Bloomberg View has an interesting editorial entitled, “Yes, Financial Crises Do Bring Hangovers.”
In an essay making the rounds this week, four prominent academic economists and former government officials argue that something needs to be done to accelerate the pace of what they call “the weakest economic expansion since World War II.” Their recipe for speeding things up is lower taxes and less entitlement spending, and I’m not going to get into whether that’s really such a good idea, in part because I imagine lots of other people will take up that argument and in part because I just don’t know the answer.
But I was struck by the second paragraph of the piece, written by John F. Cogan, Glenn Hubbard, John B. Taylor and Kevin Warsh, 1 which goes like this:
We do not share the view that the recent period of weak economic growth was simply an inevitable result of the financial crisis. Economic recoveries tend to be stronger after deep recessions, and any residual headwinds from the crisis should have long been remedied had progrowth policies been adopted. Historically, some post-crisis periods are marked by lower economic growth, but we believe that the poor conduct of economic policy bears much of that burden.
It turns out both sides are correct. The housing bubble and subsequent financial crisis contributed to a weak recovery. And then economic policies following the housing bubble collapse focued on financial regulation and a terrible healthcare bill (aka, Obamacare) rather than creating economic growth.
The root cause of the financial crisis was the massive (and unsustainable) expansion of credit, particularly for real estate loans. Thanks in part to 1) regulations such as Dodd-Frank and the creation of the Consumer Financial Protection Bureau and 2) a hangover from too much credit, real estate lending growth continues to be lower than any other recovery since World War II.
Commercial and industrial lending YoY is approaching recession levels.
And M2 Money Velolcity (GDP/Money Stock) continues to decline to the lowest level in modern times reflecting the stagnant GDP growth coupled with massive expansion of money stock.
Two examples of “The Hangover” are the 1) historically low levels of new homes sold and 2) the worst wage recovery since 1965.
Add into that the repression of bank deposit rates courtesy of Greenspan, Bernanke and Yelle, and we have a dismal recovery.
And lest we forget, the GINI index of income inequality increases after every recession, regardless of President and Congressional majorities.
Yes, the poor recovery of the US economy is a product of 1) hangover from the housing bubble and financial crisis, and 2) poor economic policies eminating from Washington DC.