DE­PRES­SION

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bank prac­tices in the sub­se­quent decades that nur­tured pros­per­ity. But some con­ser­va­tives say Mr. Ber­nanke has gone to the other ex­treme with le­nient poli­cies in his drive to nudge a health­ier re­cov­ery from a stub­bornly slow-grow­ing econ­omy.

The first-ever such lec­tures by a sit­ting Fed chair­man present a sub­tle push­back against such crit­i­cism, spear­headed by Rep. Ron Paul of Texas but en­dorsed to one de­gree or an­other by most of the other Repub­li­can pres­i­den­tial can­di­dates. Pres­i­dent Obama and most Democrats view Mr. Ber­nanke as a hero who likely averted a se­cond de­pres­sion.

The eas­ily un­der­stand­able lessons, and the videos of the lec­tures that the Fed is mak­ing avail­able to the pub­lic on its web­site, sug­gest that Mr. Ber­nanke’s tar­get au­di­ence is the gen­er­a­tion of young peo­ple at­tend­ing col­lege who grew up in af­flu­ence and know lit­tle about the De­pres­sion, as well as many par­ents and older folks who seem to have for­got­ten its bit­ter lessons.

But there’s no am­ne­sia at the Fed. Mr. Ber­nanke makes it clear that as long as he is chair­man, he will not let the cen­tral bank re­peat the dev­as­tat­ing mis­takes that made the De­pres­sion so painful for a whole gen­er­a­tion of Amer­i­cans.

“The Great De­pres­sion in­formed the Fed’s ac­tions and de­ci­sions in the re­cent cri­sis,” he said in his open­ing re­marks, not­ing the Fed’s mul­ti­ple mis­steps dur­ing the 1930s in fail­ing to stem the fi­nan­cial pan­ics, bank runs and eco­nomic down­spi­ral that cre­ated such des­per­ate con­di­tions.

In the years af­ter the great stock crash of 1929, as the Fed stood by, un­em­ploy­ment soared to 25 per­cent, stocks lost 85 per­cent of their value, the econ­omy shrank by one-third, prices fell by 10 per­cent and nearly 10,000 banks col­lapsed, he said, un­der­scor­ing the eco­nomic dev­as­ta­tion with dra­matic graph­ics pro­vided on the Fed’s web­site. In the truly world­wide col­lapse of the early 1930s, other coun­tries, es­pe­cially Ger­many, had it even worse.

Why the Fed failed

“The Fed failed” to carry out its mis­sions, Mr. Ber­nanke said. “It did not ease mone­tary pol­icy for a va­ri­ety of rea­sons,” in­clud­ing want­ing to stop spec­u­la­tion in the stock cur­rency mar­kets and try­ing to up­hold the gold stan­dard, which dic­tated the value of the dol­lar at the time, he said.

“Part of the prob­lem was in­tel­lec­tual,” he added.

At the time, the Fed sub­scribed to the “liq­ui­da­tion­ist” phi­los­o­phy of Pres­i­dent Hoover’s ad­min­is­tra­tion, which held that too much credit was fu­el­ing mar­ket bub­bles and the econ­omy dur­ing the Roaring ‘20s, and the ex­cesses had to be squeezed out through fire sales of highly lever­aged as­sets such as real es­tate and stocks.

As Mr. Ber­nanke noted, Hoover ad­min­is­tra­tion Trea­sury Sec­re­tary An­drew W. Mel­lon fa­mously ad­vised the pres­i­dent to “liq­ui­date la­bor, liq­ui­date stocks, liq­ui­date the farm­ers, liq­ui­date real es­tate” to rid the econ­omy of too much debt.

Hoover sub­scribed to Mel­lon’s the­ory that a fi­nan­cial panic was not such a bad thing.

“It will purge the rot­ten­ness out of the sys­tem,” the pres­i­dent said. “Peo­ple will work harder, live a more moral life. Val­ues will be ad­justed, and en­ter­pris­ing peo­ple will pick up the wrecks from less com­pe­tent peo­ple.”

Eighty years later, it “sounds pretty heart­less, and it was,” Mr. Ber­nanke said. Mil­lions of peo­ple were thrown out of work and tossed from their homes and farms into the streets.

Some con­ser­va­tives have pro­pounded a sim­i­lar phi­los­o­phy, say­ing the Fed should not have pre­vented banks and Wall Street firms from fail­ing in 2008, and the gov­ern­ment should not have tried to stop the down­ward spi­ral in fi­nan­cial mar­kets and hous­ing that — even with gov­ern­ment in­ter­ven­tion — re­sulted in the loss of more than one-third of the value of those as­sets.

Fol­low­ing such ad­vice as the econ­omy im­ploded in the 1930s, the Fed raised in­ter­est rates rather than eas­ing them to try to re­vive growth. It cited the need in 1929 to prick a stock mar­ket bub­ble — which it ended with no­table suc­cess and tragic con­se­quences. As un­em­ploy­ment was soar­ing in the early 1930s, the Fed raised in­ter­est rates again to de­fend the dol­lar and its link to the gold stan­dard against raids by spec­u­la­tors.

“That was the wrong thing to do,” Mr. Ber­nanke said, be­cause it sent the econ­omy plum­met­ing fur­ther and drove up un­em­ploy­ment.

Mean­while, the Fed ne­glected its pri­mary mis­sion by al­low­ing a mas­sive run on the bank­ing sys­tem that de­stroyed thou­sands of banks and took the life sav­ings and de­posits of mil­lions of Amer­i­cans, fur­ther im­pov­er­ish­ing them as they en­dured wide­spread un­em­ploy­ment, hunger and home­less­ness.

Re­cur­ring bank pan­ics

“Fi­nan­cial pan­ics in the U.S. were a very big prob­lem” even be­fore the De­pres­sion, Mr. Ber­nanke said, not­ing six ma­jor bank pan­ics be­tween 1873 and 1913, in­clud­ing more than 500 banks that failed in the 1893 cri­sis. Yet the Fed, which was founded in 1914 to pre­vent such pan­ics, failed to act in the 1930s.

While Congress made mis­takes dur­ing the De­pres­sion as well, in­clud­ing try­ing to bal­ance the bud­get un­der Pres­i­dent Franklin D. Roo­sevelt when the econ­omy was still frag­ile in the mid­dle of the decade, Mr. Ber­nanke said it took an act of Congress to ease some of the dev­as­ta­tion wreaked by the Fed.

Roo­sevelt called for, and Congress en­acted, laws in 1933 and 1934 drop­ping the gold stan­dard and cre­at­ing de­posit in­sur­ance, mea­sures that were suc­cess­ful at re­viv­ing the econ­omy at least for a while and stop­ping the run on banks, he said.

“They were es­sen­tially off­set­ting prob­lems that the Fed cre­ated or ex­ac­er­bated by not ful­fill­ing its re­spon­si­bil­i­ties,” he said.

In con­demn­ing the Fed’s ac­tions dur­ing the 1930s, Mr. Ber­nanke strikes at the heart of his crit­ics who say he has been too le­nient with loose money poli­cies that threaten to set off a re­vival of in­fla­tion. Mr. Ber­nanke has held in­ter­est rates at record low lev­els since 2008 and is promis­ing to con­tinue to do so through 2014 in an un­prece­dented ef­fort to nur­ture a faster re­cov­ery.

Gold stan­dard re­jected

The Fed chair­man also de­tails, for the first time, his rea­sons for re­ject­ing calls for a re­turn to the gold stan­dard voiced by Mr. Paul and his many ar­dent sup­port­ers.

Al­though Mr. Ber­nanke said he sym­pa­thizes with gold-stan­dard sup­port­ers’ “de­sire to main­tain the value of the dol­lar” and keep in­fla­tion low, he added that a re­turn to the gold stan­dard wouldn’t work and would hurt the econ­omy more.

“It would be very ex­pen­sive” be­cause the gov­ern­ment would have to buy more and more gold and store it in vaults at the Fed­eral Re­serve and Fort Knox, where it would sit idly as back­ing for the cur­rency, he said. “The sim­ple fact is, there’s not enough gold to meet global needs” in a $50 tril­lion global econ­omy.

“More fun­da­men­tally, the world has changed,” he said, with the global econ­omy much larger, more com­plex and in­ter­con­nected than it was in the 1930s, and peo­ple and politi­cians much more con­cerned about the Fed po­ten­tially throw­ing mil­lions of peo­ple out of work.

“If you look at his­tory, the gold stan­dard didn’t work that well, and it worked par­tic­u­larly poorly af­ter World War I,” he said. “There’s good ev­i­dence the gold stan­dard was one of the rea­sons the De­pres­sion was so deep and long. Those coun­tries that al­lowed flex­i­bil­ity in their ex­change rates re­cov­ered more quickly than those that stayed on gold to the bit­ter end.”

Mr. Ber­nanke ad­dresses an­other school of con­ser­va­tive crit­ics led by Peter Schiff, pres­i­dent of Euro Pa­cific Cap­i­tal Inc., who say the Fed’s un­prece­dented pro­grams since 2009 to pur­chase Trea­sury bonds and mort­gage bonds in an ef­fort to lower long-term in­ter­est rates in re­al­ity are a thinly veiled ef­fort to print money to fi­nance the gov­ern­ment’s bloated deficits.

They say this is a big mis­take that will lead at some point to a run on the dol­lar and Trea­sury bonds, end the dol­lar’s long reign as the world’s re­serve cur­rency, and cre­ate a de­bil­i­tat­ing run of in­fla­tion.

Re­but­ting Ber­nanke

Like the liq­ui­da­tion­ists dur­ing the 1930s, Mr. Schiff ad­vo­cates a hands-off pol­icy that lets mar­kets re­solve bad debts through mas­sive liq­ui­da­tions of hous­ing and de­faulted mort­gage bonds.

Mr. Schiff has sched­uled what he is call­ing a “non­politi­cized” lec­ture to re­but Mr. Ber­nanke’s ar­gu­ments Thurs­day while the Fed chair­man is de­liv­er­ing his last lec­ture ad­dress­ing the 2008 fi­nan­cial cri­sis.

Rather than keep­ing bank lend­ing rates near zero, Peter Schiff said, in­ter­est rates should be any­where from 2 per­cent­age points to 4 per­cent­age points higher to com­pen­sate in­vestors for higher in­fla­tion, said An­drew Schiff, his brother and spokesman.

Keep­ing rates so low “cre­ates all kinds of eco­nomic prob­lems and en­cour­ages all kinds of de­struc­tive eco­nomic be­hav­ior,” An­drew Schiff said, in­clud­ing over­lever­ag­ing by in­vestors seek­ing to take ad­van­tage of low rates to max­i­mize their po­si­tions in bonds, stocks and other mar­kets. Such over­lever­ag­ing of­ten leads to in­vest­ment bub­bles.

While Mr. Ber­nanke in­tends for the low rates to en­cour­age more lend­ing by banks to con­sumers and busi­nesses, that is not hap­pen­ing, An­drew Schiff said. In­stead, banks are bor­row­ing at near-zero from the Fed and then in­vest­ing in Trea­sury bonds to earn a 2 per­cent re­turn risk­free.

“This is not a good way to help the econ­omy” and only lets the gov­ern­ment go fur­ther into debt, he said.

Peter Schiff agrees that the cen­tral bank helped cause the De­pres­sion, but for dif­fer­ent rea­sons than ex­pounded by Mr. Ber­nanke. He blames too-loose money poli­cies dur­ing the 1920s for cre­at­ing stock and real es­tate bub­bles, a mis­take he says the Fed re­peated dur­ing the 2000s, fos­ter­ing the real es­tate bub­ble — a charge Mr. Ber­nanke de­nies.

Re­gard­less of who wins the de­bate, one clear out­come of Mr. Ber­nanke’s clash with con­ser­va­tives is that he has lit­tle chance of be­ing reap­pointed if a Repub­li­can wins the pres­i­den­tial elec­tion this year.

Jef­frey Klein­top, chief mar­ket strategist at LPL Fi­nan­cial, said Mr. Ber­nanke is at odds with most Repub­li­can can­di­dates, who “in­di­cate that they would fa­vor a less-cau­tious Fed and an ear­lier start to get­ting in­ter­est rates back up to more nor­mal lev­els.”

One for­mer can­di­date, Texas Gov. Rick Perry, called Mr. Ber­nanke’s poli­cies “trea­sonous” and sug­gested that he would fire him if elected, al­though that would not be pos­si­ble be­cause the Fed chair­man can­not be re­moved un­til his term ex­pires in 2014 un­less he com­mits an im­peach­able of­fense. But Mr. Ber­nanke al­ready has in­di­cated that he would an­nounce his re­tire­ment rather than seek an­other term.

Mr. Ber­nanke con­tin­ues to get ac­co­lades from Wall Street in­vestors and an­a­lysts for his stren­u­ous ef­forts to re­sus­ci­tate the econ­omy and mar­kets.

Ward Mccarthy, man­ag­ing di­rec­tor at Jef­feries & Co., ap­plauded the Fed chair­man’s lec­tures and other ap­pear­ances as an “ad­mirable ef­fort” to demon­strate the Fed’s trans­parency and “get the mes­sage out” in a pow­er­ful way that moved mar­kets.

“The Ber­nanke Fed will not re­peat the mis­takes of the 1930s,” he said. “Chair­man Ber­nanke will not pre­side over the next Great De­pres­sion and wants the world to know why he con­tin­ues to see a need for pro­vid­ing stim­u­lus to the econ­omy and sup­port for the bank­ing sys­tem.”

AS­SO­CI­ATED PRESS PHO­TO­GRAPHS

“The Great De­pres­sion in­formed the Fed’s ac­tions and de­ci­sions in the re­cent cri­sis,” Fed Chair­man Ben S. Ber­nanke said at Ge­orge Washington Univer­sity, not­ing the Fed’s mul­ti­ple mis­steps dur­ing the 1930s in fail­ing to stem the fi­nan­cial pan­ics, bank runs and eco­nomic down­spi­ral that cre­ated such des­per­ate con­di­tions.

Thou­sands of un­em­ployed work­ers marched in Jan­uary 1932 from Penn­syl­va­nia to Washington to ask Congress and Pres­i­dent Hoover for help.

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