Recessions lose votes. Politicians don't care about economic cycles neither they want to hear about austrian economics.
The issue this time with a negative fed funds rate is that it's not being passed through. Look at most mortgage rates, they have been rising since late February. The fed is engineering the steep yield curve in order to re-capitalize the banking system in short order to get us out of this mess. But in general, the cheap money is not flooding into the economy. What is inflationary? The stimulus package, the housing bailout, ethanol subsidies, OPEC, the farm bill...etc.
It seems he's alluding to a prolonged 70s style period of stagflation rather than a 30s full-fledged global depression. From another article by the same author http://www.ft.com/cms/s/0/260eef4a-2a6f-11dd-b40b-000077b07658.html
I second this. Thanks for posting thought provoking articles and starting great threads. Always enjoy your posts Mr. ByLoSellHi.
That's a good catch, and a thorough follow-through. I think that I now have to reinterpret some aspects of the original article, but I don't know how to come to any under conclusion other than a full flown depression is possible when the author writes: I'll just quote his conclusion (which admittedly, is much of the article), and highlight why I think he implies what's not comparable to the 70's may devolve into a 30's-type situation without intervention by regulators: At the heart of the New Keynesian doctrine stands the so-called dynamic stochastic general equilibrium model, nowadays the main analytical tool of central banks all over the world. In this model, money and credit play no direct role. Nor does a financial market. The modelâs technical features ensure that financial markets have no economic consequences in the long run. This model has significant policy implications. One of them is that central banks can safely ignore monetary aggregates and credit. They should also ignore asset prices and deal only with the economic consequences of an asset price bust. They should also ignore headline inflation. An important aspect of these models is the concept of staggered prices â which says that most goods prices do not adjust continuously but at discrete intervals. This idea lies at the heart of some central bankersâ focus on core inflation â an inflation index that excludes volatile items such as food and oil. There is now a lively debate â to put it mildly â about whether an economic model in denial of a financial market can still be useful in the 21st century. So when economists tell us that we need to keep real interest rates negative, just as we did for long periods in the past 15 years, or that we now need to bail out homeowners and banks and raise our national debt in the process, or ignore any considerations of moral hazard while the crisis is raging, we might want to question whether the recipes that got us into this mess are also most suited to get us out again. If we believe, as the BIS does, that a rapid expansion of money and credit has either caused, or significantly contributed to, the build-up of asset price bubbles and higher inflation, the opposite policy conclusions might be more appropriate. .... We might run a greater risk of a recession in the short term. But a recession is not the worst possible outcome. The worst is for this crisis to go on and on, for Minskyâs moment to become an eternity.' But back in the 70s, and for much of the 80s, central bank policy did focus on prices stability and core inflation. And that focus helped to avoid the lack of 'moral hazard' that allowed large asset bubbles to form - at least as often. By abandoning this principle, I believe the author is arguing asset bubbles have and will become more frequent and perverse, and the consequences of credit losses will become much, much more prolonged, deeper, and will threaten lending and consumption after such asset bubbles implode.