Bernanke has no particular response to this criticism—the Fed did not respond to a request for comment. But I'll hazard a try at channeling him. Schwartz is right: this crisis is different from the Great Depression. But it's because this is true that it might be a little unfair to judge his actions in the way Schwartz does. First, it's no accident that neither Bernanke, then-Treasury Secretary Hank Paulson, nor current Treasury Secretary Tim Geithner has found any effective way to dispose of the toxic assets. For most of the past 10 months or so, selling them at any price the market might pay would have made many of the major banks automatically insolvent. Which means you're automatically in a depression. So what "principles" should Bernanke have applied? Who should he have saved, and who not?

Beyond that, there is another lesson, one that shows just how deep and systemic this disaster has been—far worse, in fact, than the crash that began the Great Depression or any other crisis that even the esteemed Anna Schwartz has dealt with. In capitalism, bankruptcy is supposed to be the fate of market players who make bad choices. The system gets cleaned out, the survivors deservingly pick up their failed rivals' business and get richer, and the economy comes back to life quickly. That, after all, was Andrew Mellon's infamous response after the 1929 crash. "Liquidate labor, liquidate stocks, liquidate the farmers," Herbert Hoover's Treasury secretary said—earning himself a permanent place in the annals of American villainy. But all Mellon was really doing was administering standard economic wisdom: allow the market to clear by selling. The problem was, things were probably too far gone for that to happen without a very painful depression.

Similarly, today the government is keeping failing banks artificially afloat. Interestingly, this policy has angered critics on the left, like economists Joseph Stiglitz and Paul Krugman, as much as critics on the right like Schwartz. They want the Obama team and Bernanke to be tougher on the banks. But here is the kind of thing Bernanke might say, if he were to respond: so out of control was Wall Street in recent years, and so unbalanced were global capital flows, that almost every major global bank grew weighed down with toxic assets (a few, like Goldman Sachs, handled things better than others). The system came so horribly unglued, in other words, that there was no longer any way to allow capitalist forces to restore the system to health—without a massive failure of banking and therefore another depression. So what exactly should Bernanke have done? Yes, there is a case to be made that the Obama administration and Bernanke's Fed could have taken over a couple of banks at the outset, broken up or restructured pathological monstrosities like Citigroup. But there was very little time to develop "principles" for a crisis the likes of which no one had ever seen before.

The evidence is precisely the omnipresence of those toxic assets, and the inability of both a Republican and a Democratic administration to figure out how to dispose of them.

All of which suggests that it may be time for modern economics, created around the Great Depression, to reinvent itself. New ideas are needed. It's a debate that Ben Bernanke would no doubt love to have with Milton Friedman, were the great man still around.

© 2009