The Great Recession was the worst downturn the economy’s suffered in decades. And although the U.S. has slowly but surely recuperated, another recession will strike again.
In fact, the economy could already be in trouble.
“Most recessions happen for a different reason each time,” says Tara Sinclair, chief economist for employment site Indeed. “So if we’re just too obsessed with the reasons that caused the first one, we may miss what causes the second one.”
But identifying signs of a recession before the downturn has started is notoriously difficult. Last weekend, the Federal Open Market Committee’s No. 2 authority expressed doubt that America’s central bank would “be able to anticipate” what may drag the U.S. into another recession.
William Dudley, the FOMC’s vice chairman and president of the Federal Reserve Bank of New York, discussed the difficulties of implementing so-called macroprudential tools – or policies that would allow the Fed to extend its reach and regulate aspects of the financial sector beyond certain banking institutions.
In theory, such tools – which could have been used to moderate the housing bubble’s impact on the economy by limiting high-risk real estate activity ahead of the Great Recession, for example – would give the central bank more control over the broader economy, potentially allowing officials to identify and remedy problem areas before they get out of control. The highs wouldn’t be as high in terms of profit, but the lows wouldn’t be nearly as catastrophic. Some would argue it’s an overly cautious approach, while others would say it’s a necessary hassle.
But part of the problem in implementing these policies is that economists could invest a significant amount of time and resources into looking for certain types of maladies, only to be blindsided by a recession they wouldn’t have seen coming anyway.
“My concern is that we could overengineer the financial system, building in complexity in response to potential risks that might, or might not, manifest themselves in the future,” Dudley said. “The complexity might not gain us much in terms of greater financial stability, either because the problem that ultimately manifested itself was different than we planned for, or because people found a way around the constraint that we had imposed on the system.”