Will the Recovery Continue? Four Fragile Markets, Four Years Later

Levy Economic Institute, Public Policy Paper No. 118

15 Pages Posted: 28 Apr 2011 Last revised: 1 May 2011

See all articles by Greg Hannsgen

Greg Hannsgen

Bard College - Levy Economics Institute

Dimitri B. Papadimitriou

Bard College - Levy Economics Institute

Date Written: April 27, 2011

Abstract

This public policy brief analyzes the current economic climate in light of recent data and commentary. The authors’ approach rests upon a Keynesian framework in which departures from full employment can persist even in the long run. Moreover, monetary policy matters in our view, but fiscal policy and finance are more central to the problem of stabilizing a modern economy. In keeping with Wynne Godley’s stock-flow consistent approach to macroeconomics, levels of debt and financial imbalances play a central role in our analysis through good times and bad. Problems with private-sector debt are a subtle and important matter, which we interpret through the lens of Hyman P. Minsky’s financial fragility hypothesis. In this public policy brief, we find that as of early spring 2011, the economic recovery is still alive, but numerous dangers lie both ahead and behind: ill-conceived calls for fiscal austerity in Washington and other capitals; concerns about monetary laxity that unfortunately persist in the face of low long-term interest rates and inflation in almost every major economy; undercapitalized banks that have yet to deal with the many low-quality assets that remain on their books; a dysfunctional public-finance system in the European Union; commodity prices that are in many cases rising at double-digit annual rates; and high rates of short- and long-term unemployment. Fortunately, in spite of these nagging issues, consumer spending and the export sector have been showing some signs of improved health. Nevertheless, our analysis suggests that the current situation requires increased fiscal deficits and additional long-maturity asset purchases by the Federal Reserve.

Suggested Citation

Hannsgen, Greg and Papadimitriou, Dimitri B., Will the Recovery Continue? Four Fragile Markets, Four Years Later (April 27, 2011). Levy Economic Institute, Public Policy Paper No. 118, Available at SSRN: https://ssrn.com/abstract=1824326 or http://dx.doi.org/10.2139/ssrn.1824326

Greg Hannsgen (Contact Author)

Bard College - Levy Economics Institute ( email )

Annandale-on-Hudson, NY 12504-5000
United States

Dimitri B. Papadimitriou

Bard College - Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504
United States
845-758 7711 (Phone)
845-758 9424 (Fax)

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