A must read piece is in the upcoming June 2008 Bloomberg Markets Magazine titled: The Improviser
"Ben Bernanke, the consensus-building academic who toiled in Alan
Greenspan’s shadow, is emerging as the most powerful–and
inventive–Federal Reserve chairman in the 95-year history of the
central bank. Paul Volcker says he’s overreaching . . .
From Bernanke’s standpoint, there are two major lessons to be learned from the Fed’s reaction to the market crash of 1929 that are relevant today. The first is that the Fed should lower rates, not raise them, in the face of an economic contraction. The second is that the Fed must pay careful attention to the health of financial institutions, as lending plays a big role in economic growth.
In July 1928, when financial markets were still booming, the Fed raised its benchmark interest rates to 5 percent, the highest since 1921, effectively cutting the money supply, in order to reduce what it saw as excess speculation on Wall Street. It did so even though there were no signs of inflation, Bernanke said at the conference honoring Friedman. In October 1931, after the market crashed and GDP had begun to nosedive, the Fed raised rates again to prevent the dollar from falling in international markets. That made it harder for companies and individuals to borrow even as the economy was contracting 30 percent and deflation was setting in. A series of bank failures further reduced credit throughout the economy."
Go read the full piece now . . .
Bloomberg Markets Magazine June 2008