Bernanke may have saved the world

WASHINGTON: The causes of last year���s financial upheaval remain hotly debated, but many analysts say a swift and massive response by US authorities may have averted another Great Depression.

A year after the collapse of Lehman Brothers and a near-meltdown of the financial system, a fragile recovery appears to be under way that will put a bookmark on the worst crisis of the post-World War II era.

Perhaps the most important player in the crisis was Federal Reserve chairman Ben Bernanke, a scholar of the 1930s determined to avoid a repeat of that economic devastation. ���The Fed���s policies averted a second Great Depression,��� said Joseph Brusuelas, at Moody���s Economy.com.

���Under Bernanke���s leadership, the Fed���s unorthodox response to the crisis is without precedent. It has slashed the policy rate to zero and flooded the financial system with liquidity.���

Brusuelas said the Fed���s series of liquidity programmes ���slowly rebuilt confidence in the banking system��� and helped unfreeze credit markets to help revive economic activity.

Jeffrey Sachs, economist at Columbia University, said that at the time of the Lehman collapse, ���a depression seemed possible���, but that now ���the storm has broken��� as a result of the exceptional action of the Fed and other central banks. ���Months of emergency action by the world���s leading central banks prevented financial markets from crashing,��� Sachs wrote.

Diane Swonk, chief economist at Mesirow Financial, said the Fed and Bernanke ���performed unbelievably well in the height of the crisis���. ���He reacted so quickly, he was doing things creatively,��� she said. ���Once Lehman went there was nowhere to go but down, the question was how far we were going to fall.���

Yet Bernanke does not escape his share of blame for the crisis, both for his role as a Fed governor under then-chairman Alan Greenspan from 2002-2005 and after taking the helm at the central bank in early 2006 as the crisis was unfolding.

Economist Allan Meltzer at Carnegie Mellon University said the Lehman collapse represented a mistake of historic proportions. ���Allowing Lehman to fail without warning is one of the worst blunders in Fed���s history,��� he wrote in a Wall Street Journal essay.

Ahead of the crisis, Bernanke ���consistently downplayed the danger signs that others brought to his attention,��� said John Browne, senior market strategist at Euro Pacific Capital. ���Most troubling is the fact that Ben Bernanke was a chief advocate of ���easy money��� in the Greenspan-led Fed, earning the nickname ���Helicopter Ben��� for his threat to throw cash from helicopters to boost spending,��� said Browne.

���This, along with risk-eliminating federal policy, encouraged the formation and hugely profitable growth of casino-style behemoth banks, which became ���too big to fail.������

Still, the outcome a year later indicates the economic slump may not end up being as deep as some had feared.

An analysis by TD Bank Financial economists estimates a 3.9 percent peak-to-trough drop in US gross domestic product from December 2007 to June 2009, which they predict will mark the end of the ���Great Recession.���

While this is still the longest and deepest recession in the post-war period, it is only slightly worse than the 1973-75 recession of 16 months and a decline of 3.2 percent and the 16-month recession of 1981-82 and a decline of 2.9 percent.

���The Great Recession may turn out to be not so distinct after all,��� said the report by TD chief economist Don Drummond and colleagues.