By David Leonhardt
The New York Times
Economix Blog
October 8, 2008
The Federal Reserve’s rate cut — part of a coordinated international effort— has put Ben Bernanke front and center for yet another day. Over the past couple of years, Mr. Bernanke, the Fed chairman, has come in for a fair bit of criticism. Some of it has been justified, I think.
But it’s also worth taking a moment to consider how well prepared he is for his current task. He spent his career studying the lessons of the Great Depression and, to a lesser extent, Japan’s 1990’s slump. (And his fellow economists have enormous regard for him and his work.) He now finds himself having to put those lessons into practice. His qualifications by no means guarantee that he’ll succeed. But it’s hard to imagine anyone who is more qualified to try to minimize the damage from the current crisis. I thought of this after getting the following e-mail from the economist Bruce Bartlett:
Perhaps I am the only one who thinks so, but I think the Fed has been absolutely heroic throughout this whole crisis. It’s done a lot of things that it didn’t want to do, maybe gone over the line a bit, and set some precedents it would rather not have established. But Ben Bernanke understands the risks involved because he is a student of the Great Depression and knows how close to the precipice we are.
Sometimes you just have to throw out the rule book and do what you have to do to keep the whole system from collapsing and I think that is what he is doing. I think when this is all over people will recognize that Bernanke was Horatio at the bridge.
The reason I say this is because I have been studying the origins of the Great Depression and know how fundamental monetary policy was to that event, how horribly the Fed screwed-up, and how momentum affected the course of events. The whole calamity could have been prevented very easily in 1929, but it was a lot harder to fix in 1930, harder still in 1931, and very hard in 1932. It’s like a car rolling down hill. At the very beginning it takes little effort to stop. But once it gets going, look out below.
Bernanke is trying desperately to make sure that momentum doesn’t get going. He also understands that if the consequences of his actions are an inflation spike down the road that is far preferable to a deflationary spiral that could spin out of control and lead us into the abyss.
