Recessions Are Predictable If One Has Eyes Open

Dean Baker on 2016 July Jobs ReportRecessions are caused by one of two things: either the Fed brings them on as a result of raising interest rates to combat inflation or a bubble bursts throwing the economy into a recession.

Taking these in turn, if the Fed were raising interest rates in response to actual inflation (and not the creative imagination of FOMC members) then we would presumably be looking at a higher interest rate structure throughout the economy. In that case, the Fed should then have more or less as much room to maneuver as it has in prior recessions.

The bubble story could be bad news, but it is important to think a bit about what a bubble bursting recession means. There has been a serious effort in many circles to treat bubbles as really sneaky creatures. They just pop up when no one is looking and then they burst and sink the economy.

That is a convenient view for all the people who were in positions of responsibility in the housing bubble years and ignored the threat the bubble posed to the economy. But the reality is that the housing bubble was easy to see for anyone with their eyes open.

—Dean Baker
Bernstein and Krugman Worry about the Fed and the Next Recession

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