As the Great Recession drags on and on, it’s natural to wonder if we will ever get back to normal. Why is the recovery from this recession taking so long? Why was the recovery from other severe recessions, for example the 1982 recession where unemployment reached 10.8 percent, so much faster? Part of the answer is that we are experiencing a “balance sheet recession,” and this type of downturn is much harder to recover from than the other types we have had in recent decades. But poor policy is also to blame. Unfocused stimulus packages don’t get to the root of the problem, and short-term spending cuts are counter-productive. Instead, we need policies that do a better job of targeting the specific problems associated with balance sheet recessions. There are several things policymakers could do to address this, and each would help to improve the economic outlook.Go read the whole article to find out what remedies Mark Thoma proposes.
Historically, the recessions that are the hardest to recover from are those caused by collapsing stock and housing bubbles. When a fall in stock and housing prices wipes out retirement, education, equity, and other savings, the balance sheet losses can’t be recouped overnight. It can take years to recover what is lost. Examples of balance sheet recessions such as Japan’s “lost decade” in the 1990s and the Great Depression of the 1930s show how hard it can be to recover from this type of recession. More generally, recent work by economists Carmen Reinhart and Kenneth Rogoff shows that balance sheet recessions are “followed by a lengthy period of retrenchment that most often … lasts almost as long as the credit surge.”
But these examples also show something else: how costly poor policy can be. A slow, “lost decade” recovery like we are currently on our way to experiencing is not inevitable. The speed of the recovery from a recession depends critically upon how monetary and fiscal policymakers react, and a policy tailored toward the specific type of recession hitting the economy can shorten the recovery time considerably. One of the main reasons the outlook for our economy is so poor is that policymakers have done a poor job of matching the policies they put into place to the type of recession we are experiencing.
I'm utterly shocked by how Obama has shown himself indifferent to solving the economic mess. He was quick to pick up and extend the Bush bailouts for banks. But he has done nothing for main street and home owners. Last time I looked he was elected under the Democratic ticket, but he sure behave's like a Republican. He acts like a banker's best friend. If you've watched the film It's a Wonderful Life, Obama acts like Henry Potter is his best friend and role model. He should be acting like George Bailey (James Stewart) trying to save the community, but instead Obama's only concern seems to be to save the big banks and to heck with everything else.