by Sandy Ikeda
This passage is from a piece in, of all places, Scientific American, from, of all people, Jeffrey Sachs:
During the decade from 1995 to 2005, then-Federal Reserve chairman Alan Greenspan over-reacted to several shocks to the economy. When financial turbulence hit in 1997 and 1998—the Asian crisis, the Russian ruble collapse and the failure of Long-Term Capital Management—the Fed increased liquidity and accidentally helped to set off the dot-com bubble. The Fed eased further in 1999 in anticipation of the Y2K computer threat, which of course proved to be a false alarm. When the Fed subsequently tightened credit in 2000 and the dot-com bubble burst, the Fed quickly turned around and lowered interest rates again. The liquidity expansion was greatly amplified following 9/11, when the Fed put interest rates down to 1 percent and thereby helped to set off the housing bubble, which has now collapsed.
[…] President Barack Obama’s economic team is now calling for an unprecedented stimulus of large budget deficits and zero interest rates to counteract the recession. These policies may work in the short term but they threaten to produce still greater crises within a few years. Our recovery will be faster if short-term policies are put within a medium-term framework in which the budget credibly comes back to balance and interest rates come back to moderate sustainable levels.
Here is the entire article, “The economic need for stable policies, not a stimulus.”
Hat tip to Virginia Ikeda.
The response to my bleg has been very helpful and quite heartening, and I thank everyone who responded. Based on “accuracy and distance,” however, the winner appears to be Fred Foldvary, who in 1997(!) hits it on the nose:
“the next major bust, if there is no major interruption such as a global war, will be around 2008.”
(American Journal of Economics and Sociology 56(4): 521-41, quote at p. 538.) Thanks to Dan Klein for the tip and the cite.
Foldvary combines an Austrian business cycle model with a (Henry) Georgist theory of the macroeconomic cycle to craft what he calls a “geo-Austrian” model, and comes up with an 18-year boom-bust cycle. The html version of the article is here.