Comment of the Day: Charles Steindel: It Is Such a Bad Idea for a Central Bank to Invert the Yield Curve: "To my mind a somewhat comparable puzzle is the damage done by financial crises. It is true that it is extremely difficult for monetary policy to reverse a recession spurred by a financial crisis all on its own: crises tend to drive safe short rates down to zero all on their own, leaving little room for the Central Bank to do its thing. Thus we have had those awkward "unconventional" tools. We know--or should know!-- that fiscal policy can readily fill the gap; that's typically not adequately done, apparently because the surge in deficits spurred by the recession raises debt fears that can't seem to be beaten back...
...Now those are the positive reasons the recession lingers (there's also, of course, some behavioral factors—big increases in risk aversion, for instance—but as the 1940s showed, nothing that sufficiently strong fiscal policy can't blow away), and I think the reason we see this pattern in the historical record. But we have serious and sane people repeating the mantra that the economic recoveries from financial crises must be tepid. I don't really understand why, unless, perhaps, the whole financial system loses the "capacity" to handle basic activity—but that is surely very, very rare (not the recent industrial world, for instance)...
#shouldread
