The Secret Culprit of the Great '08 Contraction: The Dollar's Flexibility Upward

Not everybody agrees on the causes of the Great Recession, but there is one verity that we all typically hold to: as the collapse really hit back in 2008, the United States stepped in big time to bail the financial system out.

Look at the charts, and you see what appears to be overwhelming evidence. A tripling of the money supply. TARP loans at $800 billion. (Nominal) interest rates lower than ever. Budget deficits past $1 trillion. All these things materialized in late 2008, just as the economy lunged into “freefall”—another security blanket of those who think they know the general outline of things in the annus mirabilis of 2008.

Here and there, voices have pointed out inconvenient facts. John B. Taylor, the Stanford economist, for example, has been mentioning for years now that the housing bubble popped in early 2007. The vaunted Case-Shiller index sure shows as much. It was in full-fledged decline throughout 2007, at no perceptibly greater rate than in 2008.

The next point Taylor will make is the obvious one: there was no Great Recession in 2007. Not even at the end: though the “official” dating of the recession now begins with December 2007, by the old simpliste definition of two consecutive quarters of negative growth, recession did not come till summer 2008.

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