As I see it, Bernanke is right: the housing bubble and housing construction (maroon line) had collapsed—with its effects on household wealth and thus on consumption—before the recession began, and very few thought as of late 2007 that we were doomed to have a deep recession. So I do not see how Krugman and Baker could be correct. Then our slow recovery looks to me due in large part to two factors. The first is fiscal austerity (purple line), for which blame Republicans, economists who do not understand IS-LM but who insist on opening their mouths, and an Obama listening to Geithner, Orszag, and company and thinking that his job is to reach a grand entitlement bargain with Republicans. The second is the failure of housing to recover to normal—for which I blame Obama listening to Geithner and not making the revivlal of housing finance a priority:

FRED Graph FRED St Louis Fed

Paul Krugman: The Credit Crunch and the Great Recession: "Ben Bernanke argues that it was mainly about finance. I have (friendly) questions.... There’s an economic dispute underway about the causes of the Great Recession — but that’s not what’s weird. What’s so strange in these days and times is that it is being carried out among well-informed people who actually look at data and argue in good faith. Hey, guys, don’t you know that sort of thing went out a couple of decades ago?...

...Dean Baker... has long argued that the burst housing bubble was the main factor in both the slump and the slow recovery, with financial disruption a minor and transitory factor—a view I mostly agree with.... Ben Bernanke, who argues in a new paper that credit market disruption was indeed the big story.... Bernanke is mainly focused on the first year or so after Lehman, while both Baker and I are more focused on the multiyear depressed economy that lasted long after the financial disruption ended.... My problem with Bernanke’s paper, on a first read, is that I don’t quite see how that consistency can work. Specifically, I have trouble seeing the “transmission mechanism”—the way in which the financial shock is supposed to have affected actual spending to the extent necessary to justify a finance-first account of the slump...


#shouldread

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