Lessons Learned? Comparing the Federal Reserve’s Responses to the Crises of 1929-1933 and 2007-2009

Abstract

The financial crisis of 2007-09 is widely viewed as the worst financial disruption since the Great Depression of 1929-33. However, the accompanying economic recession was mild compared with the Great Depression, though severe by postwar standards. Aggressive monetary, fiscal, and financial policies are widely credited with limiting the impact of the recent financial crisis on the broader economy. This article compares the Federal Reserve's responses to the financial crises of 1929-33 and 2007-09, focusing on the effects of the Fed's actions on the composition and size of the Fed balance sheet, the monetary base, and broader monetary aggregates. The Great Depression experience showed that central banks should respond aggressively to financial crises to prevent a collapse of the money stock and price level. The modern Fed appears to have learned this lesson; however, some critics argue that, in focusing on the allocation of credit, the Fed was too slow to increase the monetary base. The Fed's response to the financial crisis has raised new questions about the appropriate role of a lender of last resort and the long-run implications of actions that limit financial losses for individual firms and markets.