Especially in the last week or two, the Fed in particular seems willing to try just about anything that might work. It seems as if the Fed and Treasury have opened up a fire hose of liquidity to try to melt the frozen credit markets. It is this downward spiral that Bernanke is trying to avoid. Depositors have no way of knowing which banks are solvent and which are not and so pull their money out of all banks, good and bad, indiscriminately. Second, allowing even insolvent institutions to go under has a very damaging effect on public confidence in the financial system. Many banks experiencing temporary shortages of cash were forced to liquidate assets in a falling market at fire-sale prices, and were thus driven into insolvency. First, the neat distinction between liquidity and solvency had become meaningless. The Fed in 1931 stuck to the principle that it should only lend to institutions facing a temporary shortage of liquidity and that propping up insolvent banks would be throwing good money after bad. were the mistakes made by the Fed-especially by its decision, in 19, to allow so many banks to fail. Rather the consensus among economists is what made the Depression great in the U.S.

What “lessons of history” are animating his decision-making now?Ĭontrary to popular opinion, the Great Depression was not caused by the stock market crash of 1929.

Reserve Chairman Ben Bernanke is often described as a student of policy failures during the Great Depression.

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