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I don't dispute what you are saying but what my point is that sometimes, regardless of fiscal and monetary policy, it will take time to emerge from a recession. It may take 5 years, it may take 10 years, and that is what the case is when there is a balance sheet recession in place. Poor policy will prolong that recovery or turn it into a Depression. Effective fiscal and monetary policy - policy that prevents further balance sheet destruction while creating an environment where balance sheet repair and restoration are allowed to occur - still may require a good deal of time. What most critics of policy don't seem to accept is that even with effective policy, a recovery may require a decade to emerge from the collapse of years and decades of excess. That is why when immediate results are not seen, governments move towards fiscal consolidation, and monetary policy tightening, the same flaws of impatience and desire for immediate gratification that fuels assets bubbles.

When we don't see explosive GDP growth resulting from policy, well, we're not supposed to. Frankly, just keeping GDP flat via policy is a triumph.

The fact of the matter is that it was the decision to tighten credit policy in 1928 that produced the Great Contraction interest rate hikes had been undertaken in 1928 to curb what the Fed saw as rampant speculation on Wall Streeta conflagration of leveraging, margin buying, and outright Ponzi scheming fueled by cheap credit that was supplied in the first instance by the Federal Reserve. (Goldman Sachs' pyramid schemes of the era, when they collapsed, would generate losses of $475 billion in today's dollars.) Federal Reserve had needlessly constricted the money supply and thereby crashed an otherwise prosperous economy.

After the Great Crash of 1929, the Federal Reserve drastically cut interest rates; but, on occasion, the Fed was forced to abruptly raise them again in complicated maneuvers to stem outflows of gold into Europe. Then these sporadic interest rate hikes for smothering several incipient recoveries, opening a vortex of deflation, and turning a recession into the Great Depression.

In reality, Bernanke is following the monetarist depression-prevention model hatched by Nobel laureate and libertarian patron saint Milton Friedman. Bernanke has repeatedly invoked the late libertarian economist in support of lowering interest rates to zero, bailing out banks, and pumping untold trillions of dollars into the financial system. The implicit goal of these policies is to ignite artificial inflation. The story begins in 1963, when Friedman and co-author Anna Schwartz published The Monetary History of the United States. Their chapter on the Great Depression was spun off into a standalone book, The Great Contraction: 1929-1933, an epic revisionist history that changed America's understanding of the causes of the Depression.

Which brings us back to the question of Ben Bernanke's economic ideology. When it comes to the Great Depression, Bernanke is a disciple of Friedman and Schwartz. In 2002, at Friedman's 90th birthday party at the University of Chicago, Bernanke was effusive. "Among economic scholars," he began, "Friedman has no peers." He developed the "leading and most persuasive" explanation of the Depression, whose impact on economics and the popular mind "cannot be overstated."

At the conclusion of his encomium, Bernanke made a stunning and ominous apology on behalf of the Federal Reserve. "I would like to say to Milton and Anna...regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

Schwartz was also present at the birthday party. "I'm sure he was sincere when he said that," she recalled. And Bernanke stayed true to his word. In 2006, he replaced Alan Greenspan as chairman of the Federal Reserve. Greenspan had engineered an era of non-inflationary loose credit that won Friedman's endorsement: "There is no other period of comparable length in which the Federal Reserve System has performed so well," Friedman declared in The Wall Street Journal.

When the economy collapsed two years into Bernanke's watch because of a massive credit bubble, Bernanke slashed interest rates to zero and ordered the money-printing presses to full steam. He also embarked on a course of "quantitative easing," whereby a central bank convolutedly buys its own government's bonds with printed money so as to sink interest rates even further.

This approach was nothing new. Friedman had recommended quantitative easing, combined with ultra-loose credit and inflation, as a panacea for Japan's slump in the 1990s, which he described as an "eerie, if less dramatic, replay of the Great Contraction." As he did with the Depression-era Fed, Friedman emphasized that, "There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so." In 1998, a year after Friedman penned his advice in The Wall Street Journal, Japan introduced monetary stimulus: a cocktail of zero interest rates and quantitative easing. But deflation continued. Today, Japan's exports are down an unthinkable 36 percent from last year and prices are plummeting at an all-time record pace.

Stateside, in light of the Fed's multi-trillion dollar balance sheet, it has been all too easy to mistake Bernanke for a Keynesian supporter of public works projects, socialistic safety nets, and government-led consumption. And while it's true that the Obama administration is pursuing Keynesian fiscal stimulus, the Federal Reserve, as an independent, semi-private institution owned by America's banks and largely walled off from the executive and legislative branches, has developed its own agenda. That agenda is monetarist. Yet the media consistently gets this crucial fact wrong.

The New York Times, for instance, has identified Bernanke as "a student if not necessarily a devotee of the British economist John Maynard Keynes." But Bernanke actually spent most of his acade

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Economists and market pundits are missing the point when they criticize the effectiveness of fiscal and monetary policy in a balance sheet recession (as academia, the IMF, OECD, Fed, etc, misguidedly criticized Japan's policies) for not fostering more GDP growth. The Keynesian role of governments during these recessions is not to borrow and spend in order to GROW, rather to borrow and spend to BRIDGE the gap, restore the money supply, and buy individuals and corporations enough time and to provide a conducive environment in which they are allowed to restore their balance sheets using the free cash flow they are able to still generate during this time. Not much different that backstopping a bank to prevent bank runs as all financial institutions are technically insolvent at any one point in time should all depositors demand their loans back in a simultaneous fashion.

One area I disagree with Koo on is the effectiveness of monetary policy. Koo seems to think it is almost entirely ineffective, but I see it as preventing further balance sheet destruction by propping up the asset values, the asset side of the balance sheet so that less repair and restoration is needed, presumably leading to a faster recovery. If your home value falls from $500,000 to $250,000 but would have fallent o $175,000 if not for Fed programs (MBS, treasury purchases, low rate environment), that is $75,000 less of deleveraging/recapitalization that individuals and financial institutions will need to endure.

On the contrary, I believe Bernanke has progressively gained a better understanding of the nature of this recession and why certain monetary policy implementation is ineffective (the pushing on a string). The world, for the most part, is in what Richard Koo refers to as a balance sheet recession, one in which the animal spirits and economic goal of profit maximation are overshadowed by the need to deleverage and re-capitalize, making low interest rate policy ineffective in terms of stimulating economic growth. Japan was in one and emerged from it (after a some policy missteps which made the recovery take 2-3 years longer), Germany emerged from it post-Telecom bubble (thanks to the Euro and the ability to export unemployment to other EU member nations), but the problem is that these two are export driven, so as they emerged from their recessions, their main sources of revenue entered their own recessions, depleting the customer base of Japan and Germany. Likewise, the Great Depression was a balance sheet recession.

In a balance sheet recession, individuals, corporations, financial institutions, individually or collectively, are in some form underwater on their balance sheets. The commonality is the destruction of asset values (due to bubbles bursting) yet maintaining an unchanged balance of debt. At this point, these entities and individuals are insolvent. The fact that they are still generating cash flow allows them to opportunity (not assured) to emerge from their balance sheet recessions, but it will take years, maybe decades, for the restoration of balance sheets to occur. In Japan, it impacted corporations as businesses in Japan were far more leveraged than their U.S. counterparts (as they should be with lower interest rates in Japan). That is why corporate debt issuance was few in number as prospective corporate borrowers feared having their balance sheets scrutinized by credit analysts and credit agencies who would discover the insolvency. So despite low interest rates, the demand for borrowing just wasn't there, nor would lenders be willing to lend upon examination of these balance sheets. In terms of the general public, well, they are savers, not borrowers. This is in contrast with the U.S. where corporations are cash rich and for the most part have healthy balance sheets. U.S. corporations still tap the bond markets taking advantage of lower interest rates to roll over their existing debt at more favorable servicing levels. It is the individuals, the consumers, who are insolvent from a balance sheet perspective. Here is where the combination of demand destruction (no demand for loans) and the shortage of supply (no lenders will to lend to these people) converge. Financial institutions, while not necessarily burdened with debt as they too have been rolling over debt at more favorable levels, have to restore the capital portion of their balance sheets (Assets = Liabilities + Equity/Capital). As capital is being restored, lenders will either not lend or only lend to the highest quality of borrowers, most of whom have no real demand for loans in this environment. Regulatory uncertainty (more capital required to be held, certain assets no longer qualifying as capital) combined with legacy loans (high unemployment = more loan loss provisions) makes lenders unsure of how much capital will be needed, so they are being extra caution in their balance sheet restoration.

After debt is reduced (U.S. consumer) and capital is adequately restored (U.S. financial institutions), these participants will then look to acquire assets on their balance sheet (assets like the ones whose value plummetted, but higher quality). Only after the repair of balance sheets and the restoration of satisfactory asset levels will consumers and concurrently financial institutions resume their normal or(as El-Erian calls for) "new normal" levels of consumption and lending.

So what policy is effective? Fiscal policy must take place, i.e. Keynesian policy, to maintain GDP levels by stepping in and restoring the money supply to prevent or slow down deflation. Markets generally provide a conducive environment (i.e. low rate) for government borrowing in these types of recessions, so it is imperative that effective leadership borrow and spend wisely (i.e. invest in infrastructure, structural reform, etc.) in order to take advantage of this low-rate environment. GDP is really a measure that gauges spending, it is more of a standard of living measure. Economists and market pundits are missing the point when they criticize the effectiveness of fiscal and monetary policy in a balance sheet recession (as academia, the IMF, OECD, Fed, etc, misguidedly criticized Japan's policies) for not fostering more GDP growth. The Keynesian role of governments during these recessions is not to borrow and spend in order

There is a saying; "If god did not want them sheared, then he would not have made them sheep!" That's what you have here in America. The tax payers are the sheep and the government has the shears! It's time for all the sheep in America to wake up and remove all incumbents from office!

People in America still wonder why vote for GOP, i can think of just some good reasons;

Privatize Social Security, retire never vote gop
No Government controls on anything vote gop, big business thanks you
Destroy working family organizations, workers dont need worker rights, vote gop
Look at the 8 years with Bush, start an unjust war, 4600 young inexperienced with little knowledge kids killed, 40,000 maimed vote gop
Over 400,000 Iraqis killed in the civil war there vote gop
2.5 trillion dollar spent on war that started on lies, vote gop
Campaign on your successes, no I mean campaign on lies vote gop
Help Americans lost billion of dollars in retirement funds, biggest drop in dow in 80 years vote gop
Only went down just over 7000 points, could have been worse vote gop
When there are jobs created in us, just say they are part time and dont count vote gop
Never say how many job were lost in 8 years of gop control, vote gop

Lying does pay off and rush and fox news wants to thank you for you vote



Business is slow so retail owners are teaching the employees to lie and be overly aggressive to get that customers last dollar. In the end they are just going to push away more customers. How about cutting some of the fat in the Ivory Tower instead of blaming all the profit losses on the actual stores?
Think of the money they could save it they would quit flying back and forth to useless meetings and use webcam or email. Some of these company owners need to take some money management classes themselves so they can learn how to cut corners in the corporate world. I keep saying we need to reduce consumptions and maintain spend on domestics and only export surplus commodities, Bring back the local, put higher tax and credit corporates importing goods. Then who would need austerity measure NOT ME!

I guess people are just worried if America turns into a third world country all of the worlds hopes, dreams, ambitions, and admiration will disappear with it, as much of the world that's all they have known, thanks to Hollywood and CNN. This is just crude generalization do not get offended by it. May be we should talk about climate change next.

The more skewed the distribution of wealth has grown over time, the more frantically has the economy been forced to create a growing array of consumer debt mechanismssubprime mortgages, payday loans, more and more intricately structured credit card debtin order simply to maintain its functioning.

When a critical mass of poor and working class Americans could no longer pay their fabulously expensive subprime mortgages and usurious credit card bills, this house of cards collapsed. A number of the financial institutions built on this consumer debt foundered and the remainder required unprecedented injections of federal funds to remain afloat. The housing market and new residential construction, the market for consumer goodsautomobiles, appliances, electronicsall crumbled, taking down with them the jobs of retirement savings of millions of Americans.

Todays retail figure will not look good in days ahead while America awaits Budget report thats already late over a month or two. I was just listening to some democrate congress women on TV and she was saying the economy is recovering and stimulus is working... with news like that let's go out and buy something...oh how much is a pack of gum now?? Thats probably what's on the mind of the American Joe.

So essentially American economy is where, after all that was promised:

(GDP = Consumer Spending) < National Debt

Hello 3rd world status. Hows the "change" doing for you now. Keep it. I mean after all this American truly only have Obabma to blame for this. And the that's the exact nity grity he's in now.

Yes its easy to figure point at the Europeans right now with debt defaults arising but that's what they should get for keep afloat and support the idea of free markets and spending money you don't have, its all make believe and master illusion, Who do you think Japan will have to blame if they dont come out of this deflation period. I bet China only wait for US Japan ties to break and then they will rule the world.

US Trade deficit grows. And what country benefitted. Let me guess, oh yes CHINA. Yes US can threaten China with sanction but soon the administration comes to their senses that they'er ones holding most of our debt. Intoxicating right! they can starve the golden goose to death and then what is your loans good for?