Monday, February 11, 2008

Postmodern recessions - Paul Krugman - Op-Ed Columnist - New York Times Blog

Paul Krugman has a useful note on Postmodern recessions, which goes directly to a comment I made earlier about the how long the pain of the present recession will affect politics.

Krugman's argument is that this recession is not the result of the Fed jacking up interest rates to induce a recession to fight inflation. Rather, it is, in his view, a side-effect of a housing boom settling out. Recovery, in employment terms, will be slow, because housing won't just come back on its own, the way the economy comes back on its own, when the Fed stops jacking interest rates.

One could quibble a bit. The yield curve did flatten out, and had the predictable effect. That effect was magnified, because the big banks had been engaged in a number of questionable practices, resulting in a lot of bad loans.

If the Fed simply caused a recession, to contain inflation, not much in the way of restructuing is called for. That's not the present case. Short recession, or long, the U.S. is in need of economic restructuring.

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