Eakinomics: Recession, Retro-style?

Eakinomics: Recession, Retro-style? In 2000 the dot-com bubble burst, and by the end of 2002 roughly $5 trillion in equity wealth had been erased. The fallout from the financial-market meltdown spilled over to Main Street America, and the United States experienced a relatively mild recession. In 2006, the housing bubble peaked and by the time house values hit their trough, roughly $6 trillion of wealth had been destroyed. Unlike the equity loss, the housing bubble was highly leveraged, and the bad mortgage debt had been packaged and re-packaged throughout the financial sector. The result was the financial crisis and Great Recession – the most severe economic downturn since the Great Depression. The key commonality is that both 21st century recessions originated in the financial markets and spilled over to the real economy. In those circumstances, monetary authorities around the globe, the Federal Reserve in particular, were very effective at flooding markets with liquidity and relatively quickly stabilizing financial markets. The climb out was long and arduous, but the downturn was stemmed effectively. Now suppose that coronavirus continues its relentless spread, becomes a genuine pandemic, and the scale of supply chain disruption and quarantining balloons. (Notice that I said “suppose,” which means that this is entirely hypothetical, so I cannot be accused of fanning the flames of panic, which is – of course – exactly what I’m doing.) Mechanically, this situation will result in a mix of negative supply shocks (loss of life, labor supply, and human capital, plus supply-chain interruptions that raise costs) and negative demand shocks (reduced demand for movies, restaurants, airlines, etc.). Most likely it will cause a global recession, and probably one in the United States as well. In these circumstances, how effective will be a sole reliance on monetary policy? Real interest rates are already negative and there will be little impact from stabilizing financial markets. The key stabilization will be the real economy, and financial markets will follow. Fiscal policy would be useful, but Europe, in particular, appears unable to muster a fiscal policy. In short, running the now-familiar 21st century playbook will likely be unsuccessful. Given the poor odds of an effective global response, a premium should be put on minimizing the economic fallout to begin with. The key element is to maintain household confidence which, in turn, requires a clear and transparent identification of the problems and associated responses. That wasn’t the playbook in China. Will it be elsewhere?