Great Moderation and Great Recession are they related?

The post-'85 period until the credit crisis has been called the Great Moderation. The standard deviation for GDP fell significantly. We went from period of calm to the big fall-out with the recession, yet we are still seeing forecasts for relatively stable GDP and little dispersion in forecasts. The market fell but it is not clear there will be a reversal of the great moderation. Is this luck or good policy? We know that policy has not worked given that we had the surprise credit crisis, or did it? We willingness to have strong activist Keynesian policies tied with better macro information may have credit downside protection in GDP. This has created the moderation in the GDP standard deviation. However, a smoother GDP as evidenced by the Great Moderation may have actually increased the risk of a crisis.

The contradiction that more stability creates more risk is the essence of the Minksy approach to crisis. We have reduced perceived uncertainty which meant that more risk-taking was done during the last ten years. More leverage occurred in the global economies so that when a crisis did occur, the impact became larger. Risk taking is again increasing because the response of governments was swift which places a floor on the downside. We continue the cycle.

While the Great Moderation has been viewed by many as a function of good luck, the policies used further enhanced the Moderation to allow for more risk-taking.