Ben Bernanke\u2019s first exposure to monetary policy was reading the works of Milton Friedman, the Nobel laureate. That was 30 years ago, when Bernanke was a graduate student at M.I.T., and he has been studying central banking ever since. By the time President Bush nominated him to run the Federal Reserve, at the end of 2005, Bernanke knew more about central banking than any economist alive. On virtually every topic of significance \u201d\u201d how to prevent deflationary panics, for instance, or to gauge the effect of Fed moves on stock-market prices \u201d\u201d Bernanke wrote one of the seminal papers. He championed ideas for improving communications between the Fed \u201d\u201d whose previous chairman, Alan Greenspan, spoke in riddles \u201d\u201d and the public, believing that clearer guidance about the Fed\u2019s aims would help the economy run more smoothly. And having devoted much of his career to studying the causes of the Great Depression, Bernanke was the academic expert on how to prevent financial crises from spinning out of control and threatening the general economy. One line from his \u201cEssays on the Great Depression\u201d\u009d sounds especially prescient today: \u201cTo the extent that bank panics interfere with normal flows of credit, they may affect the performance of the real economy.\u201d\u009d<\/p>\n
Bernanke, who came to the job with a refreshing humility \u201d\u201d a desire to be less an oracle like Greenspan than a plain-speaking technocrat \u201d\u201dfaces exactly this sort of crisis now. Ever since last summer, a meltdown in financial markets has led to daunting losses in the banking industry and throughout Wall Street. Despite having written extensively on how to deal with such episodes, Bernanke has thus far been unable to reinstill a sense of confidence. His faith in modern forecasting models notwithstanding, he failed to foresee that the sudden rise in homeowner defaults, which triggered the crisis, would have such far-reaching effects. And the monetary medicine that he has prescribed, including some of the very tools that he lovingly detailed in his research, have yet to produce a turnaround.<\/p>\n