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.
PHOTO: REUTERS
“The Fed’s policies averted a second Great Depression,” Joseph Brusuelas at Moody’s Economy.com said. “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 programs “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 writes.
Diane Swonk, chief economist at Mesirow Financial, said that 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 to 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 Federal Reserve 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,” Browne said.
“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,’” Browne said.
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 GDP from December 2007 to June this year, 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 1973-1975 recession of 16 months and a decline of 3.2 percent and the 16-month recession of 1981-1982 and a decline of 2.9 percent.
“The Great Recession may turn out to be not so distinct after all,” the report by TD Bank Financial chief economist Don Drummond and colleagues said.
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