1.2 Transient factors of the financial crisis: balance sheet recession and aggregate demand

As we saw, the mostly “supply side” explanations given for the low interest rates and the slow growth and low investment activity despite the low rates, did not convince all observers. Supporters of the explanations described above do not deny that the backwash of the crisis may still contribute to the poor growth; they simple state that even after the passing of those the global economy will have to face secular stagnation.

Bernanke, former Fed Chair, disagreed with Summers; he maintains his earlier opinion, according to which the low interest rates reflect high global savings rather than the steadily low investment demand. 15 He believes that in a low interest rate environment investments should not stay at a steadily low level. According to his first argument, it is a mistake to examine the savings and investment prospects merely within a single country. In his opinion, even if sufficient investment opportunities are not found in the USA (for example, due to the demographic changes mentioned by Summers), the market of developing countries, which offer higher return, may still remain attractive. And through this it is possible to create enough new jobs in the USA in the export sectors as well. However, even if the slow growth factors become prevalent in the developing world as well, he deems it logically impossible that in a close to zero interest rate environment no profitable investments can be found: in such case even the smallest yield provides a return. 16 Hence Bernanke is sure that over time the central banks will achieve an economic recovery with the low interest rates.

Summers is less optimistic about the ability of low interest rates to stimulate demand. He sees the risk of secular stagnation also in the fact that the economic stimulus packages applied to date by the central banks tended to result more in a recovery in prices of securities and other assets. While many mentioned the risk of new bubbles, including the emerging countries as well, these packages hardly had any impact on the recovery of the real economy and the reduction of unemployment. Summers is of the opinion that bubbles are acceptable until a certain point, because he believes that economies are able to grow, to an increasing degree, only through bubbles. However, he is anxious about the fact that according to the latest trends larger and larger bubbles are necessary for the economies to achieve satisfactory growth, because these represent financial stability risks and an eventual crisis could easily annul the growth results.

15 Bernanke (2015a) and (2015b). 16 Bernanke cites Samuelson’s graphic arguments, according to which under low – or sometimes even negative – interest rates, investments such as the straightening of the railroads’ curves, even by removing the hills, should be implemented: due to the resulting lower fuel consumption the investment will surely pay off over time.