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Blinder worried about a repeat of 1936

By Anonymous

Alan Blinder (Princeton professor of economics, and former vice chairman of the Federal Reserve) writes in the New York Times: It?s No Time to Stop This Train

From its bottom in 1933 to 1936, the G.D.P. climbed spectacularly (albeit from a very low base), averaging gains of almost 11 percent a year. But then, both the Fed and the administration of Franklin D. Roosevelt reversed course.

In the summer of 1936, the Fed looked at the large volume of excess reserves piled up in the banking system, concluded that this mountain of liquidity could be fodder for future inflation, and began to withdraw it. ...

About the same time, President Roosevelt looked at what seemed to be enormous federal budget deficits, concluded that it was time to put the nation?s fiscal house in order and started raising taxes and reducing spending. ...

Thus, both monetary and fiscal policies did an abrupt about-face in 1936 and 1937, and the consequences were as predictable as they were tragic. The United States economy, which had been rapidly climbing out of the cellar from 1933 to 1936, was kicked rudely down the stairs again ...

At some point the Fed will have to withdraw liquidity. And at some point the budget deficit will have to be addressed. Note: the budget deficit is especially difficult because there is a cyclical deficit built upon a significant structural deficit.

And reversing these monetary and fiscal policies will no doubt raise concerns of a double dip recession. But we are getting ahead of ourselves - we still need to get out of the current recession!

Full post as published by Calculated Risk on May 16, 2009 (boomark / email).