There has been a firestorm of criticism of Federal Reserve Chairman Ben Bernanke’s new monetary easing initiative, and much speculation as to why he did it. I want to suggest–to paraphrase Mark Twain–that Mr. Bernanke is worried that rumors of the of death of the Great Recession have been greatly exaggerated.
In both the Depression and the post-World War II era, recovery from a recession has been regularly signaled by an increase in housing investment. But new housing construction expenditures have remained stubbornly flat since the Great Recession was declared over in the second quarter of 2009.
Housing and aggregate demand have not recovered because nearly 15 million owners are estimated to owe about $771 billion more on their homes than they are worth. The banks are on the other side of this crunch, holding overvalued mortgage assets. This fuels doubt about the balance sheets of the big banks.