In 1983, after 12 years of elaborate research on the Great Depression, Stanford economic historian Ben Bernanke published his first major paper. In the paper, he contended the necessity for central banks to nip asset bubbles in its bud. But when bubbles eventually collapse on their own, he argued, the Fed should cut interest rates to limit the damage to the financial system and the broad economy. Bernanke was nominated as a Fed Board member by George Bush in 2002, and one of the first few lines he wrote is: “Regarding the Great Depression, … we (Fed) did it. We’re very sorry. … We won’t do it again.” 

 

Ben was promoted as the chairman of the Fed Board in 2005. Two years after his succession, ‘it’ happened again. The rate hike in 2003-4 prickled the housing bubble, and set off a financial crisis comparable to the bank panics preceding the Great Depression. Right after the Lehman bankruptcy, Ben persuaded lawmakers to authorize an $85bn bailout of AIG & lobbied for a much larger relief package totalling $700bn to buy up toxic mortgage debts in the economy. Eventually the US only saw a 5% decline in GDP, compared to ~20% nosefall at the time of the Great Depression. 

 

As Fed chairman, Bernanke did not talk much about the Great Depression and his early career as an economic historian. But in the time of crisis, when policymakers are probing in the dark, there must be something Bernanke can grip his hand on, to figure out the big picture and convince himself that the Fed is doing something right. His research on the Great Depression is likely one of those.