Managed Money, the “Great
Recession,” and Beyond
DIMITRI B. PAPADIMITRIOU
The worst economic crisis since the 1930s afflicting most developed economies began in 2007 and is still not over. Financial and economic statistics in the United States and around the globe represent a troubling state of affairs. The United States and many other nations’ expansionary aims in fiscal policy (through relaxed taxation) and monetary policy (through low interest rates) have been insufficient to restore economic health. To be sure, the emerging market economies of Brazil, Russia, India, and China (the so-called BRICs) and a few others seem to have weathered the storm much better and recovered, showing significant growth rates. In America, however, the housing market has yet to stabilize, and despite the historically unprecedented measures of the Fed and the Treasury that have led to increased liquidity, banks are still reluctant to renegotiate mortgages or lend from their growing cash coffers.
Since 2007, more than $10 trillion of homeowners’ equity has vanished. Almost half of all mortgages are “underwater,” as debt exceeds the home’s original value, generating skyrocketing defaults and foreclosures. Unemployment remains very high, hovering over 9 percent in America and in many countries in Europe exceeding 12 percent. Consumers have decreased spending, are paying down debt or increasing savings, and, in general, they show a lot of pessimism for the future. Nonfinancial corporations are not investing, but keeping sizable amounts of cash. The pessimistic economic landscape notwithstanding, the official word from the business cycle arbiter, the National Bureau of Economic Research, has declared the 2007–9 recession over as of June 2009. Economic growth in America and Europe is very much below potential and not sufficient to end labor layoffs, much less robust enough to absorb new labor entering