Bernanker: Great Depression Buff

From today’s Wall Street Journal:

In 1983, Mark Gertler asked his friend and fellow economist Ben Bernanke why he was starting his career by studying the Great Depression. “If you want to understand geology, study earthquakes,” Mr. Bernanke replied, according to Mr. Gertler. “If you want to understand economics, study the biggest calamity to hit the U.S. and world economies.”
Mr. Bernanke’s fascination with the economic earthquake never abated. “I am a Great Depression buff, the way some people are Civil War buffs,” he wrote in 2000. “The issues raised by the Depression, and its lessons, are still relevant today.”
Mr. Bernanke’s interest in the Depression, which dates back to his childhood, is a guide to the evolution of his thinking. In particular, his groundbreaking research on how mistakes by the Federal Reserve compounded the catastrophe is likely to influence how he steers the economy once he succeeds Alan Greenspan as its chairman early next year.
The Depression, he contends, has taught the importance of avoiding both deflation — that is, generally falling prices — and inflation. It has also shown the threat that falling asset prices — such as, potentially, in housing — and weakened banks can pose. Most important, it shows the damage the Fed can do when it follows wrong-headed ideas.

Forty years ago, the Federal Reserve was not thought to be that important. Today, it’s almost universally believed that Fed policy turned a minor recession into the Great Depression.

Posted by on December 7th, 2005 at 12:18 pm


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