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Is the financial crisis causing a recession?

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  • Tatom, John

Abstract

The U.S. entered a recession in December 2007. Coming in train with a foreclosure crisis that began in late 2006 and its associated financial crisis that began in August 2007, there is a tendency for analysts to attribute the recession to the financial crisis. The worst aspects of the financial crisis that attract attention today did not begin until September 2008 well after the recession began. Other factors account for the recession and could portend the imminent end to the current recession. A leading candidate for the cause of the current recession is the Federal Reserve (Fed). The Fed has caused every post-world war II recession, according to most experts, especially Milton Friedman. In late 2006 there already were signs of a sharp slowing in money growth in place portending recession; see Tatom (2006). This slowing lasted until September 2008. The recent recession has also been influenced by sharp increase in oil prices in 2007-08 that raised the relative price of energy. Subsequently, oil prices fell sharply. Thus, like the monetary policy influence, the energy price shock influence on the recession is in the process of rapidly disappearing and reversing. This is similar to the oil price shock related to the first Kuwait-Iraq war in 1990-91 when a larger and faster run-up in oil prices created a recession followed by a quick reversal of oil prices and economic recovery. Oil prices are falling faster in the current recession from their peak in July 2008. If the Fed caused the current recession and energy prices made it worse and longer, and if there were no other factors influencing it, then a quick end could be in sight, in the first or second quarter of 2009.

Suggested Citation

  • Tatom, John, 2008. "Is the financial crisis causing a recession?," MPRA Paper 12712, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:12712
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    File URL: https://mpra.ub.uni-muenchen.de/12712/1/MPRA_paper_12712.pdf
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    References listed on IDEAS

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    1. Tatom, John, 2006. "Money Growth Has Slowed Sharply—Should Anybody Care?," MPRA Paper 17780, University Library of Munich, Germany.
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    Cited by:

    1. Costa Cabral, Nazare, 2010. "Breve guia temático e bibliográfico sobre o estudo da actual crise financeira e económica
      [Short thematic guide to the study of current financial and economic crisis]
      ," MPRA Paper 20743, University Library of Munich, Germany.
    2. Tatom, John, 2009. "The Superlative Recession and economic policies," MPRA Paper 13115, University Library of Munich, Germany.

    More about this item

    Keywords

    Financial crisis; recession; monetary policy; oil price shocks;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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