BEFORE HE was chairman of the Federal Reserve Board, Ben S. Bernanke was a Princeton economist who studied the influence of financial markets on the business cycle. Mr. Bernanke tried to show how and why ample bank liquidity and strong consumer net worth magnify growth in the "real" economy -- and how, on the other hand, bank failures and falling asset prices intensify recessions. According to Mr. Bernanke, this "financial accelerator" helped explain why the Great Depression was so long and deep. Now, at a moment when house prices are falling, credit is contracting and once rock-solid Wall Street firms are trembling, the Fed chairman appears to be following his own teaching.
Over the weekend, Mr. Bernanke took unprecedented steps to prevent a financial market correction from becoming a panic -- and turning a pending recession into something much worse. With 85-year-old Bear Stearns unable to meet its clients' demands for cash, the Fed facilitated the firm's takeover, at the fire-sale price of $2 a share, by the much stronger J.P. Morgan Chase -- in part by chipping in $30 billion for Bear's unmarketable mortgage-backed securities. Also, the Fed announced that it would, for the first time, allow top Wall Street investment firms to borrow low-cost short-term funds that had previously been available only to banks. This reflected the new reality of a financial system whose lifeblood is no longer just commercial bank lending but securitized debts of all kinds.