The Wilder View

Policymakers got it wrong too

What happened on December 1, 2008? The National Bureau of Economic Research (NBER) announced that the U.S. entered its 22nd recession since the turn of the century in December 2007. Global economies are also in recession – Eurozone, U.K., Japan – driven by the U.S. financial storm and record inflation rates.


The NBER announcement sparked many bloggers to look back on who called the recession and who did not. Here is a short list of examples:

  • Boom2Bust compiled a list of memorable no recession calls
  • Econbrowser revisits its indicator index and gives props to Calculated Risk for adding recession bars to their charts back in March 2008.
  • Barkley Rosser argues he was not wrong on the recession call but the USD call.

What I think is a little more telling is how policymakers – except Bernanke – did not see this coming. Bernanke started to cut pre-emptively – back in September 2007, and before the recession started – in response to the crash of the sub-prime mortgage market. But some economies were less fortunate.

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The chart (click to enlarge) illustrates daily policy rates for key central banks – Federal Reserve Bank (Fed), Bank of Japan (BoJ), European Central Bank (ECB), Bank of England (BoE), and the Bank of Canada (BoC) – spanning the dates 01/03/2000 to 12/05/2008. During the 2001 U.S. recession, global central banks cut policy rates in concert. However in 2008 and amid rising inflation, the Fed cut first in Sep. 2007, followed by the BoC and the BoE in Dec. 2007, and lastly the ECB and BoJ cut in Oct. 08.

The biggest no-recession folly is Trichet’s no-U.S.-recession-spreads-to-Eurozone-call. Here is an excerpt from the Internaional Herald Tribune on February 14, 2008:

”The European Central Bank president Jean-Claude Trichet said Thursday that his counterparts in the United States and Britain had cut interest rates based on a “very different” economic outlook to the one in the euro area, signaling he is in no rush to follow suit.”

The President of the Eurozone – the central banker for 15 economies – seriously underestimated the global implications of the U.S. financial crisis. Trichet likely agreed with the German Finance Minister Peer Steinbrück, This crisis originated in the US and is mainly hitting the US,” he said. Oh how wrong they were because the G7 economies have all experienced the same outlook (ex post) – contracting economic growth in 2008 (see chart above).

Bernanke got it right: in spite of record inflation, 5.4%, Bernanke said this at the Fed meeting in Jackson Hole on August 22, 2008:

”Although we have seen improved functioning in some markets, the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment. Add to this mix a jump in inflation, in part the product of a global commodity boom, and the result has been one of the most challenging economic and policy environments in memory.”

Ex post, economists will likely say that Bernanke’s mistake was not easing further or not starting his policy of quantitative easing earlier.


Inflation surged and is likely one of the direct causes of the 2008/2009 recession. However, global policy makers (ex the Fed) put too much weight on the inflation pressures and not enough weight on the U.S. financial storm. Inflation targeting is not an inflexible rule. The ECB, the BoE, and the BoC could have been more aggressive in their policy rate cuts.

You all know that I likey Bernanke. The U.S. would be a lot worse off if Trichet were our central banker rather than Ben Bernanke.

Originally published at the News N Economics blog and reproduced here with the author’s permission.

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