Free exchange: The opposite of insurance

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Europe goes to the polls

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Free exchange

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A new book argues that household debt, not broken banks, fuelled the recent recession

BEFORE Ben Bernanke found himself trying to prevent a second Great Depression as chairman of the Federal Reserve, he had become well known in economic circles for explaining why the first one happened. In a paper published in 1983, Mr Bernanke blamed the collapse of the banking system for constricting the supply of credit, which “helped convert the severe but not unprecedented downturn of 1929-30 into a protracted depression”.
The notion that financial crises are transmitted to the broader economy by the “bank-lending channel” has dominated subsequent policymaking. It is why Mr Bernanke fought so hard to stop the panic in 2008 and to recapitalise the banking system afterwards. Tim Geithner, who was at the Fed with Mr Bernanke and then became Barack Obama’s treasury secretary, spends much of his new memoir reiterating their argument (see article): “When the financial system stops …

Link to article: www.economist.com/news/finance-and-economics/21602244-new-book-argues-household-debt-not-broken-banks-fuelled-recent?fsrc=rss

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