When we talk about the way in which the most recent crisis unfolded, we often talk about uncertainty of the extent of mortgage losses as a cause of the financial crisis. And we discuss that uncertainty as if it were entirely about microeconomic unknowns: which banks held which securities, what mortgages were in which securities, and how much of the information used in origination (like household incomes) was reliable, for instance. But there is also considerable macroeconomic uncertainty, which may well be the more important consideration. There are a lot of loans that go bust when real output falls 3% in a year that would not if output merely grew at 0.5%. Big crises therefore display a rather significant level of recursivity. Suppose there are brewing financial losses lurking in a financial system. Then suppose the outlook for the economy dims somewhat. Deterioration in the outlook raises expectations of likely financial losses. If the deterioration isn't addressed then crisis dynamics intensify and the outlook for the real economy worsens again. Eventually you get a break—a shift in the equilibrium. The crisis becomes acute, and the real economy suffers a major blow.
By recursivitiy the author means that a central bank aggregates data over the whole economy, and that causes a delay in its function. The delay is especially bad when the Central Bank aggregates over a huge continental wide economy. The delay in central bank actions to lower rates sooner makes worse the negative shock because real growth has already fallen by the time the Fed figures it out.
True in this case? No, the USA suffered a sudden reversal in terms of trade due to oil. Our central bank was chasing an oil bubble. The price of energy reached a peak of $120/barrel, and some 6% of our producers dropped out of the economy. It was not a demand shock, it was, plain and simple, a world oil shortage suddenly appeared, and that was the proximate cause of the recession.
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