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Friday, November 14, 2008

"A Depression Buff's New Course of Study"

Can Bernanke meet the challenge?:

A Depression Buff's New Course of Study, by Carlos Lozada, Washington Post: ...It seems somehow fitting to see Bernanke -- a top scholar on the economics of the 1930s -- at the helm of the Federal Reserve in yet another age of war and financial peril.

Bernanke ... has devoted years of research to explaining how policy mistakes and financial panics transformed a 1929 recession into a worldwide calamity... If anyone can steer us clear of a similar fate today, it should be him -- right? Now history has put the self-described "Great Depression buff" to the test. ...

Nearly fourteen years ago,... I sat in ... Robertson Hall at Princeton ... struggling through Bernanke's course in macroeconomics. ... I recall tough assignments and a stressful midterm exam that had me wrestling with something called the Euler condition. (Don't ask, because I still don't know.) The exam was challenging, we were told, because a test should be a learning opportunity, not just a gauge of whether we could spit back class notes.


[R]ecently, I decided to crack open his textbook and sift through his prolific writings on the Depression... As I read Bernanke's "Essays on the Great Depression," a selection of his academic papers, what leaps out is his emphasis on the Depression as a global phenomenon. Tempting as it is to focus on President Herbert Hoover and the 1929 U.S. market crash, Bernanke explores conditions across dozens of countries ... and which central banks made the right calls.

"Arguments which focus almost entirely on the U.S. are missing a crucial aspect of the issue," Bernanke stressed... As the current downturn ricochets through the global economy ... Bernanke has coordinated interest-rate cuts with other countries and extended up to $120 billion in lending to the central banks of Brazil, Mexico, Singapore and South Korea. ...

Bernanke also emphasized that decisions by central bankers were crucial during the late 1920s and early '30s -- and nowhere more so than in the United States. In a paper called "Deflation and Monetary Contraction in the Great Depression," he offered "the clearest indictment of the Federal Reserve" and concluded that the Fed's moves were "actively destabilizing" in the crisis's early stages.

"By raising interest rates" after the 1929 crash, "policymakers contributed to soaring unemployment and severe price deflation," Bernanke explained in a Foreign Policy magazine essay in 2000...

In the run-up to the Depression, Bernanke argued, better leadership could have made a difference. ... "[W]hat we ... know is that the central bank of the world's economically most important nation in 1929 was essentially leaderless and lacking in expertise," Bernanke lamented. "This situation led to decisions, or nondecisions, which might well not have occurred under better leadership. . . . And associated with these decisions, we observe a massive collapse of money, prices, and output." ...

Bernanke praises government efforts to prop up those financial markets in the 1930s, but that does not necessarily translate into support for wider interventions. ... And although Bernanke once urged Japan to show "Rooseveltian resolve" in getting out of its own economic crisis in the 1990s, his assessment of FDR's New Deal seems lukewarm. ...

Finally, Bernanke fervently believes that the lessons of history matter. "...The issues raised by the Depression, and its lessons, are still relevant today."

He wrote those words in 2000, long before today's crisis. ... But an understanding of history may only get you so far, other economists argue, especially when we've not really been transported back to 1929. In an Oct. 18 interview..., [Anna] Schwartz ... said that Bernanke's historical smarts were his "claim to be worthy of running the Fed" but concluded that "my verdict on this present Fed leadership is that they have not really done their job." ...

For all our sakes, I hope my old professor has distilled the right lessons from the Great Depression and can discern which do and which don't apply today. If he passes this test, history will grade him generously. If not, I suspect it will be hard for the country to find solace in a new learning opportunity.

    Posted by on Friday, November 14, 2008 at 12:33 AM in Economics, Financial System, Monetary Policy | Permalink  TrackBack (0)  Comments (31)


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