Federal Reserve Chairman Ben Bernanke was slow to recognize the threat posed by the housing bubble. As late as the spring of 2007, he was saying the danger was largely confined to the subprime market.
He was wrong. But once Bernanke recognized the full danger, he deployed an aggressive array of measures to prevent another Great Depression. Over the last year, the Fed's balance sheet has doubled to about $2 trillion, a rough measure of the liquidity that's been pumped into the economy.
For that reason, President Barack Obama's nomination of Bernanke for a second four-year term surprised no one. Nominating someone else — such as National Economic Council Chairman Lawrence Summers — would have likely triggered a negative reaction in the financial markets.
Assuming the Senate confirms Bernanke, he may well conclude that as turbulent as the last three years have been, the next challenge could be even more ticklish. The Fed must figure out how — and when — to reel in all the money that's been pumped into the economy without triggering a recessionary relapse.
Bernanke is a keen student of the Great Depression. He is acutely aware of what happened in 1937. Up to that point, the economy was recovering rapidly from the collapse of the stock market, the disarray in the banking system and a devastating deflation. Unemployment had peaked at 25 percent, but had eased to 14 percent.
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