Tuesday, December 08, 2009


The basic argument is very simple. The country had an enormous housing bubble. This bubble drove the economy ever since the last recession in 2001. It propelled the economy directly through a building boom that sent housing construction to record levels. Indirectly, it led to a consumption boom as people spent money based on the $8 trillion in housing equity that was temporarily created by the bubble.

When the bubble collapsed...We lost close to $500 billion in annual demand due to the collapse of housing construction. The building boom created an enormous glut of housing. There will be little need for new construction for several years in the future.

The disappearance of trillions of dollars of bubble generated housing equity led to a plunge in consumption. Annual consumption has fallen by close to $500 billion. If we add in a loss in demand of close to $200 billion associated with the bursting of a bubble in commercial real estate, the collapse of the bubbles led to a fall in annual demand of close to $1.2 trillion. The Fed has nothing in its bag of tricks that allows it quickly replace $1.2 trillion in demand, which is why the country is now mired in double-digit unemployment.

...Bernanke and his sidekick, Greenspan, chose to take none of these measures. Instead they insisted everything was fine the whole time. Things were not fine and the country is paying the price. And yes it is very much Bernanke's fault.

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