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Spin one for the Gipper, cont'd

Paul Krugman has more on the difference between the 1981 recession and the 2007 financial crisis:

The 1981-2 recession was a very different kind of event from the 2007-9 recession: basically, it was a recession deliberately created by the Fed to bring down inflation. The Fed raised interest rates sky-high, causing a plunge in home construction, which was the main driver of the slump. When Paul Volcker believed that we had suffered enough, he cut rates, housing sprang back — and it was housing that mainly drove the recovery. Reaganomics was basically irrelevant.

The 2007-9 recession was driven by the collapse of a huge housing bubble, and the resulting financial fallout. The Fed couldn’t cut rates sharply, because they weren’t all that high to begin with; there couldn’t be a housing boom, because housing was already overbuilt. Here’s the picture:

Thumbnail image for fredgraph.png

By Ezra Klein  |  August 4, 2010; 1:53 PM ET
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"The Fed couldn’t cut rates sharply, because they weren’t all that high to begin with..."

The Fed was (and still is) pushing on a string on interest rates. So the Fed began its quantitative easing program on a massive scale to rescue the US banking system.

What are the prospects for the US economy with housing potentially falling off a cliff in the second half of this year?

Posted by: tuber | August 4, 2010 3:19 PM | Report abuse

I think it's great to have apologists like Ezra actively campainging for our ruling class no matter how corrupt they are.

Journolist proves that.

Posted by: WrongfulDeath | August 5, 2010 8:46 AM | Report abuse

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