whole world isn’t bent on frivolous simultaneous monetary creation. And we know that it is not, based on the collective global outrage shown towards the Fed’s quantitative easings, the big touchy issue of the most recent G-20 meeting.
The Treasury and Fed can set exchange rates and proffer needed liquidity. These august institutions, from spring 2008 through the end of the “freefall,” just less than a year later, managed the dollar up, up, up. So everybody got out of all their investments and into dollars. Want to pay off a loan? Can’t, it’s denominated in dollars and the principal just went up by a quarter. Could you lend me some money for a bridge ? Love to, but I’d rather hold cash, it’s going up on its own. Could you stake some collateral now that everything’s in crisis? I would, but my paper is worth pennies on the dollar given that everyone’s sold and moved into treasuries.
There’s the Great Recession (and the financial crisis) for you, at least its massive contraction phase of the latter half of 2008 and the first pathetic months of 2009. Yes, after March of that year the Treasury relaxed and the dollar started its old familiar grind down against just about everything.
Well, you sure can’t hang this one on the gold standard. Under that not-so-long-lost regime, exchange rates are fixed. And if there’s a liquidity crisis, authorities (preferably private ones) get counterparties together to agree on payment schedules and move on. This would have worked to a T this time, in the summer/fall of ’08. But there were no private authorities worthy of the name, and big government caught a fancy for tight money and upward volatility in exchange rates.
Here’s former Treasury secretary Timothy Geithner, bragging to CNBC in October 2009: “When the crisis was at its peak, when people were most concerned about the risk of collapse and deflation, what happened then? The world wanted to be in Treasuries, in the safest, most liquid markets, and you saw the dollar rise when people were most concerned about the future of the world. And that is a very important thing. It’s not something we can count on, so we need to make sure that we understand and we—and we continue to foster, and again, we’re going to do that.”
“[I]t’s not something we can count on”—namely manic dollar flexibility that brings about worldwide contraction. If we want to start really learning about what made a garden-variety recession into the beast of ’08-’09, we have to start getting serious about federal culpability, and the merits of fixed exchange rates, monetary anchors, and private custodianship of our financial system.
The article first appeared in Forbes.
W styczniu 2020 roku Wielka Brytania formalnie opuściła Unię Europejską. Oczekiwane korzyści z brexitu, poza odzyskaniem suwerenności w zakresie kształtowania prawa i zewnętrznych relacji gospodarczych, jednak się nie zmaterializowały. Widoczny jest natomiast spadek wydajności i konkurencyjności brytyjskiej gospodarki, co wpływa także na kondycję rynku pracy.
