Back in October I argued that the reason the Fed was not engaging in massive monetary stimulus, as folks like Scott Sumner were stressing, is not because they didn't think it would work but because they were worried that it would; following the crisis the Fed became the world's central banker, not just the U.S.'s:
I have no reason to think this is true, but perhaps Bernanke is influenced by another scholar of the Depression - Charles Kindleberger. Kindleberger argued that the Great Depression became a cataclysmic international event because of the unwillingness of the U.S. and inability of the U.K. to supply public goods to stabilize the international system. Those public goods include maintenance of a system of stable exchange rates and open markets ...
In other words, perhaps Bernanke is acting as the world's central banker. If Bernanke believes that a U.S.-led currency war would have adverse consequences for the global economy, then perhaps he is willing to prolong the U.S. recovery in order to prevent a large global downturn. Such a deterioration of the global economy would also affect the negatively affect the U.S. of course. So while, ceteris paribus, a dollar devaluation would help the U.S., ceteris is not paribus. A U.S. devaluation would prompt a series of actions in Frankfurt, Tokyo, and Beijing. The resulting exchange rate instability would spook financial markets and hamper trade. Cries for protectionism would grow louder, and the net effect would be sharply negative.
Faced with that scenario, perhaps Bernanke has opted instead to try to stabilize markets and defuse an explosive global political economy by allowing other countries to beggar the U.S. some in the short run. Again, I don't know if this is the case, but it seems more persuasive to me than "Bernanke doesn't understand the monetarist lessons from the Depression".
Then in December I noted that the Fed was operating as the world's lender of last resort, and concluded "This provides further evidence that the Fed's behavior cannot be understood out of a global context." Well, now we get even more information about the extreme actions the Fed took to stabilize the global financial system:
The biggest borrowers from the 97-year-old discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008 when use of the program surged to a record.
There is a lot of detail in the report, which summarizes some 90,000 pages of documents released under FOIA request, but notable foreign firms that received funding include Societe Generale, Dexia SA, Bank of Scotland, Norinchukin Bank, Bank of China, Deutsche Bank AG, Arab Banking Corp., and others. These are some of the world's largest financial institutions, and the Fed's support for them likely prevented the crisis from being much, much worse. So, of course, Ron Paul is apoplectic:
“The American people are going to be outraged when they understand what has been going on,” U.S. Representative Ron Paul, a Texas Republican who is chairman of the House subcommittee that oversees the Fed, said in a Bloomberg Television interview.
“What in the world are we doing thinking we can pass out tens of billions of dollars to banks that are overseas?” said Paul, who has advocated abolishing the Fed. “We have problems here at home with people not being able to pay their mortgages, and they’re losing their homes.”
The American people likely will be outraged, because people like Ron Paul won't stop misinforming them until they are. What the Fed was thinking as it passed out tens of billions was that the if the global economy collapsed that would have pretty profound negative implications for the American people, including those with mortgages to pay. (Anyway who does Paul think he's kidding? He wouldn't support a Fed program to refinance mortgages. Hell, he's a liquidationist. If he were honest, he'd be applauding people losing their homes, as a necessary step in the purge.) Meanwhile, if the Fed acted quickly it could not only halt the downward spiral but do so with very little risk. And, in fact, "all the discount window loans made during the worst financial crisis since the 1930s have been repaid with interest."
Note that the ECB has done some similar stuff, but only on a regional level. That, in a nutshell, is the difference between the role of the two central banks in the global economy.
If I'm interpreting him right, then Bernanke's actions have been terribly misunderstood. And probably underrated.