How good is your memory? Not many people today have personal memories of the Great Depression some 80 years ago, when thousands of banks closed. It would be natural, you'd think, to have a burning memory of what happened just five years ago when the U.S. banking system was on the brink of a similar collapse. The housing bubble burst. Lehman Brothers went bankrupt. Banks pulled back on lending, investors avoided new bonds and everyone seemed to be stockpiling cash. The economy started to contract by 5 percent to 6 percent annually. Trillions of dollars were knocked off the value of U.S. companies. The public and financial authorities had reason to believe nothing much could be done to avert a rerun of the Great Depression.
George Santayana (and before him the 18th century British philosopher and politician Edmund Burke) had history in mind when he observed that those who can't remember the past are condemned to repeat it. Five years hardly qualifies as "history," so it is unnerving that even supposedly well-informed people have forgotten how we got out of the mess. Last year, for example, the House of Representatives followed the lead of former Texas Republican Rep. Ron Paul (now taken up by his son, Kentucky Sen. Rand Paul) in passing a motion for an audit of the Federal Reserve, as if the Fed had been a cause of our problems.
On the contrary, the Federal Reserve was quite simply our last hope. It was the chairman of the Federal Reserve Ben Bernanke who came to the rescue. Bernanke, a former Princeton professor, was a scholar of the Great Depression, a background that proved critical. Right from his start in 2006, he demonstrated a tough independence. Unconvinced of inflation predictions in 2007, he refused to continue ratcheting up interest rates – and he was proved right. When the crisis hit in 2008, he went way beyond the standard response of a central banker, which would have been to lower interest rates and hope that cheaper credit would somehow work its way to more borrowing, more activity, more jobs. » | Mortimer B. Zuckerman | Friday, August 09, 2013 [?]
