Since 2006 The Affordable Mortgage Depression thesis has described an economy which would be under deflationary pressure, from the structural aftermath of the Housing Bubble, through 2013. This perspective has been described in detail via blog since 2008.

Conversely the Federal Reserve/Bernanke argued in:

• 2005 that housing prices would not fall nationally
• 2006 that housing prices would continue to rise
• 2007 that mortgage defaults would be limited, would not spread beyond subprime, and would not spill over into the rest of the economy or the financial system.
• 2008 that there would be no economic recession
• 2009 that the economy had bottomed out and was beginning to recover

Links to articles featuring specific quotes:
The Federal Reserve, FDIC and Bank Regulators Ignored Repeated Warnings of a Housing Crash Going Back to 2005
The Failure of Ben Bernanke. Part II: "Ignorance is Bliss"

While it is encouraging that the Fed has finally recognized that this persistent downturn will not be resolved until 2013, Bernanke continues to rely on policies which never had any chance of resolving the downturn, and have been proven to be ineffective over the past four years.

Excerpt from The Failure of Ben Bernanke. Part III: “Misidentifying the Cause, Misdiagnosing the Cure and Doing More Harm than Good”

“The Fed Chief’s strategy for solving the crises was to lower interest rates, in an uncoordinated fashion, quickly and consistently in an effort to inject liquidity into the financial system. As reported by the New York Times, Bernanke’s interest rate cuts “were intended to counteract the tight credit market and spur growth”.

But at its core the Housing Collapse and expanding Depression was never about liquidity nor was it caused by the Credit Crisis. Decreased liquidity manifest itself as a result of the forces battering the economy, but the Credit Crisis was a symptom of the economic downturn, not the cause. The Credit Markets simply recognized reality before Ben Bernanke did.

Interest rates have no bearing on solvency concerns triggered by overvalued assets and excessive leverage. To this end interest rate cuts were completely ineffective in stemming or curing the problems afflicting the economy. The Federal Reserve quickly exhausted its primary stimulus tool as overnight interest rates approached zero percent. Bernanke failed to achieve a stated goal that was never in fact realizable.”





The Fed lowered its target rate to 0% in December of 2008 when the unemployment rate was 7.4%. After two and a half years of this extraordinary monetary policy, which discourages savings, distorts investment decisions and creates global asset bubbles, the unemployment rate is 9.1%. Defined unemployment would be materially higher had millions of dejected Americans not left the workforce.

If in fact the Fed maintains the current Overnight Target Rate at 0% through mid 2013, this errant policy will have been in effect for four and a half years. Yet, frighteningly this unprecedented, long-lived and ineffective period of 0% interest rates will have been implemented to combat a crisis that Bernanke believed would not occur, and will have no bearing on the length of the downturn.

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Article entitled “Since 2006 There Have Only Been Two Routes to an Economic Recovery; Neither of Which Has Been Attempted” to follow.