By Laura Conaway

Don't blame Alan Greenspan, at least not too much. That's one of the unstated conclusions from the International Monetary Fund in its World Economic Outlook for October. The IMF looks at causes and cures of the economic crisis, and finds that "monetary policy was not the smoking gun."

Greenspan, the former chair of the Federal Reserve, kept interest rates low during the first part of this decade. Economists, including ones Planet Money talks to, say Greenspan's policy steered investors away from relatively safe instruments like U.S. Treasurys and into riskier mortgage-backed securities.

The IMF notes that loose monetary policy had an effect, then concludes "it is not likely to have been the main systematic cause of the booms and subsequent busts across the global economy." Central banks did miss the warning signs, the IMF says, and thus the chance to raise rates and stave off a crisis.

After the jump, how long will the crisis drag on?

The IMF surveyed nations that have been through a financial crisis and found there's no quick path back to the old level of prosperity. From the IMF:

For the average country, output per capita declines by about 10 percent of its precrisis trend and fails to rebound seven years after the crisis, although there is a large variation in outcomes across crisis episodes. This result holds for both advanced and emerging economies.

What helps? Government money and plenty of it.

The medium-run output loss is not inevitable. Some countries succeed in avoiding it, ultimately exceeding the precrisis trajectory. Although post-crisis output dynamics are hard to predict, the evidence suggests that economies that apply macroeconomic stimulus in the short run after the crisis tend to have smaller output losses over the medium run.

The other salve is financial reform, the IMF says. World leaders have repsonded with an effective round of stimulus measures, the group notes. Now if they can just get on with "implementing reforms."

categories: Forecasts

3:47 - September 22, 2009

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