Sunday, 6 September 2009

Did Bernanke save US from another Great Depression?

The causes of last year's financial upheaval remain hotly debated, but many analysts say a swift and massive response by US authorities may have averted another Great Depression.

A year after the collapse of Lehman Brothers and a near-meltdown of the financial system, a fragile recovery appears to be underway that will put a bookmark on the worst crisis of the post-World War II era.

Perhaps the most important player in the crisis was Federal Reserve chairman Ben Bernanke, a scholar of the 1930s determined to avoid a repeat of that economic devastation.

"The Fed's policies averted a second Great Depression," says Joseph Brusuelas, at Moody's

"Under Bernanke's leadership, the Fed's unorthodox response to the crisis is without precedent. It has slashed the policy rate to zero and flooded the financial system with liquidity."

Brusuelas said the Fed's series of liquidity programmes "slowly rebuilt confidence in the banking system" and helped unfreeze credit markets to help revive economic activity.

Jeffrey Sachs, economist at Columbia University, said that at the time of the Lehman collapse, "a depression seemed possible," but that now "the storm has broken" as a result of the exceptional action of the Fed and other central banks.

"Months of emergency action by the world's leading central banks prevented financial markets from crashing," Sachs writes.

Diane Swonk, chief economist at Mesirow Financial, said that the Fed and Bernanke "performed unbelievably well in the height of the crisis."

"He reacted so quickly, he was doing things creatively," she said. "Once Lehman went there was nowhere to go but down, the question was how far we were going to fall."

Yet Bernanke does not escape his share of blame for the crisis, both for his role as a Fed governor under then-chairman Alan Greenspan from 2002-2005 and after taking the helm at the central bank in early 2006 as the crisis was unfolding.

Economist Allan Meltzer at Carnegie Mellon University said the Lehman collapse represented a mistake of historic proportions.

"Allowing Lehman to fail without warning is one of the worst blunders in Federal Reserve history," he wrote in a Wall Street Journal essay.

Ahead of the crisis, Bernanke "consistently downplayed the danger signs that others brought to his attention," said John Browne, senior market strategist at Euro Pacific Capital.

Source: EconomicTimes

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