Following the pattern of the Bank of England, the United States's regional Federal Reserve Banks are quasi-governmental corporations with special charters, missions, and governance structures created by the central government. This provides them with an unusual degree of autonomy. For example, the Bank of England's charter strictly regulated the kinds of financial transactions it could undertake without going ultra vires. But the Bank of England did, repeatedly, engage in ultra vires actions. In fact, the Chancellor of the Exchequer would, not infrequently, write to the Governor of the Bank of England inviting him to and requesting that the Bank do so.
Somehow, in the summer of 2008, the systemically-important American investment bank of Lehman Brothers entered into a state in which it was grossly insolvent, albeit still liquid. Somehow, in the summer of 2008, the Federal Reserve failed to either to develop a plan to guide the successful conservation and resolution of Lehman Brothers should it also become insolvent or to immediately shut it down before the insolvency of this systemically-important financial income became large enough to threaten the stability of the system as a whole. So when Lehman did hit the wall in the fall of 2008, Bernanke, Paulson, and Geithner dithered. That, I think, was the biggest policy mistake of the last decade.
Ryan Cooper has a very good candidate for the second biggest policy mistake of the past decade, however: Ryan Cooper: The biggest policy mistake of the last decade: "After the 2008 financial crisis, old-fashioned Keynesians offered a simple fix: Stimulate the economy. With idle capacity and unemployed workers, nations could restore economic production at essentially zero real cost. It helped the U.S. in the Great Depression and it could help the U.S. in the Great Recession too...
...But during and immediately after the crisis, neoliberal and conservative forces attacked the Keynesian school of thought from multiple directions. Stimulus couldn't work because of some weird debt trigger condition, or because it would cause hyperinflation, or because unemployment was "structural," or because of a "skills gap," or because of adverse demographic trends. Well going on 10 years later, the evidence is in: The anti-Keynesian forces have been proved conclusively mistaken on every single argument. Their refusal to pick up what amounted to a multiple-trillion-dollar bill sitting on the sidewalk is the greatest mistake of economic policy analysis since 1929 at least. Let's take the culprits in turn.
The contrarianism began in earnest in early 2010, when two papers were published apparently finding that austerity—increasing taxes and/or cutting spending to reduce the budget deficit—was actually beneficial.... Alberto Alesina and Silvia Ardagna.... Carmen Reinhart and Kenneth Rogoff.... Both of these papers turned out to have major conceptual problems. Alesina and Ardagna... cherry-picked... unusual cases.... Reinhart and Rogoff got their causality backwards, and even had a humiliating Excel formula error.... More clues that Alesina, Ardagna, Reinhart, and Rogoff got everything wrong can be found in the real world, where the Obama administration's modest stimulus package, while too small to fix the Great Recession entirely, did make things much better. Conversely, the European countries that subjected themselves to severe austerity regimens saw their employment and production collapse, just like Keynes would have predicted....
Next up: the inflation alarmists. In late 2010, a bunch of conservative financial and economics luminaries, including Michael Boskin, John Cogan, Niall Ferguson, Kevin Hassett, Douglas Holtz-Eakin, Bill Kristol, and John Taylor, signed an open letter to then-Fed Chair Ben Bernanke warning that "[t]he planned asset purchases risk currency debasement and inflation."... A related argument from 2011-12 came from economists Tyler Cowen and Robert Gordon... that the slow post-recession growth problem was a structural one caused by lack of innovation, meaning the economy was running up against supply constraints... What connects the monetary stimulus skeptics (Boskin, Cogan, et al.) and the supply-siders (Cowen and Gorden) is... that... if the economy is bumping up against maximum capacity, then there should be price pressure.... Yet it's been six to eight years since their arguments and there's hardly been a glimmer....
Then there are... the "skills gap"... a major focus of Barack Obama's State of the Union address in 2012... the demographic trend argument, which explains a declining fraction of the prime working-age population participating in the labor market... as some kind of cultural development.... Both of these arguments... imply a labor shortage—if unemployed workers are essentially unemployable, and declining labor force participation is due to unshakable cultural trends, then workers that do have jobs should enjoy bigger wages.... [Yet] the overall wage share... fell to historic lows during the crisis and remains there to this day....
There was no skills gap, nor an innovation shortage, nor an explosion of stay-at-home dads. There was a collapse in aggregate demand that was left to rot, while a lot of people who should have known better made things worse. One nauseating irony about this blizzard of nonsense is that many of the anti-Keynesian arguments were premised on avoiding future negative growth effects. For instance, in a 2010 op-ed flogging his erroneous pro-austerity paper, Rogoff wrote, "The sooner politicians reconcile themselves to accepting adjustment, the lower the risks of truly paralyzing debt problems down the road."... The evidence for the Keynesian position is overwhelming. And that means the decade of pointless austerity has severely harmed the American economy — leaving us perhaps $3 trillion below the previous growth trend. Through a combination of bad faith, motivated reasoning, and sheer incompetence, austerians have directly created the problem their entire program was supposed to avoid. Good riddance.
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