Saturday, December 13, 2008

Bernanke says crisis 'no comparison' to Great Depression

Don't get me wrong by posting whole of this article here. I am not a huge fan of Ben Bernanke but out of objectivity I should post all the conflicting views here. I'm constantly reading the most pessimistic and optimistic views - throwing myself into confusion. If I can get myself out of confusion, I know I have understood the subject and ready to make the conclusion for myself. We must constantly talk to our foes and friends which requires a lot of courage and security. We must debate with ourselves constantly to check whether we have blind spots. Blind spots are dangerous in the world of investments - sins of omissions(miss investment opportunity) or commissions(lose money).

His premise of printing money is this:

the Fed chief said lessons learned from the Depression may still apply today, including the "excessively tight monetary policy" that led to higher interest rates and deflation of about 10 percent a year over the first three years of the 1930s.


There is no doubt that Alan Greenspan loose monetary policy and lack of oversights created this mess. Whether Ben's prescriptions to do damage control are working, only time can judge him. He is either going to go down in history as hero or zero!

WASHINGTON (AFP) – Federal Reserve chairman Ben Bernanke said Monday the current economic situation bears "no comparison" to the much deeper crisis of the 1930s Great Depression.

"Well, you hear a lot of loose talk, but let me just ... say, as a scholar of the Great Depression -- and I've written books about the Depression and been very interested in this since I was in graduate school, there's no comparison," Bernanke said in a question period after an address in Austin, Texas.

Bernanke cited "an order-of-magnitude difference" in the current situation compared to the 1930s.

"During the 1930s, there was a worldwide depression that lasted for about 12 years and was only ended by a world war," he said.

"During that time, the unemployment rate went to 25 percent, at least, based on the data that we have. The real GDP (gross domestic product) fell by one-third. About a third of all of the banks failed. The stock market fell 90 percent."

Bernanke said the situation at that time represented "very difficult circumstances," because "we didn't have the social safety net that we have today. So let's put that out of our minds; there's no -- there's comparison in terms of severity."

He added, "We're very lucky to live in a country as rich and diversified as the one we have. And I hope that we will have a quick and rapid recovery from the current slowdown."

Still, the Fed chief said lessons learned from the Depression may still apply today, including the "excessively tight monetary policy" that led to higher interest rates and deflation of about 10 percent a year over the first three years of the 1930s.

"We have learned from that experience that monetary policy has got to be proactive and supportive of the economy in a situation of difficult financial conditions," he said.

"The other part was -- the other error, the big mistake that policymakers made in the early '30s was they essentially allowed the financial system to collapse and they didn't do anything about it. The Federal Reserve did no action as the banks failed by the hundreds and the thousands."

In a related matter, President George W. Bush said in an interview released Monday that Bernanke and Treasury Secretary Henry Paulson warned him weeks ago that bold action was needed to avert a new Great Depression.

"I can remember sitting in the Roosevelt Room with Hank Paulson and Ben Bernanke and others, and they said to me that if we don't act boldly, Mr. President, we could be in a depression greater than the Great Depression," Bush told ABC News.

Bush said the conversation came four to five weeks after the government began mulling rescue plans for insurance giant AIG and other companies.

"And that was right before we went to Congress for the 700 billion dollars" in rescue funds, Bush said.

"And my attitude is, is that if that's the case, this administration will do everything we can to safeguard the financial system. And that's what we've been doing."

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