Did Bernanke save us from another Great Depression?
The recession is probably over. So said Ben Bernanke this week. His timing is exquisite. President Obama has reappointed him to be Fed chairman, and he can now head into his Senate confirmation hearings this fall with the reputation that he nipped another Great Depression in the bud.Skip to next paragraph
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But did he?
Trying to challenge Mr. Bernanke's job performance is like trying to convince your average ancient Greek that Zeus was a bumbling weakling. That's because the mystique surrounding the Fed's ordinary actions – let alone its recent, extraordinary ones – is thicker than the fog at Mt. Olympus's summit. People entertain perfectly absurd beliefs concerning what the Fed can – and what it can't – do; and while some like to blame the Fed for every economic hiccup, others are no less convinced that the economy would drop dead were it not for its constant care.
One doesn't usually turn to old TV shows for economic insights. Yet the best way to put the Fed's role in the recent crisis in perspective is by recalling an episode of "The Beverly Hillbillies" – the one in which Granny convinces everyone that a spoonful of her medicine can cure the common cold. Sure enough, it can: It just takes between a week and 10 days.
Recessions don't peter out in 10 days, of course. But they do eventually end, with or without central bankers' help. According to the National Bureau of Economic Research, the US went through 32 recessions between 1854 and 2001, the average duration of which was about 17 months – or a few months shorter than the current recession, so far.
Even a severe downturn can be followed by rapid recovery without aggressive central bank intervention. In the 1921 recession, wholesale prices, industrial production, and manufacturing employment all fell by 30 percent or more within a year. Yet by early 1922, the US economy had recovered fully from its mid-1921 low. What's more, it did so with no help from the Fed, which was determined to let the recession take its course, so as to hasten the restoration of the prewar gold standard.
Bernanke, in contrast, has been praised for taking bold, innovative measures to tame a supposedly unprecedented economic collapse. But his innovations included errors of both commission and omission that almost certainly deepened the recent downturn, making it last that much longer.