"I'm with Brad"

Jared Bernstein:

Diagnoses and Prescriptions: The Great Recession: There’s a very interesting, albeit down-in-the-weeds, analytic debate brewing around a confluence of recent publications. Tim Geithner’s new book defends the interventions of the Treasury department he led to reflate credit markets (and I worked with the team on this back then). Mian and Sufi’s new book ... argues that Treasury got it wrong by not recognizing the extent to which debt burdens were restricting growth and intervening in ways to write off more debt...

Dean Baker has long argued the problem was not just the debt overhang but the wealth effect’s sharp shift into reverse when the housing bubble burst. That’s similar to Main/Sufi except it implies that even had you forgiven the debt, consumption still would have tanked. Brad DeLong articulates an “all-of-the-above” theory, suggesting each of these analyses gets at one part of the problem but you need all of them to understand what happened.

Here’s what I think..., you have to do everything you can to get the system back up. You have to reflate the credit system through both liquidity (as in the TARP) as well as Mian/Sufi-style principal reductions and cramdowns of mortgage debt that cannot realistically be serviced without sustained pain. The administration did a lot of the former and little (not none) of the latter. ...

Dean’s point means that debt forgiveness and revived credit flows must be met with deep fiscal stimulus that lasts as long as needed. ... With the private sector still licking its wounds, absent committed stimulus there’s no reason to expect deleveraging, or even aggressive monetary policy, to trigger the growth needed to reach escape velocity. ...

So I’m with Brad—all of the above. And let’s keep it real: the problem was not only that we didn’t do all of the above. It’s that even when we did the right things, we didn’t stick with them long enough. The important thing is to try to learn from our mistakes, and I for one am thankful to all of these authors for continuing to plumb these deep waters. ...