Has the ‘Great Moderation’ returned — and is that a good thing?
By Andrea Riquier
Have we returned to the Great Moderation? That was the question posed by Paul Ashworth, chief U.S. economist for Capital Economics, in a note out Wednesday. The “Great Moderation” is the name often given to the period from the mid-1980s to 2007, when the Federal Reserve kept inflation and economic growth relatively stable… until it all collapsed in spectacular fashion in the global financial crisis of 2008. …Indeed, when the Federal Reserve rushed to calm the overnight financial markets in September, Washington analyst Karen Petrou had this to say: “The Fed promised yet again to ‘do what it takes’ by way of an unlimited backstop to stabilize financial markets,” Petrou said. “Far worse, repo-market turmoil parts the curtain, revealing the imperial U.S. central bank to be a flummoxed Fed as unimpressive as the embarrassed Wizard of Oz. In the years before 2008, the Fed’s flattering fiction was Greenspan’s ‘Great Moderation.’ Since then, it’s been what I’ll call the Great Stability — that is, safer banks mean safer markets. Both illusions pleased internal Fed expectations of perfect objectivity backed by awesome analytical prowess. Their demise proves that central planning done by central banks is no less dangerous than any other kind of central plan.”