In his Wapo column Robert Samuelson tackles “Why the recovery is feeble”:
Federal Reserve Chairman Ben Bernanke last week became the latest economist to ask why the current economic recovery has been so weak. The question has inspired a cottage industry of studies, papers and speeches with often-esoteric and murky theories. The explanation is actually straightforward: The financial crisis and Great Recession scared the wits out of most Americans — not just consumers but also corporate managers, bankers and small-business owners. They are reacting accordingly. They’re cautious, risk-averse and defensive. They’re spending less and saving more.
The recovery’s languor is striking. Bernanke, speaking to the New York Economic Club, noted that the economy’s annual growth rate had averaged only about 2 percent since the recession officially ended in mid-2009. By contrast, the average growth rate of post-World War II recoveries at a similar stage is almost 4.5 percent. This means the economy is producing about $1.4 trillion less of everything, from Big Macs to cars, than it would if we’d had an average recovery.
No one asks any more why the crash was so deep. The generally accepted reason being the blow-up of the housing bubble and the damage it inflicted on households and financial institutions. And the Fed is praised for not letting it reach ‘Great Depression’ status!
Samuelson muses further:
Typically after a recession hits bottom, there’s a period of above-average growth. Excesses (too many houses or dot-com start-ups) are cured by fire sales or bankruptcies. Pent-up demand or government “stimulus” policies spur spending. Surviving businesses begin to hire to meet added sales. Confidence revives. Recoveries become self-sustaining.
In today’s recovery, this recuperation has been partial. One theory is that recessions accompanied by a financial crisis are harsher and longer. To repay debts, borrowers reduce spending. Facing bad loans, lenders lend less or go bankrupt.
That has become the “great cop-out”, courtesy of Reinhart & Rogoff. But the real reason for both the hard fall and feeble recovery is depicted in the chart below (which Bernanke should put up on his office wall as a permanent reminder). Both the deep drop and feeble pick-up are associated with monetary policy, i.e. Fed errors. Behind the fall was the Fed´s unassailable concern with the possible inflationary effects of oil and commodity prices. Behind the weak recovery is the Fed´s 2% inflation target “firewall”.