Fed's Bernanke:Not Repeating Great Depression Mistakes
10/15 02:07 PM
By Michael S. Derby
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Federal Reserve Chairman Ben Bernanke said Wednesday a repeat of the experience of the Great Depression is unlikely, due to key differences in how policymakers responded to problems then and now.
Against all the recent market and economic trouble, "monetary policy has been proactive and aggressive and we have moved quickly and early to try to stabilize the financial system," Bernanke said.
Meanwhile, "we didn't wait for three and a half years as the financial market collapsed to take strong action," he said.
What's been done so far by the Fed and the government represent "powerful steps" and officials have avoided the "critical errors" made by leaders in the 1930s, Bernanke said.
The Fed chairman's comments came in response to questions following a speech before the Economic Club of New York. He spoke in the wake of a flurry of aggressive actions by the government to restart the nation's financial system, in an effort done in conjunction with the governments of other major nations.
A key part of that wide response included an emergency half-percentage-point rate cut by the Fed last week. While equity markets remain under pressure, signs some parts of the credit market may be starting to perform better have market participants debating whether further rate cuts will be needed.
In his formal remarks, Bernanke said the Fed would use every tool at its disposal to revive markets, and the central bank "will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity." He also said it will take some time for both the markets and the economy to recover from the impact of recent events.
The central bank chairman appeared to describe an environment where the Fed could cut rates again, and he noted those who believed aggressive rate cuts over recent months would end badly have been proved wrong.
"There was a lot of concern and skepticism that our actions might lead us into stagflation or inflation," Bernanke said, referring to rate cuts that began in late 2007 and continued into this year. He added, "there was also skepticism that the situation was all that serious."
"The evidence is now in that inflation problems are moderating and it looks like we are returning to price stability at a reasonable pace," Bernanke said, in a move that takes away one key factor that had limited the Fed's rate-cutting hand.
But the central banker also cautioned that "monetary policy also has its limits" and that in the face of troubles like those now before the global economy, a full scale government response is what's needed.
Bernanke said another lesson from the market's crisis is that "we have got and developed in this country a very serious too big-to-fail problem" within the financial system. While the banking system is diverse, "there are too many firms that are in some sense systemically critical, and that creates problems ... and it creates distortions in that market discipline will break down if everybody believes firm X won't be allowed to fail."
-By Michael S. Derby, Dow Jones Newswires; 201-938-4192; michael.derby@ dowjones.com
(Brian Blackstone contributed to this article.)
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(END) Dow Jones Newswires
10-15-081407ET
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