Paul Krugman: Botching the Great Recession: "The acute ph...

Paul Krugman: Botching the Great Recession: "The acute phase of the financial crisis... was relatively brief... scary and did immense damage���America lost 6 �� million jobs in the year after Lehman fell. But... measures of financial stress fell off rapidly in 2009, and were more or less back to normal by the summer. Rapid financial recovery did not, however, produce rapid recovery for the economy as a whole. As the same figure shows, unemployment stayed high for many years...

...Why didn���t financial stability bring a rapid bounceback? Because financial disruption wasn���t at the heart of the slump. The really big factor was the bursting of the housing bubble���of which the banking crisis was a symptom.... The housing bust led directly to a dramatic drop in residential investment, enough in itself to produce a deep recession, and recovery was both slow and incomplete.... What should we have done to produce a faster recovery? Private spending was depressed; monetary policy was ineffective because we were at the zero lower bound on interest rates. So we needed fiscal expansion, some combination of spending and tax cuts. And we did, of course, get the ARRA���the Obama stimulus. But it was too small and, even more important, faded out much too quickly....

Why, then, didn���t we get the fiscal policy we should have had? There were, I���d say, multiple villains.... First, we can argue whether the Obama administration could have gotten more; that���s a debate we���ll never see resolved. What is clear, however, is that at least some key Obama figures were actively opposed to giving the economy the support it needed. ���Stimulus is sugar,��� snapped Tim Geithner at Christina Romer.... Very Serious People pivoted very early from concern about the unemployed���hey, they probably lacked the necessary skills���to hysteria over deficits. By 2011, unemployment was still over 9 percent, but all the Beltway crowd wanted to talk about was the menace of the debt. Finally, Republicans blocked attempts to rescue the economy... claimed that this was because they cared about fiscal responsibility���but it was obvious to anyone paying attention (which unfortunately didn���t include almost anyone in the news media) that this was an insincere, bad-faith argument..... The end result was that policy moved quickly and fairly effectively to rescue banks, then turned its back on mass unemployment. It���s a story that���s both sad and nasty. And there���s every reason to believe that if we have another crisis, it will happen all over again...

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