La Follette and Economics professor Menzie Chinn recently gave a talk on his soon to be released book titled The Lost Decades: The Making of America’s Debt Crisis and the Long Recovery, co-authored with Harvard professor Jeffry Frieden. The book comes out on Monday, September 19th and promises to be one of the more analytical and critical looks at the Great Recession in a sea of works based on speculation and sensationalism. The Lost Decades looks at all of the possible scenarios for the recession and expounds upon the various factors that contributed to the $2.8 trillion loss in GDP the U.S. experienced in the recession. Explanations of the crisis include: the failure of Fannie Mae and Freddie Mac, the Community Reinvestment Act, credit default swaps and obligations (CDS’s and CDO’s), the monetary policy of the Fed, the existence of a large global savings glut, alleged criminal activity, the expansion of deregulation across many industries, and tax cuts and fiscal profligacy. Chinn and Frieden make the claim that the Great Recession is an example of a classic capital flow cycle crisis that was compounded by financial innovations.
In The Lost Decades Chinn and Frieden address the Bush Administration’s interpretation of the crisis which blamed the recession on the global savings glut that depressed interest rates leading to a search for higher yields in bond markets. This coincided with a housing boom, the overleveraging of bad debts, and the collapse of various entities within the shadow-banking system, namely Bear Sterns and Lehmann Brothers. Chinn and Frieden also consider the impacts of the growing structural deficit of the United States that has resulted from the 2001 and 2003 tax cuts and the how the disappearance of higher premiums for “risky behavior” set the economy up for what was an inevitable collapse.
Chinn and Frieden point to several policy challenges that have resulted from the recession namely: reigning in the debt in an era of slow growth, regulatory reform, and the need for tax reform. They also point out several solutions that aim to pull the U.S. out of its economic malaise including: higher capital requirements, expanding regulations to the shadow-banking sector, requiring exchange trading of CDS’s, and consumer financial protections.
The Lost Decades promises to be one of the more insightful books that looks into the Great Recession and rather than focusing on the individual actors or dramatic stories that have accompanied it, The Lost Decades looks at the conditions present at the collapse and provides a means to avoid its replication.
Econbrowser – Professor Chinn’s blog