Ben Bernanke said the credit freeze was even more to blame

Bernanke presented his findings Thursday at the Brookings Institution, where he is distinguished. It seeks to answer a fundamental question: what has most slowed the economy during the recession?

Is it the deterioration in the balance sheets of US households that, for years, have exceeded their means by relying on the wealth of housing that evaporated in 2007, a story put forward by economists, including Atif Mian and Amir Sufi ?

Or was it a series of executions on the credit markets – a modern variant of the banks in the 1930s that fueled the Great Depression – which accelerated sharply after the bankruptcy of Lehman?

Mr. Bernanke's paper does not claim that these explanations are in conflict. The economic slowdown could have been aggravated by the frugality of consumers faced with the sharp drop in housing prices and the sharp contraction in the supply of credit to households and businesses.

However, both stories suggest differences in what policy makers should do in the most urgent way to deal with a crisis.

The explanation of the household balance sheet argues for a greater focus on reducing homeowner debt through the modification of mortgage loans so that borrowers face fewer spending restraints. The explanation for the contraction in credit, on the other hand, suggests that the thaw in the credit markets is the most important.

Mr. Bernanke conducted an economic experiment. He estimated how much weight an explanation should have on the economy, then looked at which scenario best predicted what had really happened.

He found that the factors most strongly associated with the explanation of credit panics were "by far" the best predictors of the economic deterioration that followed the most acute stage of the crisis, when Lehman Brothers failed in September 2008.

Take industrial production, which contracted sharply in 2008. A model that explains economic performance based on the weakening of household balance sheets or a decline in bank lending would not have shown any significant decline of industrial production, but a simulation of gout.

All types of credit markets, from short-term money markets to credit card loans and small business loans, rose during the crisis, suggesting a sharp decline in credit supply.

The loss of investor confidence caused by freezing credit markets "has led to blind campaigns … and bomb sales that have sharply reduced prices and increased returns for most private loans, not just loans. residential mortgages ".

The results do not plead to ignore the problem of household balance, he said. Even without credit crunch, the mortgage crisis would have hurt the economy by limiting consumer spending.

It is plausible that the weakening of household balance sheets was the "main reason" for slowing consumption before the crisis and that "household deleveraging and balance sheet repair have been a major impediment to recovery," writes M Bernanke.

Nevertheless, the results suggest that the largest contribution to the sharp contraction of the economy in 2008 came from the credit markets. This explanation justifies many of the measures taken by the Fed to stabilize these markets in late 2008 and 2009.

At a conference in Brookings on Tuesday, Minneapolis Fed President Neel Kashkari, who contributed to the Treasury's response to the 2008 crisis, proposed an analogy with Bernanke's view. Mr Kashkari compared the credit markets at the heart of the economy and the financial crisis to a heart attack.

"A heart attack kills the patient because it deprives the blood of critical organs," said Kashkari. If you go to emergency for treatment, he adds, "the surgeon will not operate all your organs. The surgeon will do what is necessary for the heart to flow blood into the organs.

Write to Nick Timiraos at [email protected]