Less Bang for America’s Stimulus Buck
At the height of the crisis, the combined effect of fiscal stimulus and massive monetary easing had a big impact in preventing a credit freeze and limiting the downward spiral in asset prices and real economic activity. But that period is over, because counter-cyclical policy cannot undo the damage that excessive leverage caused to balance sheets in the financial and household sectors.
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MILAN – The run-up to the economic crisis in the United States was characterized by excessive leverage in financial institutions and the household sector, inflating an asset bubble that eventually collapsed and left balance sheets damaged to varying degrees. The aftermath involves resetting asset values, deleveraging, and rehabilitating balance sheets – resulting in today’s higher saving rate, significant shortfall in domestic demand, and sharp uptick in unemployment.