Got that 1937 feeling all over again!
WASHINGTON - August 7, 2011 - U.S. Federal Reserve Chairman Ben Bernanke, a self-proclaimed expert on the Great Depression, once promised that the central bank would never repeat its 1937 mistake of rushing to tighten monetary policy too soon and thereby prolonging an economic slump.
He has been true to his word, keeping interest rates near zero since late 2008, and more than tripling the size of the Fed's balance sheet, to $2.85 trillion. But cutbacks in government spending may end up having a similarly chilling effect on the economy, and there is little Bernanke can do to counter that.
Back in 1937, the U.S. economy had been growing rapidly for three years, thanks in large part to government programs aimed at ending the Great Depression that began in 1929.
Then the central bank clamped down hard on lending, and federal government spending dropped 10%. The economy contracted again in 1938. The jobless rate soared.
"Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again," Bernanke said back in 2002 at a conference honoring legendary economist Milton Friedman's 90th birthday.
Bernanke convenes the Fed's next policy-setting meeting on Tuesday, facing growing concern that the United States may be slipping into another Great Depression while Europe staggers toward a deeper debt crisis. Standard & Poor's decision on Friday to lower the U.S. credit rating adds yet another element of uncertainty to the mix.
