1. Did a financial crisis cause a fall in expected and actual aggregate demand? (With central banks being unable or unwilling to do enough to stop it).
2. Or did a fall in expected and actual aggregate demand cause (or worsen) a financial crisis? (With central banks being unable or unwilling to do enough to stop it).
Obviously, there is a positive feedback multiplier between financial crises and expected and actual aggregate demand growth. (If central banks are unable or unwilling to prevent there being positive feedback.)
I started to write a post on this, but scrapped it, because I couldn't think of any way to provide good evidence one way or the other.
Now David Beckworth has a very important post which provides evidence for the second hypothesis. Go read it. Or simply look at the picture. US households' expected dollar income growth started to fall well before the US financial crisis.
[Update: see also Marcus Nunes' post and graph.]
The purpose of this post is simply to draw attention to David's post, and to raise a few minor points:
1. It's not enough just to look at the US. The same thing happened in a lot of other countries at the same time.
2. Households' average expectations of their own nominal household income growth isn't exactly the same as expectations of nominal GDP growth.
3. You can see the 1982 and 2009 recessions clearly foretold in David's picture. But you can't see, or can only just see, the 1991 and 2001 recessions.
4. David's graph starts to head south in 2005. It's just a bit too early for comfort, if you want to say that declining expected nominal income is what caused the 2008 financial crisis and 2009 recession.
5. Putting 3 and 4 together: while it is a commonplace in intertemporal macroeconomic theory that a decline in expected future nominal income would cause a decline in current desired nominal expenditure ("aggregate demand"), that can't be the only thing that affects aggregate demand. Interest rates, for example, would be another thing. Can those "other things" fill in the small gaps between David's picture and what actually happened?
6. "Never reason from an expectations change". What caused/allowed expectations to change like that?
In any case, Scott Sumner's crazy idea that declining actual/expected NGDP is what caused (at least a large part of) the financial crisis, rather than vice versa, is looking a lot less crazy. And maybe it's time to put macro into finance, rather than (just) vice versa.
Gotta go grade exams, and do a lot of admin stuff.