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  Martin Feldstein’s Looming Recession

  By James Annable | Oct 12, 2018

  In a WSJ op ed (9/28/2018), Martin Feldstein warned that “another recession is looming”. There are reasons for readers not to be alarmed. Newspaper editors are notoriously eager to publish anything that foretells the serious pain of deep macro contractions. Such stories excite readers. Moreover, in Feldstein’s case, the “looming” recession at the beginning of his piece morphs into “a downturn brought on in the next few years” at the end. No economist actually employed to make some sense out of the the macro future could get away with such a wandering time frame after dramatically promising a “looming” recession.

  But I am not interested in Marty’s forecasting accuracy. I read the piece to see what kind of macro model he is using to support his pessimism. It appears he remains mired, along with his mainstream colleagues in the academy, in the attempt to make market-centric general-equilibrium analysis stabilization-relevant. His argument rehashes of the housing bubble that occurred in  the run-up to the great Recession. That’s OK but far from sufficient. He must show how a events in a relatively small sector of the economy will cause a substantial contraction of employment and output in the rest of the economy.

  The academy’s consensus 2008-09 story motivates that collapse with the nontransparent  packaging of subprime residential mortgages along with standard low-risk home loans into CDOs that were sold broadly to financial institutions. The ostensible problem was the widespread fraud with respect to the documentation of subprime household income that induced outsized loan default that contaminated the whole class of residential mortgage CDOs. With the bankruptcy of Lehman Brothers, which had concentrated holdings of the suspect instruments, investors became sufficiently scared to spurn the all residential mortgage assets; and the episode of extreme instability was underway. Feldstein offers an interesting variant on that well-known story. He makes no mention of subprime mortgages, the star of the Big Short and by popular consensus the cause of the Great Recession.

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