Fin - Daily Ticker - US

Sponsored by

Bernanke In Denial About Economy’s Fate, Vincent Reinhart Says

Daily Ticker

Gross domestic product slowed to a meager 1.8% for the first quarter of 2011, just as Fed Chairman Ben Bernanke (among others) predicted.

"We have not seen the GDP number yet but we are expecting a relatively weak number for the first quarter, something a little under 2 percent," he said during his first-ever press conference yesterday. (See: Bernanke Speaks! Fed Chair Defends QE2, Says Inflation Not His Fault)

Concurrent with the press conference, the FOMC revised down its GDP forecast for the rest of 2011. The forecast is now 3.1% - 3.4% growth down from 3.4% - 3.9%.

But Bernanke tried to put a positive spin on things, declaring: "Most of the factors that account for the slower growth in the first quarter appear to us to be transitory."

Vincent Reinhart, former director of the Federal Reserve Board's Division of Monetary Affairs and current American Enterprise Institute senior fellow, does not agree. He believes the Fed will likely have to revise down growth expectations for 2011 yet again. And forget that V-shaped recovery, he says, because V-shaped recoveries are not likely after severe financial crises.

"After a severe financial crisis, we [tend to] get a severe recession, slower recovery and subpar expansion," he says, citing This Time is Different, a book co-written by his wife Carmen and Harvard Professor Ken Rogoff.

What is more startling is the number of times economies dip back into recession before fully recovering. "In those 15 severe financial crises I talked about, 7 out of the 15 cases there were two recessions in the decade following the crisis," says Reinhart. "Basically we are flying the plane lower and closer to the ground, we are therefore vulnerable to adverse shocks."

Bernanke certainly did not signal such pessimism in his comments yesterday. "All I can say is while the recovery process looks likely to continue to be relatively moderate one compared to the depth of the recession, I do think that the pace will pick up over time," he said in response to a question.

But the chairman is fooling himself, Reinhart says, or trying to put on a brave face for public consumption.

"Denial is a standard feature of financial crises," he tells Aaron in the accompanying clip. "We are on a subpar growth track and it really isn't that surprising."

View Comments