Not so fast Bruce Bartlett

Bruce blames government (especially the Fed) and hence blames government.

Now some believe that Greenspan kept the yield curve to steep from 2002 to 2004, then Scott Sumner thinks the Fed kept the yield curve to flat just prior to the recession in 2006 to 2007. Probably Scott is closer to the truth. The Fed was probably six months late in lowering interest rates in mid 2007. Why? Likely the Fed was watching the stock bubble and inflation rather than the shape of the yield curve, and who can blame them after the prior stock bubble. The Fed should have no other rule than to keep the yield curve reasonably sloped at the short end. But if anything, the problem was short interest rates too high in mid 2007. I think Brad DeLong called it right at the time.

Do we really think that six month uncertainties in Fed actions caused this Depression? No, the financial community is too smart for that.

I noticed the bond market was also off by six months in predicting the recession. In early 2006 they tried forcing long term yields down, yet the economy kept chugging along for another six months. It is the private sector that fooled us, in particular the consumer did this to us by using technology in surprising ways to cut back on energy consumption. We were surprised by a positive technology shock.

This depression was a technology shock, as were the two other major depressions we have suffered since the electrical industrial revolution in 1850. The government and the Fed had little say in determining the arrival of new technology and the subsequent shocks.

If government has a problem that problem is its inability to move the economy toward better energy efficiency by using the same technology on our roads.