The Failure of Demand Management Policy since 2007…: Evening Comment

Suppose you had told the Federal Reserve back in mid-2007: you are about to be hit by the biggest adverse-demand and credit-channel shock in history, which will create the largest overhang of undesired risky debt ever.

Would anyone at it then have said: “Good! Let’s lower the price level seven years from now by 5% relative to expected trend, and lower nominal GDP seven years from now by 12% relative to currently-expected trend!”?

In the five years after the Great Depression trough in 1933 nominal GDP grew by 52%. In the five years since the Lesser Depression trough in 2009 nominal GDP has only grown by 18%.

And the response from my friends in the Fed, the Treasury, and the White House is: “we did everything we could” and “everybody else has done worse”…