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Richard M. Salsman Contributor

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Opinion 38,968 views

How Bernanke's Fed Triggered the Great Recession

US Federal Reserve Chairman Ben Bernanke speak...

Image by AFP/Getty Images via @daylife


Bernanke typically is described as that rarest of combinations: a Republican yet also an Ivy League academic, a bureaucrat who’s nevertheless respectful of markets, an expert on the Great Depression yet aware of the Fed’s role in it, and above all a man supposedly wise enough to not let “it” happen again. Yet in 2008-2009 Bernanke did nearly let “it” happen again — a banking collapse, a depression, deflation — by bringing the U.S. financial system to its knees by roughly the same Fed policy adopted in the 1930s, followed by his blizzard of paper-money printing that has caused a dollar debasement unprecedented in U.S. history. The result has been a huge destruction of wealth, spreading fiscal chaos and stagflation as far as the eye can see.




Bernanke knows all of this — and far better than his clueless interrogators. In a 2004 speech titled “What Policymakers Can Learn from Asset Prices” Bernanke recounted the unassailable historic evidence that an inverted yield curve is invariably bearish with a reliable time lag of a year or so. “Various yield spreads have been found to be informative about the future course of the economy,” he said, and “some have exceptionally good forecasting track records,” especially “the slope of the yield curve,” which is “measured as the 10-year bond rate less the 3-month bill rate.” He conceded that “evidence for the predictive power of the slope of the yield curve” is abundant, and exists “for other industrialized countries as well as the U.S.”

As Bernanke acknowledged, “the slope of the Treasury yield curve” has been “recognized for some time as a useful indicator of cyclical conditions,” that it “has turned negative between two and six quarters before every U.S. recession since 1964,” that U.S. recessions invariably have “followed the inversion of the yield curve,” and that the yield curve “captures the stance of monetary policy.”

The latter concession means that the Fed can easily and deliberately invert the yield curve whenever it chooses, either with short-term rate hikes or passivity in the face of plunging bond yields. Likewise, the Fed also can always act to prevent an inverted yield curve – and thus also to prevent future recessions. Notably, the U.S. yield curve was inverted prior to all seven U.S. recessions in the past half-century and no recession occurred in that time without a prior inversion. That’s a perfect forecasting record. The Fed also inverted the yield curve prior to the 1929 stock-price crash and Great Depression in the 1930s. The only “criticism” the Fed got in subsequent decades was that it didn’t follow its punitive rate policy with massive money-printing.

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  • Mark Adomanis Mark Adomanis, Contributor 3 years ago

    If the dollar increased in value against other currencies, then that means virtually every other central bank was even MORE irresponsible than the Fed. So if the dollar’s debasement was “unprecedented” the debasement of the ruble, the real, the pound, and the Euro was…super-duper-really unprecedented?

  • bubbaboy bubbaboy 3 years ago

    I would also like to add that by depreciating the US Dollar vis-a-vis other currencies, US manufacturing would become more competitive, so maybe the depreciation is not such a bad thing after all. The main reason why so much of the manufacturing has gone to China is because it’s cheaper to manufacture goods here. That’s it. People may try to explain it through some complicated theories, but the only reason is the cost. The US needs to pull up its socks on the manufacturing front to really rev up the economic engines again. And a cheaper currency would help.

  • gcruz0812 gcruz0812 3 years ago

    I feel like this is what is wrong with politics. Before I get into this area I would like to point out this article is vilifying Bernanke, both saying he is well aware of what he is doing and yet very smart. Bernanke would make a large fortune working for private enterprise yet he works for the federal government. Why? Prestige, power, legacy and possibly even a bit of civic duty, lets not get crazy and call him a hippie though. So here is this man with a wealth of knowledge, a student of the great depression and the numerous theories as to why it occurred, everything from Keynes to Friedman and most certainly as far back as Malthus’ theory of general gluts and everything in between. So why would this man knowingly push us further into a recession; embarrassing himself and ruining his prestige, legacy and all of the other goodies being Fed Chairman gets you? Because it didn’t happen that way. At the very worst one can say that Bernanke screwed up and made the wrong decision. At the very best one can say that Bernanke’s situation was unavoidable due to delaying the severe recession the should have followed the dot com bubble. Yet does it matter, back to the basics of economics, incentives, we must look at where our leaders incentives lie as people. Bernanke does not want to be remembered as the Chairman that led us to be taken over by China’s booming economy so in my opinion we must put the best man forward we have and trust in the incentives we have created. If this poster has a better scholar of recessions to put forward I would love to hear their credentials.

    Back to the issue of politics, Democrats and Republicans need to stop fighting. It’s like fighting out who gets to fire the gun at the zombie coming towards the two and eventual both die. I think all Americans agree we want to solve social issues in what ever fashion that is and promote growth. Lets start there and work out way to a solution.

  • Hello bubbaboy,

    That is certainly true but the issue is not the value of the dollar vs. the yuan but wages. Workers in China earn about 1.50 USD/hr with no benefits while a worker in the US earns more than ten times that much. There is just no way that an investor is going to fund the building of a factory in the US if it is at all possible when he or she could build the same factory in China. The prices of the products produced will be low and the profits high.

  • timmot3 timmot3 3 years ago

    Hi Richard, With respect to your fine explanation about yield curves…The real truth of the matter is that the rot started in 1971 when Pres.Nixon abolished the gold standard.
    By doing so he removed any natural ceiling which could have contained all this hardship. It effectively removed all natural control over being able to afford to live within the means of the country.
    The people followed his example and have simply spent money they never had…
    The USA and it’s people craved more cash so they borrowed more, just like a junkie craving drugs…It could never have ended any other way, but disaster!
    You really cannot blame one man for the country’s problems. You have to blame the entire ethos and psyche of the people spending like there was no tomorrow!
    Never in history has any FIAT currency worked and it never will…
    Unfortunately an old saying “He with the gold shall rule” was based on a wise premise…
    Unfortunately for western nations, they attach little importance to ownership of precious metal and many of their “rocket-scientist” governments preclude them from owing gold, silver etc…Whereas the Chinese, Indians etc have a totally opposite inclination to own the precious metals….This imbalance is unhealthy and eventually will create it’s own problems..
    The recent opening of the Pan Asia Gold Exchange in China is a Harbinger for the US$ and will surely precipitate it’s demise as the world’s reserve currency!An online precious metals exchange which offers safe storage of the precious metals….Hmmmm The Chinese nation of > billions against the USA of +/-360 million…Hardly a contest I would say…
    I respectfully suggest that we will shortly see the Chinese link their currency to precious metals in some way and when that happens, the Fed, Mr.Bernanke and “all the king’s men and all the king’s horses” can bend over and kiss their tushies goodbye!.

  • bubbaboy bubbaboy 3 years ago

    i completely agree with your point, and this point was also raised by an American friend when he came to visit me here in China. But after staying here for a little more than 6 months in a manufacturing facility, i can safely say that the current level of wages in China is untenable. Slowly, the wages are inching upwards, and unless the government intervenes in some way to protect this “low-cost” advantage (which it definitely will), manufacturing will shift from China, to a cheaper alternative (which could be America in a couple of years, given the added advantage of innovation). On the issue of benefits, though i agree with your point that an average chinese worker has no conventional benefits like healthcare, the factories here provide all the meals and accommodation.

  • mikeuchima mikeuchima 3 years ago

    Mr. Salsman,

    Your whole argument seems rather backwards (or at least inside-out) to me.

    It seems clear that prior to the recession, the housing market was overheated and lending was out of control; by your own reasoning (inverted yield curve slows down lending), kicking rates up a notch would seem like a pretty reasonable (or at least not unreasonable) thing to do in that situation. The alternative would’ve been to allow the over-leveraged, out-of-control economic juggernaut based almost entirely on unreasonable housing valuations to continue on its path, making the inevitable crash at the end all that much worse.

    Your claim that we’re now in a period of stagflation doesn’t hold water either, as your argument seems to be almost entirely based on the price of gold. Yes, I know you’re a gold bug, so nothing I can say will change your mind; but based on any rational evaluation, gold hasn’t doubled solely due to declines in value of the dollar. There are other factors at work as well, not the least of which is the not insubstantial number of speculators who are — like yourself — gold bugs.

  • trisailer trisailer 3 years ago

    Bernanke triggered the recession and there was no bubble?
    This explains why our country is in the shape it’s in. So called qualified economist making statements like this. I had been waiting for the bubble to crash the economy for months and I’m no “economist” Do you really believe that the economy was sustainable beyond maybe another month or two?
    I saw the same thing happen in the 80′s.
    In fact it was all the phoney paper that the bankers and “economist” generated that created the situation. Most of those mortgages sold were doomed to fail and everyone knew it.

  • Hmmn, sounds like my grandkids getting excited about a new conspiracy they found on the net. See, what it is, Bernanke represents the secret power elite, the Bilderberger group of Satanists who control everything behind the scenes. . .
    Kidding aside, I’d like to verify your objectivity by reading an opposite view, that the inverted yield curve is a good way to control excessive overheat and inflation, that judicious money quantification can restore calm and even fiscal relationships. That’s what scientists do, they try hard to disprove a theory by looking for evidence to support its opposite.