I've read countless news headlines recently about how economists are "surprised" over an "unexpectedly bad" economic indicator.
But it's not surprising at all. It's no mystery.
The government hasn't taken the necessary actions, and has instead been doing all of the wrong things.
The leading monetary economist told the Wall Street Journal that this was not a liquidity crisis, but an insolvency crisis. She said that Bernanke is fighting the last war, and is taking the wrong approach. Nobel economist Paul Krugman and leading economist James Galbraith agree. They say that the government's attempts to prop up the price of toxic assets no one wants is not helpful.
The Bank for International Settlements often described as a central bank for central banks (BIS) slammed the easy credit policy of the Fed and other central banks, the failure to regulate the shadow banking system, "the use of gimmicks and palliatives", and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts "will only make things worse".
And BIS warned that the Fed and other central banks were simply transferring risk from private banks to governments, which could lead to a sovereign debt crisis.
Virtually all leading independent economists have said that the too big to fails must be broken up, or the economy won't be able to recover (and see this). Instead, they have been allowed to get even bigger (and see this and this).
Nobel prize winning economist George Akerlof predicted
in 1993 that credit default swaps would lead to a major crash, and that
future crashes were guaranteed unless the government stopped letting
big financial players loot by placing bets they could never pay off
when things started to go wrong, and by continuing to bail out the
gamblers. (Not only has the government rewarded the gamblers, bailed them out and let them engage in a new round of risky betting, but it hasn't even reined in credit default swaps.)
And instead of trying to restore trust in our financial system - which is a prerequisite for any sustainable economic recovery - Summers, Geithner, Bernanke and the boys have tried to sweep the problems under the rug and con the public into believing that everything is okay and that no real reform is needed.
As I wrote in October:
William K. Black - professor of economics and law, and the senior regulator during the S & L crisis - says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts").