Bernanke Seeks to Avoid Greenspan's Mistakes

Federal Reserve Chairman Ben Bernanke got the nickname "Helicopter Ben" because his willingness to use tools other than the Fed Funds rate to stimulate the economy. Bernanke feels an over-reliance on the rate was the mistake made by prior Federal Reserve Chairman Alan Greenspan that prolonged the 2002 recession.

Since the start of the Mortgage Crisis, the Fed has developed 11 new programs, such as loaning $540 billion to bail out money market funds. As a result, the Federal Reserve's balance sheet has doubled to $1.7 trillion, comprised of mortgage-backed securities, Bear Stearn assets and a loan to AIG. Last year its assets were only $873 billion, and it held ultra-safe U.S. Treasuries.

This week, the FOMC is expected to lower the Fed Funds rate to 1%, so the Fed will need to continue to be creative in using other tools. In fact, it may buy more U.S. Treasuries to keep long-term interest rates low, and purchase more mortgage-backed securities. The important thing is to act quickly and decisively to avoid a long recession such as that experienced by Japan in the 1990's. Bernanke has done extensive research in alternative Federal Reserve tools as part of his studies of the Great Depression and Japan's recession. (Source: Bloomberg, Bernanke Seeks New Tactics, October 23, 2008)

What It Means to You

Bernanke's expertise and willingness to be creative means that the credit crisis, which could have created a decade-long depression, will probably only last another year or so.

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