Sunday, August 31, 2008

The Cause Of The Weak 2001-07 Recovery

Via Barry Ritholtz I see this NYT article about how the 2001 to 2007 expansion was the weakest expansion on record, at least in terms of average annual growth. If you consider its length it was greater than some previous expansions (such as the very short-lived expansions from July 1980 to July 1981 and from April 1958 to April 1960), but still one of the weaker.

What was the cause of this? The NYT journalist, Floyd Norris mentions one of the explanations, namely that the 2001 recession was so short and mild and that the weak recovery was in part a pay-back for this. However, he argues that this can only explain some of it since the expansion even including the previous recession was slower than previous ones. However, what he fails to consider was that the 2001 recession really should have been a relatively severe one, since it came after a massive tech stock bubble had been deflated and large imbalances had been accumulated. Normally, when you see bubbles like that you have sharp downturns afterwards. But because Greenspan quickly inflated a housing bubble by cutting interest rates from 6.5% to 1.75% in less than a year the recession was shallow.

The payback for this came in two forms. Both in the relatively slow boom between 2001 and 2007 and in the new recession that most likely started in November 2007 (I see that like me, Norris dates the end of the peak of the boom to October 2007)


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