Revisiting an Early Look at the Recession

by cactus

Revisiting an Early Look at the Recession

Now that the recession is officially here, I’d like to revisit a post I wrote in March entitled How is This Recession Not Like Other Recessions?.

In it, I note the following:

So in terms of politics… what we see is that the Fed is much more likely to cut real M1 by a lot when there’s a Dem in office, and the economy has been much, much more likely to make it through such a cut in real M1 without suffering a recession when a Dem is in office. The end result, of course, is that the percentage of time that the economy is in recession when the President is a Republican is much higher than the percentage of time that the economy is in recession when the President is a Democrat.

Now, back to the current mess… since every single one of the seven previous recessions for which we can compute real M1 using data on the Fed’s website was preceded by a cut of 3.5% or more in the three month real M1, the natural question is…. is that true this time too? As with many things involving GW, the answer is… No. If there’s one recession that wasn’t at last partly triggered by the Fed, this one is it.

This is not to say that the Fed wasn’t partly at fault for creating the messy conditions, but it did not trigger the recession by shrinking the real money supply in the year leading up to the recession’s start, unlike every other recession since 1959, the first year for which data on M1 is available on the Fed’s website. Put another way – the cause of this recession is if not unique, its certainly extraordinary in the past few decades. And if its not a contraction in the money supply that’s causing this, then its something “real.” When the problem is a contraction in M1, well, the fix simply involves re-inflating the money supply. But something else has to happen when the recession is caused by something “real” – the “real” problem has to be fixed. One thing that ain’t gonna fix it is throwing money at Goldman, Welfare, Queen & Sachs – its not Goldman’s problems that precipitated the recession, after all. The economy had slowed down long before anyone realized what a hash the investment banks and AIG had made of their business.

So how long is this recession going to last? I really hope not long. But what if the problem really is the fact that the US economy doesn’t produce much any more, and houses are way overvalued? I sure hope we don’t have to wait until those problems are fixed.

The post also had something else that I like:

Which leads to my question from yesterday’s post, yet again – why are we seeing a recession now, at this time, so soon after the last one. The last time we see a recession so soon after the previous one, Reagan was in office. The last time we saw a President with two recessions in his term, Nixon was in office. Unless the last few decades have been a major aberration, an ordinary business cycle shouldn’t be bringing us to a recession so soon. So to repeat: why are we seeing a recession now, given that GW has gotten everything he’s wanted – tax cuts, help from the Fed, reduced regulation, even two wars (and remember – Conservatives and libertarians credit WW2 with ending the recession, not FDR)? Could the conservative or libertarian model have predicted such a thing?

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by cactus