Explaining the Great Moderation (with a very simple tl;dr)

 
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The Great Moderation was a decrease in macroeconomic volatility. Essentially, the business cycle just calmed down for a while, represented here:
Spoiler

If there are just three things you need to understand while studying economics, they're the Great Depression, the Great Moderation and the Great Recession. With, I think, the Great Moderation being the most important. How exactly did this decrease in business cycle fluctuations come about? Good monetary policy, is the answer.

A speech by Ben Bernanke (most recent Chair of the Fed) tells us that nominal income--as well as possibly inflation--is the only reliable indicator of monetary policy within an economy. Not interest rates, not commodity prices and not monetary aggregates. If we take this to be the case, how did monetary policy perform during the Great Moderation? Very well, indeed.
Spoiler

Alan Greenspan--Chair of the Fed at the time--has given conflicting views about whether or not they were targeting nominal income at the time. However, in a late 1992 FOMC meeting, Greenspan states:
Quote
I'm basically arguing that we are really in a sense using [unintelligible] a nominal GDP goal of which the money supply relationships are technical mechanisms to achieve that.
And this is supported by a study from Josh Hendrickson.

There has been some push-back against the monetarist line, especially by those who take a credit cycle-view of the economy. It goes back to a 1983 paper by Ben Bernanke, in which he argues that disintermediation between banks (otherwise known as a credit crunch, or debt-deflation) is a sort of 'real' shock which can make the economy worse by depressing aggregate demand.

This idea, however, doesn't hold up under scrutiny. There's no reason why financial crashes should drive the entire economy into a Recession, and indeed we've often seen that they don't, they just exacerbate already bad monetary policy--as in 2008. In 1987, just after Greenspan became chairman, the biggest crash in stock prices occurred. It was bigger than the 1929 stock market crash; in fact, it was so bad that 33 economists promulgated the view that the following years could be as bad as the 1930s. It wasn't. . . Pretty much nothing happened in the real economy, because the Fed injected liquidity and maintained aggregate demand.

These two graphs show what happened to nominal spending growth (aggregate demand) in 1987 and 2008.
Spoiler

And, in support of this view, a paper by the Bank of England concluded that quantitative easing works not because it facilitates lending, but because it maintains aggregate demand.

TL;DR:
- Good monetary policy = good economy.
- Alan Greenspan is forgetful, but a monetary god.


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Given the chance, would you sex Greenspan?


 
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Given the chance, would you sex Greenspan?
I'd have such a depressionary effect on his butthole, all of the monetary easing in the world couldn't maintain the demand for his prostitution.


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Given the chance, would you sex Greenspan?
I'd have such a depressionary effect on his butthole, all of the monetary easing in the world couldn't maintain the demand for his prostitution.
You should tutor me in econ by way of erotic analogies.


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Given the chance, would you sex Greenspan?
I'd have such a depressionary effect on his butthole, all of the monetary easing in the world couldn't maintain the demand for his prostitution.
You should tutor me in econ by way of erotic analogies.
gay gay gay gay gay gay gay gay gay gay
don't oppress me


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