The Crisis We Didn’t Have

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Matt Yglesias points out correctly today that during the aughts there were a lot of economists who thought that America’s trade deficit was unsustainable and would shortly lead to a major financial crisis of some kind. So the questions they were asking revolved around things like how long it would take for the value of the dollar to correct, whether we’d be better off with a quick crash and recovery or a long, slow slog back to balance, and so forth. Either way, though, a crisis like this would have fundamentally required American consumption to decrease until we got our affairs back in order.

In the event, though, that’s not the crisis we had. Our trade deficit may have played a role in what ended up happening, but basically it was just a huge housing/debt bubble that exploded, leaving balance sheets in tatters:

Precisely because lots of smart people foresaw the occurrence of that crisis, and because that crisis really seemed very likely, and since a crisis certainly did happen a diverse array of smart people have just sort of trundled along acting as if the crisis we’re facing is that crisis…. Indeed, I would say that an awful lot of the Obama agenda has been about efforts to address the crisis we should have had. That’s why [they think] long-term fiscal austerity is important and why there was no “holy crap the economy’s falling apart, let’s forget about comprehensive reform of the health, energy, and education sectors” moment back in 2009.

….I’m inclined to think that we will, at some future point, face the crisis we should have had and it will need to be addressed in complicated ways. But the crisis we’re having is, for all its horror and scale, is a pretty banal monetary crunch—the natural rate of interest is below zero, nomimal rates can’t go below zero, and the Fed won’t act to push real rates lower. Fixing that wouldn’t fix “all our problems” any more than ending the Great Depression solved all the problems of the America of its time (Jim Crow, anyone?) but it would solve the problem and it doesn’t require us to fix the other stuff first.

That’s an interesting theory, though I’m not sure I buy it, possibly because I’m more cynical than Matt. To some extent, I agree that early on there was some honest confusion as we tried to sort out what had happened, and even now there’s probably some honest belief that a long-term trade deficit crisis is still in our future and we ought to do what we can to keep it from happening. To a much larger extent, though, I think that responses to the Great Recession were preordained by ideology and political convenience. Some beliefs about our current crisis are defensible, but there are others so far off the mark (we need to worry about hyperinflation, bond markets are terrified of U.S. deficit levels, it was all the fault of the CRA, etc.) that it’s simply not plausible that these are honest mistakes. They’re politically driven from the get-go, and these arguments, or similar ones, were inevitable no matter what form the crisis had actually taken. That’s not because of genuine confusion about what happened, it’s because there are plenty of actors all along the chain, from economists to bankers to pundits to politicians, who are invested in certain answers and dedicated to inventing problems that require those answers.

One of these days we may yet get the crisis we thought we were going to get back in the early aughts. If we do, I guarantee that all those economists and bankers and pundits and politicians who are preaching austerity and deregulation and low taxes today will still be preaching them. That might even be the right answer the next time around, but if it is, it will merely be a coincidence.


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