In Defense of Bernanke

Macroeconomists often act as Monday-morning quarterbacks of monetary policy, and Ben Bernanke has gotten plenty of criticism, some of it rather harsh. Taking a more favorable view, in Barron's, Randall Forsyth defends Bernanke's handling of the credit crisis:

Importantly, these innovations [the TSLF and PDCF*] obviate the need for the Fed, in the widely cited words of a speech by Bernanke in 2003, to drop dollars from helicopters to stave off a deflationary crisis. The present Fed chairman gets credit (and blame) for that turn of phrase, but it originated with Nobel Laureate Milton Friedman.

Indeed, much of Bernanke's academic work built on the insights of Friedman and his collaborator, Anna J. Schwartz, who pinned the blame of the Great Depression on the Fed for permitting the money supply to contract by one-third. Bernanke's work focused on how that happened; the answer was basically a breakdown in the financial system.

Using that insight, Bernanke has fashioned these new instruments to make sure the 21st century financial system does not break down as the one of the 1930s did. Until now, the instruments were extremely blunt -- as in driving short-term rates down to 1% under his predecessor, Alan Greenspan, and holding them at preternaturally low levels even after the economy and the financial system recovered from the tech-telecom bust.

In essence, Ben Bernanke has come up with an alternative to the monetary printing press to deal with the greatest credit bubble and bust in history...

Hat tip to The Big Picture.
*The Primary Dealer Credit Facility (opening discount window lending to investment banks) and Term Securities Lending Facility (loans of Treasury securities collateralized by mortgage backed securities; see this earlier post). Also, Real Time Economics has a brief guide to the "alphabet soup."

Update (5/4): Paul Krugman writes:

The Fed’s efforts these past nine months remind me of the old TV series “MacGyver,” whose ingenious hero would always get out of difficult situations by assembling clever devices out of household objects and duct tape.

Now that is high praise, indeed!