If there were just one graph that shows what happened in 2008 and throughout the Great Recession, I would have to say that this one from Marcus Nunes is it. Sometimes I look at it and think about how bad this is, and not only form a household welfare point of view.


The first aspect of how bad this is, as I’ve pointed out elsewhere, is that  government revenue dipped from the historical average of ~18% of GDP to 14% and 15% respectively in 2009-10. That “money” was vaporized in the crash. It represents almost $1T that isn’t coming back, not counting any shortfalls from 2011-12.

Among things that have crossed my mind about this is that it’s a terrible thing for the Fed to have done during a war. There’s more to elaborate, like perhaps treason, on top of the rest of the terrible things that happened to average middle class families and government debt, but it goes without being that explicit. It highlights just how profoundly consequential it is to give the central bank the discretion to wander off the reservation and refuse to wander back.

Scott Sumner made a proposal for a NGDP/inflation targeting hybrid compromise yesterday. His plan is workable from an economics point of view, but it leaves the central banks free to either do it or not do it.  If I had a choice, however, I would go for the complete regime change to NGDPLT because it is rather short sighted after having the worst financial calamity since the Great Depression that we would leave the central banks with that kind of discretion, knowing what caused it. We were in a war – we shouldn’t have had to worry about what the Fed as doing. We need to take away the “Who the hell do you people think you are?” factor, and we can’t do it while quietly allowing the people responsible for this mess to pick and choose which compromises they wish to make.

The entire episode is completely inappropriate for a representative republic. There would be no fiscal cliff if the Fed had been following the law. None of the nightmare over the last 4 years would have happened. And we want to allow the Fed to continue to bend the political system over a barrel? We want it to decide if we win or lose a war; and we want it to decide how much money we spend and the kind of regulatory structure to have? I think not. The job of the Fed is to just shut up and print money, and leave all of the political choices to where the accountability lies.

I don’t want compromise. I want average people to understand what happened to them; and I especially want the politicians to understand what went wrong. The only way to get there is to stand firm and go for the whole NGDPLT enchilada while having it out with the inflation nutters. No compromise is worthy if it results in protecting Bernanke and his sycophant cohorts who believe themselves to be above the law. No, no. They don’t get to pick and choose. No compromise. No prisoners.