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) – slammedthe 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".
BIS also cautioned that bailouts could harm the economy (as did the former head of the Fed's open market operations).
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 seethis and this).
While modern economic theory shows that debts do matter (and see this), the U.S. is spending on guns and butter like debts are a good thing.