A Look Back at the Great Recession

David BeckworthWestern Kentucky

University

Five Surprising Facts

•Monetary Policy Tightened During Crisis• The Fed Allowed the Money Supply to Collapse• The Fed Did Not Buy Up All the National Debt• The Fed Did Not ‘Artificially’ Lower Interest Rates• The Fed Actually Wants Inflation Between 1% and 2%

Monetary Policy Tightened In the Crisis

Monetary Policy Tightened In the Crisis

Slow Down Money Supply

Increase Money Demand…

Reduce Total Dollar Spending

Reduce Total Dollar Spending …and No Fed

Offset

Monetary Policy Tightened In the Crisis

Monetary Policy Tightened In the Crisis

Monetary Policy Tightened In the Crisis

The Fed Allowed the Money Supply to

Collapse

The Fed Allowed the Money Supply to

Collapse

The Fed Allowed the Money Supply to

Collapse

Fed Did Not Buy Up All the Debt

Fed Did Not Buy Up All the Debt

Fed Did Not Buy Up All the Debt

Fed Did Not Artificially Lower Interest Rates

Fed Did Not Artificially Lower Interest Rates

Fed Did Not Artificially Lower Interest Rates

Fed Did Not Artificially Lower Interest Rates

What about short-term interest rates?• Think of the market-clearing interest rate

(MCI) • During slump:•Household credit demand falls, saving increases => MCI drops•Firm expected return on investment falls => MCI drops

• MCI should drop until its profitable for households & firms to borrow again• Problem: Zero Lower Bound

Fed Did Not Artificially Lower Interest Rates

The Fed Wants 1% - 2% Trend Inflation

The Fed Wants 1% - 2% Trend Inflation

The Fed Wants 1% - 2% Trend Inflation

Implications for the Future• Fed will not let inflation take off• IOER•Reverse Repos•Shrink Its Balance Sheet

• This means Fed will snuff out any recovery that pushes trend inflation above 2%• Continued Slow Recovery • In my opinion, a key reason for slow

recovery past five years