I recently learned that Bernanke is a long time academic of the Great Depression. How much of a role does his extensive knowledge of, and interest in, this woeful period in our economic history play in the Fed's current actions and plans?
We're now hearing that the Fed may soon receive greater powers. This is coming hot on the heels of great activity by the Fed to supposedly bail-out our flailing financial system that would have otherwise caused the economy to collapse. Whether that is true or not, is another matter. The question at-hand is whether Bernanke's possible preoccupation with an incredibly difficult time in our history has resulted in actions by the Fed that were too aggressive. Moreover, are its new-to-be powers warranted, really?
"IF the financial accelerator hypothesis is correct, changes in home values may affect household borrowing and spending by somewhat more than suggested by the conventional wealth effect, because changes in homeowners' net worth also affect their external finance premiums and thus their costs of credit,"Bernanke said.
The above quote from a Bloomberg article suggests that the Fed's actions are warranted in light of what could happen if things even begin to go in the wrong direction, which, admittedly, they have. The difficulty with economics is that there really are no certainties. It's a backward-looking profession that is constantly asked to forecast. Whether or not Bernanke is in-fact overreacting given his great interest in the Great Depression will only be know after the fact. What's more interesting that that proposition, however, is whether or not it's fair to credit him for his actions if he's prove right ...if it is after all, a best guess...
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