New Book Blames Bernanke's Fed Policy (not W, not Wall Street) for causing Great Recession of 2008-09

New Book Blames Bernanke's Fed Policy (not W, not Wall Street) for causing Great Recession of 2008-09

Senior Fed economist Robert Hertzel writes: “Restrictive monetary policy rather than the deleveraging in financial markets that had begun in August 2007 offers a more direct explanation of the intensification of the recession that began in the summer of 2008.”

In his book "The Great Recession: Market Failure or Policy Failure", Hetzel pins the blame squarely on the Federal Reserve and Team Bernanke.

"A moderate recession became a major recession in summer 2008 when the [Federal Open Market Committee] ceased lowering the federal funds rate while the economy deteriorated. The central empirical fact of the 2008-2009 recession is that the severe declines in output that in appeared in the [second quarter of 2008 and the first quarter of 2009] … had already been locked in by summer 2008."

Not only did the Fed leave rates alone between April 2008 and October 2008 as the economy deteriorated, but the FOMC “effectively tightened monetary policy in June by pushing up the expected path of the federal funds rate through the hawkish statements of its members. In May 2008, federal funds futures had been predicting the rate to remain at 2% through November. By mid-June, that forecast had risen to 2.5%.

Herzel's analysis is supported by two charts - Figure 1 shows the passive tightening by the Fed, referred to above.

The second chart, Figure 2, shows that the economy was weathering the housing collapse up until the Fed passive tightening began, which created expectations of a sharp downturn and long-term drop in wealth. It was only at that point that the economy tanked and the Great Recession began.

"In early fall 2008, the realization emerged that recession would not be confined to the United States but would be worldwide. That realization, as much as the difficulties caused by the Lehman bankruptcy, produced the decrease in equity wealth in the fall of 2008 as evidenced by the fact that broad measures of equity markets fell by the same amount as the value of bank stocks … Significant declines in household wealth have occurred at other times, for example, in 1969–1970, 1974–1975, and 2000–2003. However, during those declines in wealth, consumption has always been considerably more stable, at least since 1955 when the wealth series became available. This decline in consumption suggests that the public expected the fall in wealth to be permanent."

Accoring to economist Hertzel, Obama has been inaccurately blaming the policies of the previous Bush years for the Great Recession, which his analysis debunks and disproves.

Politicians can continue blame to Bush and the banks and free-market capitalism for the Great Recession, just as some folks still blame Hoover and Wall Street for the Great Depression. But in both cases, it was the Fed.