Does the Housing Boom Signal the End of the Slow Recovery?

By Michael D. Bordo

The recovery from the financial crisis of 2007‐2008 has been proceeding for 16 quarters, slower than every preceding recession with a financial crisis in U.S. history. Many have argued that the sluggish recovery reflects the severity of the financial crisis. Yet this goes against the record of U.S. business cycles in the past century and a half.

According to Nobel Prize winning economist Milton Friedman, “A large contraction tends to be followed by a large business expansion.” Friedman explained this tendency for a rapid bounce back from a deep recession by his plucking model. He imagined the U.S. economy as a string attached to an upward sloping board, with the board representing the underlying growth rate. Recessions were downward plucks on the string and recoveries were the string bouncing back—the greater the pluck, the faster the bounce back to trend.