Karl Smith:
Smithianism and Its Discontents « Modeled Behavior: [A] recession is somehow related to people not buying stuff. So, the natural questions then are
What are they not buying?
Why are they not buying it?
A cursory look at the data makes the answer to the first question abundantly clear: cars and houses…. Now you can pipe this through any narrative you want and say that:
- Once consumer balance sheets collapsed even a zero federal funds rate was too high to make it optimal for consumers to keep buying transportation and structures.
- Fear among investors and consumers caused them to scale back purchases of long lived items like transportation and structures
- The Federal Reserve failed to [sufficiently] accommodate a huge spike in the demand for money leading to a fall in the demand for transportation and structures
- The Federal Reserve tightened monetary policy in late 2008 causing a decline in the demand for transportation and structures [no, you can't: you can say that the Federal Reserve failed to sufficiently accommodate a spike in the demand for money; you can't say it tightened the supply--DeLong]
- Total debt levels in the economy began to decline in 2008 leading to inadequate demand for transportation and structures
- Failures in the banking system caused a tightening of credit in 2008, leading to less purchases of transportation and structures
- The shock from the fall in asset values in 2007-2008 rippled through the economy leading to a decline in the purchase of transportation and structures
- With retirement accounts and homes collapsing in value, folks thought twice about going out and making big ticket purchases like transportation and structures.
- Consumer deleveraging led to a decline in discretionary purchases of transportation and structures.
However, these are all talking about the same thing. Something happened to credit markets that made people unwilling or unable to purchase transportation and housing. Thus to a large extent we can judge the ebbing of this phenomenon by looking at whether people are more willing or able to purchase transportation and housing. Part of that depends on how badly people need new transportation and structures. Part of that depends on whether they can get easy financing for transportation and structures. Both of those things are improving. This leads to a baseline view that the process causing the Great Recession is about to unwind.
But how fast? And why should the unwinding process start not four years from now but right now? And if you think it is about to start right now, why didn't it start two years ago?
