Wednesday, April 09, 2008

The risk of a decade-long economic stagnation is quite limited so far

You'll have to tolerate more of my Nouriel Roubini fanboyness.
[C]ould the US experience an L-shaped recession, i.e. a protracted period of economic stagnation like the one experienced by Japan in the 1990s after the bursting of its housing and equity bubble? My view is that a protracted economic stagnation – bordering on an economic depression – is unlikely in the case of the US as the policy response of the US is already more aggressive than the one of Japan. Japan waited almost two years after the bursting of its bubble to ease monetary policy; and it waited two years before providing fiscal stimulus. In the US, instead, both monetary and fiscal stimulus have started in earnest early on. Also Japanese postponed the necessary corporate and banking restructuring for years keeping alive zombie firms and zombie banks via inappropriate forms of forbearance. In the US both private and especially public efforts to restructure the impaired assets and firms will start faster and more aggressively. Thus the risk of a decade-long economic stagnation is quite limited so far.
Which I take to mean that he figures if the Fed keeps trying to restore the credit markets, eventually something they do will succeed. But, they're trying to restore them to a temporary and artificial state created by low interest rates -- if we keep kicking the can down the road, eventually we'll reduce interest rates to 0 and having nothing to show for it, like Japan.

The point is that to a large extent since 1997, and moreso since 2001, our economy has been a lie. We've had a Republican or a Clinton in office for 36 out of the last 40 years -- only Jimmy Carter tried things like getting us to use less energy (remember 72 degrees?) and he was whacked because the economy wasn't fixable in 4 years. And the Iranians didn't like his stand on energy.

The same thing will happen to President Obama. Maybe we should lengthen presidential terms.

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