Bernanke has the on-coming Recession figured wrong

How are the 1929 Great Depression, the 1990's Japanese long period of really poor economic performance and the current American Recession alike? For one thing, each was caused by economic mismanagement by the central bank and by the the government, and each was prolonged by mismanagement by those two entities. Michael "Mish" Shedlock, thinks that Ben Bernanke has the dynamic of the current American recession wrong, and he explains why he thinks so in his article Crash Course For Bernanke. He quotes from an article that Bernanke published in 2000:

The downturn following the collapse of Japan’s so-called bubble economy of the 1980s was not as severe as the Great Depression. However, in some crucial aspects, Japan in the 1990s was a slow-motion replay of the U.S. experience 60 years earlier. After effectively precipitating the crash in stock and real estate prices through sharp increases in interest rates (in much the same way that the Fed triggered the crash of 1929), the Bank of Japan seemed in no hurry to ease monetary policy and did not cut rates significantly until 1994. As a result, prices in Japan have fallen about 1 percent annually since 1992. And much like U.S. officials during the 1930s, Japanese policymakers were unconscionably slow in tackling the severe banking crisis that impaired the economy’s ability to function normally.

[Shedlock's comment] It's amazing that anyone could possibly think that if only Japan had started cutting rates in 1992 instead of 1994 that it would have made any difference. Unfortunately for the world, we now get to test out Bernanke's theories in real life.

Let's hope that Bernanke is right and Shedlock is wrong, but I don't count on it. Go read the article for the details.

As you read it, though, you might want to keep this statement from the New York Times today in mind:

Sales of new homes fell last year by 26 percent, the steepest drop since records began in 1963, the Commerce Department said on Monday.

Until the prices of existing homes fall to a level that fits with rents and current incomes, this drop in the sales of new homes will continue to fall. Unfortunately, the homes in the housing bubble areas are still overpriced by 20% to 30%. Housing markets move slowly, so those prices will probably not get down to a reasonable level for at least a year, maybe two. Only after that will the degree of damage our economy has absorbed over the last two decades begin to become clear and possibly be corrected to some extent.

The problems are deep and the solutions will be slow in coming.