Disappointing Bernanke

Federal Reserve Chairman Ben Shalom Bernanke made several important statements in testimony to Congress's Joint Economic Committee that the Fed. In essence, they show the  impotence of economic theory and thus economic authorities basing their policies on wrong understanding. Several examples:
1. “.. Recent revisions of government economic data show the recession as having been even deeper, and the recovery weaker, than previously estimated; indeed, by the second quarter of this year--the latest quarter for which official estimates are available--aggregate output in the United States still had not returned to the level that it had attained before the crisis.”

Any economics, financial or monetary policy should include some expected level of uncertainty in real time measurements such as real GDP and inflation (the GDP deflator). If it is always a surprise, how can one build a reasonable response and policy? One should never characterize an economy with one number without uncertainty. It contradicts scientific methodology.

2. “Slow economic growth has in turn led to slow rates of increase in jobs and household incomes.”

This statement presumes that there can be a situation when slow growth may lead to higher rates of increase in jobs and incomes. Actually, all these processes are equivalent and no one leads to another. They coexist.

3. “ Consumer behavior has both reflected and contributed to the slow pace of recovery.”

This statement is beyond any understanding. Consumers are treated as a black box without any rules how “garbage in” is converted into “garbage out”. This is a typical economic statement which explains every deviation in real economic growth as consumer behavior expressed in demand/supply shocks. Nobody knows what drives these shocks and why the economy runs away from the balance. In a way, this explanation creates a malice loop without start and end.

4. “Other sectors of the economy are also contributing to the slower-than-expected rate of expansion. The housing sector has been a significant driver of recovery from most recessions in the United States since World War II. This time, however, a number of factors--including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of "underwater" mortgages (on which homeowners owe more than their homes are worth)--have left the rate of new home construction at only about one-third of its average level in recent decades. “

This deserves a special attention. Here Ben unfolds reasons one layer down. The housing sector slumps due to a number of factors. These factors are obvious results of the overall economic slump. What raises again the question on the reasons of the economic slump itself, and this is not housing as one can judge.

5. “ Nonetheless, financial stresses persist.”

Thus, the current financial crisis is a process which does not depend on real economic growth and when it is over, the economy will rocket up. Does that mean that the financial crisis could be healed without economic growth, but as it is? I would expect that the financial crisis will end when real economic growth recovers. In my opinion, it will happen in 5 to 10 years.

6. “In view of the deterioration in the economic outlook over the summer and the subdued inflation picture over the medium run ...”

This is a mere declaration of the status quo. However, the inflation projection is right as we showed many years ago

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