Yesterday, in his press conference, Fed Chairman Ben Bernanke said he really doesn’t know what the economy’s problem is.
Specifically, he said:
“We don’t have a precise read on why this slower pace of growth is persisting.”
That statement is pretty much a lie.
It’s not completely a lie, because no one ever has a “precise read” on why the economy is doing anything. But it’s a statement that ignores an elephant in the room, one that every open-eyed economist and market observer on the planet appears to be aware of except for Ben Bernanke.
What’s that elephant in the room?
The work of professors Ken Rogoff and Carmen Reinhart, Richard Koo, Paul Krugman, Niall Ferguson, and many other economists, which shows that–after debt-fuelled financial crises like the one we just had–economies take a long time to recover.
After such debt-binges, we often go through what are known as “balance sheet recessions.” In these recessions, recoveries are slow because the economy needs to “de-leverage”–meaning that it needs to work off the debt that built up in the decades leading up to the crisis. As the chart below illustrates, in the early 80s, Americans began to borrow more and more relative to their incomes–and they didn’t stop borrowing until 2007.
And as anyone who has ever had to cut back spending to work off credit card debt knows, it’s a lot harder to live large when you’re deleveraging than when you’re borrowing and spending.
Professor Ben Bernanke is a brilliant economist. It is inconceivable that he is unaware of the work of Rogoff, Reinhart, et al. And, therefore, every time Bernanke shrugs his shoulders and says he can’t imagine what the problem might be, he is intentionally playing stupid.
If Bernanke doesn’t believe the work of Reinhart and Rogoff–or doesn’t believe that we need to reduce our debts–fine. But if he doesn’t believe those things, then he needs to say so, and explain why not. Because the evidence that Reinhart and Rogoff are right is highly persuasive.
The last massive economy to go through a “balance sheet recession” is Japan–and Japan’s economy has been sputtering for two decades. There are obviously many differences between Japan’s economy and the US economy, but the basic debt-binge-followed-by-deleveraging is the same.
Ben Bernanke didn’t make us borrow all that money. Ben Bernanke didn’t tell us to rush out and get adjustable rate mortgages (like Greenspan). Ben Bernanke didn’t pooh-pooh all financial regulation until the entire financial system collapsed (like Greenspan). Ben Bernanke didn’t get us into this mess.
So, why can’t Bernanke just say that, odds are, the need to continue to reduce our debts will result in slow growth for many more years?
Why can’t he just level with the American people about the situation we’re in?
Why does he have to pretend that it’s just a complete mystery?
Is he afraid that, if he tells the whole truth, the country will get so depressed that we’ll just give up? Does he think we can’t handle the truth? Is he that worried about getting canned that he’s just not willing to step back and address this question forthrightly?
Level with us, Ben. We can handle it. We’ve overcome tougher challenges than this one.
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