In the 1930s of course the overreaction went too deep.     Hope was zapped from ordinary men and women workers.     And the government didn’t know what to do.    The then president Franklin D. Roosevelt implemented the New Deal, and took the advice of the great economist of that era, Keynes, and tried to push hope back into the economy.  It only partially worked. Some say he didn’t go far enough, and that it ironically took World War II, and the resulting massive surge in government spending, to lift the economic gloom.

But, while the US failed to grapple with the underlying problems of the 1930s, the lessons remained for today, and one academic man in particular made it his business to understand the crisis of that era in as much detail as possible.  This academic’s name is Ben Bernanke.  It is all rather fortuitous, because today, Bernanke is the chairman of the Fed – the most powerful central banker in the world – and upon his shoulders rests the responsibility of ensuring the US suffers no 1930s-style depression.

Many laugh off the idea that the US could face depression.  They even dismiss with scorn the idea the US could follow Japan and experience a lost decade.    Bernanke himself has insisted that there will be no 1930s-style depression.

Yet look at his policies.  At a time of surging inflation, he is cutting interest rates at an extraordinary pace.  Rates have fallen from 5.25 per cent to 2.25 per cent in less than six months.    It’s unprecedented. Meanwhile, the Fed has been pumping money into the economy,  it has even taken on bank mortgage debt, and lent against it.   He may be telling us there is no 1929/1930s crisis in the offing, but Bernanke’s actions belie his words. 

Many say the root cause of the current crisis is too much debt, and yet Bernanke is dealing with the crisis by trying to tempt us into borrowing.

We said above that each economic crisis in history is different. The danger is that Bernanke, by putting into practice all the solutions to economic crisis he learned from his studies, could be making things worse.

The causes of the current crisis are surely quite different from the factors that caused the 1930s depression.    

Actually, the policies Mr Bernanke is pushing are quite similar to those employed by his predecessor Alan Greenspan, who also dealt with economic crisis by slashing interest rates.       But many say it was the policies of Greenspan that created the current financial mess.  Earlier this year Patrick Artus, one of France’s most influential economists, said Greenspan was a “very bad’‘ Fed chairman. In an interview with Bloomberg he said, “Greenspan was an arsonist and a fireman combined.” 

There is a danger that Benrnanke is trying to solve the current crisis by pouring the nearest liquid to hand over the subprime fire.  But it is possible the metaphorical liquid he has so rapidly reached for is the equivalent of petrol.

© Investment & Business News 2013