An Observation on Chairman Bernanke’s Press Conference

On April 27, 2011 held his first press conference as Fed Chairman Bernanke, such press conferences will now be held quarterly.  Beginning at 53 minutes and 40 seconds, Chairman Bernanke was asked by a reporter who prefaced his question by quoting Reinhart and Rogoff’s book, “This Time is Different,” in which they found that recoveries following financial crisis tended to be slow if he thought that Americans expected too much from monetary policy. 

Bernanke praised Reinhart and Rogoff’s now classic work but correctly explained that the book did not provide a full explanation of why these recoveries were slower and offered some possibilities from his research.  These included problems in credit markets and housing sector, and inadequate fiscal and monetary response.

What constitutes and adequate or appropriate response is controversial and inspires an interesting and heated debate.  I will focus on fiscal policy and debt accumulation.  Reinhart and Rogoff write that “Arguably, the true legacy of banking cries is greater pubic indebtedness—far over and beyond the direct headline costs of big bailout packages.”  The Bush and Obama administrations have followed a traditional path of bailing out financial institutions (TARP authorized spending of $700 billion) and offering fiscal stimulus through deficit spending (ARRA authorized expenditures of $787 billion).  The recession has also reduced tax receipts.

The graph shows an index of the national debt held by the public.  The index begins at 100 at the end of August 2007 as the housing bubble bursts.  The gray area is represents the eighteen month recession that began in December 2007.  The index has increase to 190.7, meaning that debt held by the public has increased 90.7 percent.  This is an unfortunate sequence of events given the anticipated explosion of debt due to unfunded entitlements.Replace this text with...