Too much pleasing prosperity can lead to instability

READING former Federal Reserve chairman Ben Bernanke's new memoir of the financial crisis - The Courage to Act - you are reminded how lucky we are. Despite a disappointingly slow economic recovery, it could have been much, much worse. The conventional wisdom is that we have dodged a second Great Depression, when the unemployment rate reached 25 per cent. Nothing in Mr Bernanke's account contradicts that conclusion.

If ever Main Street depended on Wall Street, this was it. Businesses need credit to finance new investment, to smooth seasonal fluctuations and to cover daily expenses. As firms lost access to credit, or feared doing so, they saw their survival at stake. They conserved cash by any means available. They stopped hiring, started firing and delayed investment projects. From September 2008 to February 2010, payroll employment fell by 7.1 million.

The Fed helped check this downward spiral before what we now call the Great Recession became another Great Depression. With private lenders on strike, the Fed temporarily provided funds as a "lender of last resort". Its complex lending programmes supported banks, securities dealers, money market funds, foreign lenders and the commercial paper market. The amounts were stupendous. At one point, lending through the traditional "discount" window approached US$900 billion.