Writing in the Wall Street Journal, John B. Taylor takes the present common wisdom to task:
In the years leading up to the panic, mainly 2003-05, the Federal Reserve held interest rates excessively low compared with the monetary policy strategy of the 1980s and ’90s—a monetary strategy that had kept recessions mild. The Fed’s interest-rate policies exacerbated the housing boom and thus the ensuing bust. More generally, extremely low interest rates led individual and institutional investors to search for yield and to engage in excessive risk taking, as Geert Bekaert of Columbia University and his colleagues showed in a study published by the European Central Bank in July.
Meanwhile, regulators who were supposed to supervise large financial institutions, including Fannie Mae and Freddie Mac, allowed large deviations from existing safety and soundness rules. In particular, regulators permitted high leverage ratios and investments in risky, mortgage-backed securities that also fed the housing boom.
He continues by criticizing the bailout of Bear Stearns, the failure to bailout Lehman Brothers, TARP, the stimulus, Dodd-Frank, and the PPACA. While I agree that the monetary and regulatory policies of the Aughts set the stage for the financial crisis and subsequent economic doldrums, I think it’s important to recognize that none of the policies of which Dr. Taylor is so critical arose in a vacuum.
All other things being equal without the housing bubble there would have been virtually no growth at all in the economy and, especially, in employment. Other than healthcare and education that is which can hardly be called growth at all. The reason I put it that way is that when the increase in borrowing exceeds the increase in GDP the growth is illusory.
I think you’ve got to go a lot farther back than the Aughts and consider the problem much more deeply than that. One-way free trade undermines the mass employment-mass consumption paradigm of the post-war economy and we haven’t found a ready substitute.