E Fed Great Depression And Great Recession Liquidations Go Unexplained

This is one of your most insightful questions. It may be one of the biggest macro mysteries of the last decade. The truth is, nobody (except perhaps for Bernanke himself) knows the answer to this question.

Bernanke not only understood the Great Depression, he also understood how a central bank could fix (or prevent) it. In 1999, as an academic, he wrote a paper analyzing the Japanese “lost decade”, and sharply criticizing the Japan central bank for not taking the appropriate monetary policy steps to correct the economy. And listing a large number of specific steps they could take. If there was anyone who you would wish to be chair of the US Federal Reserve in 2008, Bernanke seemed like he should be the guy.

And then, in 2008, when he actually was chair, Chairman Bernanke did not in fact act according to the monetary policy advice of 1999 Bernanke the Academic. Nobody knows why.

There are lots of theories and speculation. Fed chair is not a dictatorship; he still would need to convince the other (perhaps much more ignorant) Fed governors. There’s also a lot of politics in Washington, perhaps concern that “radical action”, if unsupported by the elected officials, would have a danger of impacting the Fed’s “independence”. There’s talk of the “FedBorg”, where the organization seems to somehow assimilate everyone who enters it, and they begin acting just like everyone else who has been there, regardless of their prior history.

But the truth is, nobody really knows. On this blog, we generally believe that 1999 Bernanke was correct, understood the causes of demand recessions, and knew the fixes. But 2008 Bernanke did not implement that advice. The million-(trillion?-) dollar, unanswered, question is: why not? We don’t know.    

Geddis, went on to say the following in response to my statement that the Fed has to be held accountable, at least in the analysis, for what it has done to America:

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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