Narayana Kocherlakota is by far and away my favorite recently former Fedster. But like all Fedsters, as close as he comes to the truth about the Fed’s role in the crisis of 2008-09, he just can’t seem to fall over the ledge into the refreshing freedom it brings to just speak it straight and plain.
He has a new commentary posted on Bloomberg today, ironically about the unlearned lessons of the lost decade, where he outlines lost productivity and income, comparing between pre-crisis levels to today, and here is what he says about it:
But 1939 was different in one crucial way: Back then, with the unemployment rate at about 10 percent, the Federal Reserve recognized that the economy was operating well below potential and hence still had a lot of room to grow. Now, by contrast, Fed officials worry that, with unemployment close to 4 percent, the economy may have already reached or exceeded its potential — meaning they view the damage done by the crisis as being permanent.
After starting off with this:
Ten years on, it’s possible to say that — in some ways — the financial crisis of 2007 to 2009 did more economic damage than the Great Depression of the 1930s. Yet the response of our elected officials still leaves much to be desired.
Here’s the lesson Kocherlakota says we should learn:
What should this experience teach us about economic policy? It suggests that financial crises and the responses to them can have highly persistent adverse effects on economic potential. The risk of such large costs means that policy makers must have better safeguards in place, and be willing to respond vigorously through monetary and fiscal stimulus when crises nonetheless happen.
So what’s happening along these lines? The Trump administration’s nominee to be vice chair of supervision and regulation at the Federal Reserve wants to make the big banks’ stress tests less stringent — and that’ll make a financial crisis more, not less, likely.
While I agree with a large portion of the piece, in a multitude of abstract and nuanced ways, it is close to one of the saddest things I’ve ever read since the largest part of the problem is the point that Kocherlakota leaves until the very end, buried under complaints about the elected officials:
In a speech last summer, Fed chair Janet Yellen suggested that the Fed’s planned response to a recession would lead to elevated unemployment for many years.
Yellen’s description of the Fed’s planned response to a recession is virtually the same as was the Bernanke Fed’s response to the 2007 recession while the politicians were helpless to do anything but watch in horror as the tragedy unfolded and scores of millions of nameless, faceless victims lost everything to the sound of bureaucratic laughter from the marble halls at the Fed. And there isn’t anyone but the nameless and faceless in the blogosphere saying it. Forget about fiscal stimuli or lack thereof. This is what makes the next crisis a matter of when, not if.
Hopefully, by the time it may have a chance to occur, the politicians will have done something profoundly important, like reforming the FOMC with the heaps and bounds of accountability that is sorely needed, and we will never come to realize the financial horrors that they would have saved us from.