Goldman Finds Most Modern Recessions Were Caused By The Fed

… Overnight, it was Goldman’ turn to scare its clients with an extended analysis of when and under what conditions the next recession could strike, and as Hatzius and co write in “s economic team write in The Next Recession: Lessons from History, “with the current expansion already the third longest in US history, investors have begun to look ahead to the next recession. We ask how likely the next recession is to come soon and where it is likely to come from….

While some frequent contributors to postwar recessions such as oil shocks look less threatening today, others such as declines in financial asset prices, sentiment-driven investment swings, and too-rapid tightening of monetary policy retain their relevance as recession risks. Combining lessons from this historical investigation, our cross-country recession model, and both our own research and academic research on US-specific leading indicators, we then develop a recession risk dashboard. The dashboard reinforces our view that recession risk remains only moderate.

While the answer to the first part remains elusive, and to Goldman it is still relatively low, the answer for the second part is clear: in the post WW2, virtually every recession (and depression) was caused by the Fed.

Goldman starts with a historical overview of the causes of recessions. Looking at 33 US recessions since the 1850s, it finds that while many pre-WW2 recessions originated in the financial sector, most post-WW2 recessions were caused by monetary policy tightening and oil shocks and, and sentiment-driven swings in borrowing and investment led to recessions in both eras. A similar IMF study of the key contributors to 122 advanced economy recessions shows that even before 2008, financial crises were a fairly common source of modern recessions too.

…continue reading

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