Tuesday, May 13, 2008

Bernanke, the Improviser

The event was a 2002 conference at the University of Chicago to celebrate the Nobel laureate Milton Friedman's 90th birthday. When Ben S. Bernanke rose to speak, he said that the Federal Reserve, of which he was then a governor, had come around to Friedman's view that the central bank's blunders were to blame for the Great Depression. "We're very sorry," Bernanke said, prompting laughter. "But thanks to you, we won't do it again."

From Bernanke's standpoint, there are two major lessons to be learned from the Fed's reaction to the market crash of 1929 that are relevant today. The first is that the Fed should lower rates, not raise them, in the face of an economic contraction. The second is that the Fed must pay careful attention to the health of financial institutions, as lending plays a big role in economic growth.

I had the same feeling: Being a Great Depression buff himself, Bernanke has been so much worried about another great depression under his reign. That partly explains his aggressive monetary policy.  History will tell whether he's right or wrong.
read more here (source: Bloomberg)