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THE BOOK ON BERNANKE

I Took His Class. Now He's Being Tested.

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By Carlos Lozada
Sunday, November 16, 2008

It was the annual conference of the American Economic Association in January 2000, and the well-regarded Princeton professor was explaining why he had always loved macroeconomics. What made his chosen field so compelling, he said, were the "extreme and dramatic events" it covers, such as hyperinflation, depressions and financial crises.

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"This dramatic aspect always appealed to me," Prof. Ben S. Bernanke told fellow economist Brian Snowdon in an interview.

If economic turmoil really fascinates him, the Federal Reserve chairman must now be having the time of his life. The global economy is in the midst of the most extreme and dramatic financial trauma since the Great Depression, when markets crashed, prices plummeted, banks collapsed and jobs vanished, leaving a legacy of breadlines, Joads and Hoovervilles.

Echoes from that era resonated in Washington this weekend as leaders from the world's top economies gathered for a summit that has evoked overblown comparisons to Bretton Woods, the 1944 conference that sought to repair a global economy emerging from depression and war. It seems somehow fitting to see Bernanke -- a top scholar on the economics of the 1930s -- at the helm of the Federal Reserve in yet another age of war and financial peril.

Bernanke, whose term as Fed chairman began in February 2006 and runs through the first year of the incoming Obama administration, has devoted years of research to explaining how policy mistakes and financial panics transformed a 1929 recession into a worldwide calamity meriting its own capital letters. If anyone can steer us clear of a similar fate today, it should be Bernanke -- right? Now history has put the self-described "Great Depression buff" to the test.

As I watch him grapple with our current crisis, I feel guilty for not having a better sense of his efforts. Nearly 14 years ago, as a distracted 23-year-old graduate student in public policy, I sat in the bowels of Robertson Hall at Princeton University, struggling through Bernanke's course in macroeconomics. He wasn't yet chairman of the economics department -- much less of the Fed -- but for one semester, the man who would succeed Alan Greenspan taught me theories of business cycles, why prices rise and fall, and whether the government can boost economic growth or prevent downturns. Go figure.

Bernanke was a good instructor, but the class wasn't easy. I recall tough assignments and a stressful midterm exam that had me wrestling with something called the Euler condition. (Don't ask, because I still don't know.) The exam was challenging, we were told, because a test should be a learning opportunity, not just a gauge of whether we could spit back class notes.

It was not my finest academic moment, nor one I imagined ever revisiting. But recently, watching my old professor testify before Congress and move markets with each speech, I decided to crack open his textbook and sift through his prolific writings on the Depression -- books, speeches, articles and interviews -- looking for new lessons that shed light on his quest to keep today's recession from becoming another Great one.

As I read Bernanke's "Essays on the Great Depression," a selection of his academic papers, what leaps out is his emphasis on the Depression as a global phenomenon. Tempting as it is to focus on President Herbert Hoover and the 1929 U.S. market crash, Bernanke explores conditions across dozens of countries -- assessing where banking crises erupted, how deeply economic activity plummeted and which central banks made the right calls.

"Arguments which focus almost entirely on the U.S. are missing a crucial aspect of the issue," Bernanke stressed to Snowdon, as recorded in Snowdon's 2002 book, "Conversations on Growth, Stability and Trade."

As the current downturn ricochets through the global economy -- with Europe and the United States entering recessions, China launching a massive New Deal-like stimulus package and developing nations teetering as capital flows dry up -- Bernanke has coordinated interest-rate cuts with other countries and extended up to $120 billion in lending to the central banks of Brazil, Mexico, Singapore and South Korea. As with the Depression, the transnational dimensions of today's crisis never seem far from his mind.

Bernanke also emphasized that decisions by central bankers were crucial during the late 1920s and early '30s -- and nowhere more so than in the United States. In a paper called "Deflation and Monetary Contraction in the Great Depression," he offered "the clearest indictment of the Federal Reserve" and concluded that the Fed's moves were "actively destabilizing" in the crisis's early stages.


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