Brad DeLong had some insightful and amusing observations on the priorities of Federal Reserve Chair Ben Bernanke and Treasury Secretary Henry Paulson. I can’t resist reproducing Brad’s comments with some annotations of my own.
Brad writes: Is 2008 our 1929? No. It is not. The most important reason it is not is that Bernanke and Paulson are both focused like laser beams on not making the same mistakes as were made in 1929.
JDH annotates: Said mistakes of 1929 being allowing widespread bank panics to destroy the ability of financial intermediaries to function and allowing the price level to fall by 1/3. “Not on my watch” seems to be Bernanke’s motto.
Brad writes: They are also focused, but not quite as much, on not making the mistakes made by Arthur Burns in the 1970s.
JDH annotates: Said mistakes of the 1970s being overestimating what monetary stimulus can accomplish and igniting inflation as a result. The desire to avoid repeating this error is what prevented the Fed from lowering the target for the fed funds rate last week despite the chaos. Notwithstanding, I expect that Bernanke would quite gladly accept some resurgence in inflation if that would help avoid a financial meltdown.
Brad writes: And they are also focused, but not quite as much, on not making the mistakes the Bank of Japan made in the 1990s.
JDH annotates: Said mistakes in Japan being allowing substantial deflation (which again I’m quite certain Bernanke will avoid at all costs) and allowing zombie banks— banks with negative net worth– to remain functioning, but paralyzing everyone with the fear that any changes could kill them off for good.
Brad writes: They want to make their own, original, mistakes…
JDH annotates: Heh.