The rolling crisis that has become the daily routine of late has no obvious and immediate solution, but at least we can be clear about how we arrived in this thankless position. And maybe, just maybe, we can learn a thing or two about policymaking for the years ahead. It won’t be easy, but progress never is, especially in the dismal science.
Facing up to reality offers no silver bullet answers, but ignorance will only aggravate our troubles in the future. With that, let’s acknowledge that the current mess is the consequence of years, perhaps decades of mistakes and short-sighted policies. The list is long, and the details complex. Volumes will be written about how policy makers stumbled. For now, we’ll revisit one issue that this observer believes has been central, though hardly alone in the buildup to the problems that afflict us.
Arguably one of the bigger missteps flows from the idea that the economy can be reengineered and manipulated so that recessions are a thing of the past. For quite a while it’s been tempting to think that the Federal Reserve and its counterparts around the world figured out how to smooth out the rough bumps in the business cycle. Viewed through the perspective of history, the Great Moderation looked like the answer to every central banker’s prayers. The goal certainly was a populist winner: recessions that were less frequent, less painful and perhaps even a vestige of a bygone era. For a while, the impossible seemed possible. A look over the history of business cycles certainly gives that impression via fewer, less painful downturns. That appeared to be the new world order, and the assumption was that the retooled cycle rules could go on forever. The tech bubble burst early of 2000-2002 was a warning shot, but most chose to ignore it, in part because for all the pain of that episode, consumer spending never really suffered, thanks to Greenspan’s Fed.