What Happened in 2004?

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Over the weekend, Noam Scheiber offered a smart take on the question of Alan Greenspan’s interest rate policy between the bubbles:

Problem is, once you break the 2001-2004 easing into its 2001-3 and 2003-4 subcomponents, and you acknowledge that the point of the 2003-4 period was to prevent a deflationary spiral, Greenspan’s reasoning starts to look extremely circular. That is, Greenspan was lowering interest rates in order to prevent a costly deflation at the risk of creating a bubble which could lead to an even costlier deflation. But if you have the tools to prevent the costlier deflation from destroying the economy, then you have the tools to prevent the less costly deflation from destroying the economy, and there’s no need to pre-empt it.

Here’s a chart of the past ten years’ worth of interest rates:


As you can see, the very steep interest rate cuts during and in the wake of the recession are one thing. The additional lowering of rates in 2003 and the continuation of sub-two percent rates throughout 2004 is another matter. Meanwhile, there seems to be a taboo around talking about this, but it seems worth mentioning that while the low interest rates in 2004 were somewhat unorthodox monetary policy, they were almost certainly helpful to the George W. Bush re-election campaign.