Ryan Avent of Free Exchange has a post that aims to reinterpret macroeconomic policy in the 2000s in light of what we’ve learned since the financial crisis. He raises a number of possibilities:
(1) Given sluggish growth in nominal output from 2001 to 2003, a market monetarist time-traveler would recommend a more accommodating monetary policy than the Fed actually delivered at the time. This might have had a number of salutary consequences, e.g., a domestic recovery that wasn’t quite as heavily weighted towards housing, a China that abandoned its currency peg in the early 2000s and thus shifted towards a more consumption-oriented growth model earlier on, etc.
(2) The federal deficits of that era may have contributed to the stability of the global financial system. Ryan argues that large federal surpluses had caused a shortage of safe assets, and this in turn encouraged innovative financial products (e.g., mortgage-backed securities) that contributed to systemic instability. Ryan is careful to add that tightening mortgage lending standards might have been a better way to mitigate downside risk. Another caveat is that the Recourse Rule greatly contributed to rising reliance on asset-backed securities.
(3) Ryan concludes by suggesting that the stability of the 2000s might have actually been problematic, and so while the Bush-era federal deficits were relatively benign in terms of direct effects, the secondary effects were quite negative. This passage reminded of Ashwin Parameswaran’s emphasis on the downsides of stability, though Ryan and Ashwin approach the issue through very different conceptual lenses. For one thing, Ashwin’s views on monetary policy are markedly different from Ryan’s.
In an only tangentially related vein, I also recommend, for a good dose of economic pessimism, Clive Crook’s recent Bloomberg View column on the fragile state of the global economy. Crook, like many centrists, believes both that the 2009 fiscal stimulus was too little of a good thing and that the president should have committed himself to a strong form of fiscal consolidation in the medium-term. (I’m in the small minority that believes that the composition of the fiscal stimulus law was very important, i.e., I can imagine supporting a fiscal stimulus of comparable magnitude but that placed greater emphasis on, for example, repairing and replacing military equipment.)