Bryce's graph, the founder of Prospective Value may be eerily prescient. We will see how closely we follow the trend of the Great Depression. Ben Bernanke, the Chairman of the Federal Reserve, is a student of history and specializes in the Great Depression; he is intimately familiar with the mistakes made by the Federal Reserve (or, more specifically, by the New York Federal Reserve while in the midst of a power struggle with the Board of Governors) leading up to the bank runs of 1931.

Here's a concrete example of Mr Bernanke learning from his predecessors' mistakes:
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On C-Span, Rep. Paul Kanjorski (D-PA) explained how the Federal Reserve told members of Congress about an electronic run on the banks "to the tune of $550 billion dollars" within "an hour or two" last fall.

According to Kanjorski, on September 18, 2008 the Fed tried to "stem the tide" by pumping money into the financial system but it didn't work and decided instead to announce an immediate increase in deposit insurance to $250,000 per account to stop the panic.

Said Kanjorski: "If they had not done that, their estimation is that by 2 p.m. that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it."
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And, in keeping with his determination to prevent the failure of major banks, Mr Bernanke has aggressively eased credit (precisely the opposite of what the Fed did in 1931), bringing down the federal funds rate to the 0-0.25% range at the Federal Open Market Committee on December 16, 2008. As Mr Bernanke said in his interview with 60 minutes last night, he believes that the recovery of the general economy will follow only after inter-bank and bank-to-consumer lending is back to normal. The 1 month London Interbank Offered Rate (LIBOR), the inter-bank interest rate for a one month loan, measures 0.56 this week; in a healthy economy, LIBOR measures 0.35; last year, the 1 month LIBOR rate measured 2.89.

These are short term considerations. Robert Samuelson calls for thinkong on a longer time horizon. Mr Samuelson argued in March of 2008 that "In judging what that balance should be, the Fed needs to be less intimidated by present problems and more concerned with long-term consequences."

Pointing back to the 1970s, Mr Samuelson writes, "Unfortunately, the Fed shows signs of overreacting to these pressures and repeating the great blunder of the 1970s. Underestimating inflation then, the Fed repeatedly shoved out too much money and credit in a vain effort to keep the economy near "full employment." Inflationary psychology became widespread, and the resulting wage-price spiral fed on itself. Now, switch to the present. Again, the Fed has underestimated inflation. It expected the economic slowdown to suppress inflation spontaneously."

Given the events in September 2008 your correspondent detailed above, Mr Bernanke is understandably more concerned with a general collapse of the economic system than inflation. But the latter is a legitimate concern. Will the period following the recession we're in right now be characterized by stagflation?

Mr Bernanke is a student of history, and I doubt that he pulled blinders on to study the Depression isolated from event leading up to it and following it. No: Mr Bernanke -- should Mr Obama reinstate him as Chairman -- will likely move aggressively to tackle inflation when he feels the financial system can bear sharper credit conditions. Disclaimer.