Fed Chief Ben Bernanke: The Right Man in the Right Place at the Right Time

The United States and the world is fortunate to have Ben Bernanke as Chairman of the U.S. Federal Reserve Bank during this time of extreme financial stress in the world financial system. Chairman Bernanke's has studied extensively the causes and consequences of the Great Depression, has written widely on the topic of the Great Depression, and has formed conclusions about the policies that exacerbated what was a recession that turned into a financial calamity.

Mr. Bernanke received his Ph.D. in economics from the Massachusetts Institute of Technology in 1975. He taught for many years before entering public service as a Board Member of the Federal Reserve, where he serves currently as Chairman. His research interests include the causes of the Great Depression. He has written extensively on this topic, including a book entitled Essays on the Great Depression published in 2005. At a conference in 2002 in Chicago to honor Milton Friedman at his 90th birthday, Bernanke lauded in his speech the studies of Milton and Anna Friedman on the Great Depression in which they concluded that the Great Depression was a monetary phenomenon; that is, in Milton and Anna Friedman demonstrated that the Federal Reserve restricted the money supply at a time when economic output was slowing. The money supply restriction, in addition to certain other monetary phenomena, caused economic output to slow further and exacerbated a normal business cycle downturn into a steep, and significant business crisis that we refer to as the Great Depression.

Mr. Bernanke concluded his erudite speech on the causes of the Great Depression with this remark: “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thank to you, we won't do it again.”

It is this remark that strikes one today as the most prescient and the most telling of Mr. Bernanke's unique role in history today. He is the one figure who indeed has studied and understands the complex causes - monetary, economic, and political - of the Great Depression. For this reason alone the United States and the world are lucky to have this unique individual, with a specialty in business cycle economics with a focus on the Great Depression, in the one position where he can do the most good - the Chairmanship of the Federal Reserve.

When Mr. Bernanke assumed his title as Chairman of the Federal Reserve in 2005, the U.S. economy was if not robust, was at least growing adequately in the two to three percent range on an annual basis, and there was no hint of a credit crisis. Home prices were continuing their 20-year upward ascent, banks were making fortunes originating loans and selling them to Fannie Mae and Freddie Mac, and only a few lone voices such as A. Gary Shilling and Robert Schiller (of the Case/Schiller Home Price Index) were warning of a large bubble in the housing market that would threaten bank solvency.

The prognostication of the naysayers and pessimists soon came to pass, and the credit crisis mushroomed from a limited asset class - securitized mortgages and their cousins, structured investment vehicles or SIV's - to all financial assets and even real assets, including homes, land, and commercial properties. With the equity markets tumbling, independent investment banks seeking bankruptcy protection, banks failing, and multinational insurance companies threatening a domino financial collapse, the financial landscape began to look like that of the Great Depression. The one man who studied what occurred almost 80 years ago - the man with the closest thing to first-hand experience in managing such a crisis - was in the one position where he could effect the most change the most expeditiously; through some odd fateful decision made by President George Bush in 2005, the right man was in the right position at the right time.