Is the Great Moderation Over?

About a month ago (9/3/2008) I was interviewed on the question:

Is the Great Moderation Over?

[It's a follow-up to this interview from a year ago on the same topic.]

Comments

[Dickeylee]

Well, let's see, DOW down 13% in the last 5 trading days, down 33% in last year, NASDAQ off 35%, S&P down 34%, Russell 2000--well don't ask. And all this with the US Taxpayer tossing Wall St a Trillion $$, but, what about that Moderation again?

[Dickeylee]

Consumer credit card purchases off in September for first decline since 1998. So who is cutting back for Christmas? This will kill REIT's and shopping mall properties. A Christmas season bust will spiral unemployment to double digits. Oh, right, so how about that moderation?

[Chirag]

I guess its over with the current financial crises.

[Winslow R.]

Revealing.

Such confidence in the monetary system even with overwhelming evidence the monetary policy mechanism is totally dysfunctional??????????

What part of monetary policy is having any impact on the economy? Do not include the 'fiscal policy' actions being carried out by the Fed.

The Great moderation came about because the monetary policy mechanism appeared to work with 'minor' doses of fiscal policy from 1982 -2007.

Even the appearance of a functioning monetary policy mechanism depends upon short-term interest rates being above the zero bound.

It no longer is.

Economists (Ben Bernanke in particular) foolishly thought the mechanism still worked and inverted the yield curve one time too many and was only successful in destroying the financial sector.

Great system :(

The monetary policy mechanism is broken as there is no reason the economy should be controlled by bashing the financial system over the head to slow it down and then pouring money into the pockets of the financial class to speed it up.

We could stick with the current monetary policy and allow fiscal policy to push us through another bought of inflation and get short-term rates back up to 20% ad nauseum. The Fed, once again, would have some modicum of control while fiscal policy does the real work. More likely we will just fall to the zero bound and start depending upon fiscal policy as in Japan.

Or we could redesign the monetary mechanism.

I'm sure you are slowly, very slowly swinging this titanic site in this direction as you are aiming for proper positioning, and people just aren't there yet.

Or am I just deluding myself?

[Ponzi]

The moderation was nothing more than living high on borrowed money, borrowing ever more to pay the interest on the old loans. The party is fun for the borrowers while it lasts, but eventually they can't borrow any more to pay the interest on the old loans. It was a giant Ponzi scheme, and now it appears that everyone may suffer because of the excesses of the unchecked spendthrift borrowers.

[john c. halasz]

Slow to moderate growth over the next year, Prof Thoma? Why such relative optimism?

[Doug]

Even the rich are going to have to buckle down for the coming Gr8 Depression. Even the pool cleaners will not be available because they won't be able to drive to the mansion...