Economists, such as Larry Summers, have been seeking an explanation for the weak recovery. The need for an explanation is pressing, since the economy has been surprisingly unresponsive to conventional monetary and fiscal stimulus.
The credit market had a major shock when Lehman defaulted, and has suffered from PTSD ever since. The deleveraging process took three years, from the end of 2007 to the end of 2010. Total credit did not begin to grow again until late 2010, and a number of sectors took much longer to complete the debt reduction process. Only now has the process finally ended, although the PTSD remains.
- Nonfinancial businesses
- Financial businesses
- State & local governments
- The federal government
The failure of the Fed to get control of the money supply is explained by the headwinds resulting from the credit cycle, particularly the financial sector, as well as its unwillingness to adopt sufficiently radical policies despite lip-service to the contrary. The Fed has missed its statutory employment and inflation targets for the past five years. The Fed allowed the credit cycle to overwhelm its stimulus efforts (as it did in 1930-33).
Credit has not been flowing to the economy at a pace anywhere near the pre-crash rate. In fact, it’s even worse than that: credit growth today is lower today than at any point between WW2 and the Crash. Currently growing at 3%, it had never before dipped below 4% even during the worst postwar recessions. This is a huge drag on both AD and money growth.