Wednesday, July 9, 2008

Something to Munch On: "Recession is not the worst possible outcome"

In his recent column in the Financial Times ("Recession is not the worst possible outcome"), Wolfgang Münchau writes,

If this had been a mere financial crisis, it would be over by now. The fact that we are suffering its fourth wave tells us there might be something at work other than merely financial euphoria and bad regulation.

Münchau goes on to say that the prime cause of our current situation was 15 years of bad economic policies, particularly keeping real interest rates too low for too long. Given that he wonders, "whether the recipes that got us into this mess are also most suited to get us out again."

Worth reading in its entirety, though some of Münchau's prescriptions would seem unlikely to be implemented in the U.S. for political reasons, e.g., gearing monetary policy primarily toward price stability (instead of the Fed's current dual mandate: price stability and full employment), or imposing maximum loan-to-value ratios on mortgages (recall the resistance a few months ago to proposals to raise the down payments on FHA loans to 3.5% from 3%).


Daniel said...

Did you catch FT's recent article comparing the current blame game for a rise in oil prices with the one that occured roughly 50 years ago, with onions (when futures were banned)? Very interesting.

DaveinHackensack said...

No, but I'll have to look that one up.