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Interesting reading here from the San Francisco Fed.  Sometimes I wonder if the SF Fed even communicates with Ben Bernanke. Although Bernanke clearly had no idea there were bubbles forming in the global economy, remains oblivious to reflating future bubbles and emphatically denies that Fed policy has made problems worse, the SF Fed appears to argue the opposite.  This paper concludes what we have long believed – the recovery is likely to be weaker than expected as global debt remains a hindrance to overall consumption and the Fed plays an important role in exacerbating the boom bust cycle:

In the years leading up to the crisis, a combination of factors, including low interest rates, lax lending standards, a proliferation of exotic mortgage products, and the growth of a global market for securitized loans fueled a rapid increase in household borrowing.

Going forward, the efforts of households in many countries to reduce their elevated debt loads via increased saving could result in sluggish recoveries of consumer spending. Higher saving rates and correspondingly lower rates of domestic consumption growth would mean that a larger share of GDP growth would need to come from business investment, net exports, or government spending. Debt reduction might also be accomplished via various forms of default, such as real estate short sales, foreclosures, and bankruptcies. But such deleveraging involves significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores.

As countries begin to emerge from the recession, it is important to consider what lessons might be learned for the conduct of policy. History suggests that asset price bubbles can be extraordinarily costly when accompanied by significant increases in borrowing. During the recent housing bubble, underwriting standards were weakened and credit extension rose at abnormally high rates, creating a self-reinforcing feedback loop that drove house prices upward. In the aftermath of a global boom-and bust cycle in credit and housing, financial regulators should take the necessary steps to prevent a replay of this damaging episode.