When Ben Bernanke stood up in front of Milton Friedman (it was his 90th birthday) back in November 2002, what he told the co-author of A Monetary History was that the monetary account contained within its pages had become settled, the officially-accepted version of events. What had made the Great Depression truly prolonged and horrific had been the long-ago Federal Reserve screwing it all up – badly.

Bernanke at the time wasn’t yet the Fed’s Chairman but he was one of its policymaking members alongside being a widely-recognized scholar of that very economic calamity. Thus, the underlying truth to his slightly tongue-in-cheek phrasing was nonetheless immensely serious and, as we would soon find out, gravely consequential:

I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

But what was it that the Federal Reserve had actually done wrong? According to Friedman, “America’s” central bank had failed to act in line with all existing and still current understanding about money systems; from Bagehot onward, to come forward in times of crisis to lend freely even if it has to be done at high rates provided good collateral.

Currency elasticity and all that.

The statistics at least bear out the horror of what truly had been an egregious (and indescribably costly; see: WWII) error. Lending collapsed, deflation took hold and wouldn’t let go until the smoldering wreckage of Europe and the Pacific would get rebuilt decades later.

This is what we are all taught to think of when it comes to a modern central bank. Immersed in the aftermath of calamity, recognizing the incipient spark of its causes, as Bernanke allegedly has been, in 2002 the future Federal Reserve leader was ostensibly pledging currency elasticity would never again surrender money and finance to the deeply destructive forces of economic deflation.

Faced in its own hour of crisis, should any such serious crisis ever arise, the central bank had sworn to stand athwart any budding monetary gale to see to it that it never goes so far again.

But then how does anyone explain 2008?

You see, the modern Federal Reserve is not actually a central bank and hasn’t truly been one in a very, very long time. Even in 2002, Bernanke – as his then-boss Alan Greenspan – already knew this. The arrogance, if you will, behind his promise to Milton Friedman was in believing that while the Fed didn’t do much in money they could easily, predictably, and successfully control the banking system which actually did (in Greenspan’s contemporary parlance: “the proliferation of products”).


By December 2008, standing within the all-too-similar inelasticity of another deflationary event on par with only that other one, the Federal Reserve and all its global counterparts had already begun to evolve. They’d been forced to by this reckoning between arrogance on their part and a very different monetary reality at least for the public’s imagination.

It has been couched quite favorably, with incredible speed and charity, as a rather benign-sounding ultimately minor deviation in procedure: from lender-of-last resort to now market-of-last-resort. It may seem a trivial distinction, yet there is both the recognition of this other, hidden shadow money reality alongside an operating standard that’s completely unlike anything a true central bank would ever contemplate.

Because this new doctrine compelled by failure incorporates the fact the Federal Reserve actually is not a central bank. What it may be, however, and the jury’s still out, a marginal asset buyer.

Market-of-last-resort pays little to no attention to effective global dollar liquidity, realizing that since there is no central bank any such attempt to impose currency elasticity would be futile (having learned the hard way during the first global financial crisis). QE and the like (other programs, such as the PDCF) focus instead on “bailing out” markets impaired by the eruption of gross currency inelasticity for reasons left unexplored.

Basically, this non-central bank central bank still tries to act as a circuit breaker under crisis but employing very different means at very different times; buying impaired assets as markets break down rather than currency elasticity before they do.

In practice, like 2008, this has sidelined the non-central bank central bank leaving it effectively the janitor who comes in after the mess and attempts to begin cleaning up. The mess still happens, policies put in place have almost nothing to do with interrupting rampaging inelasticity, but the Fed and its compatriots around the world get to parade around somewhat plausibly (in theory) claiming it would’ve been worse had the “market-of-last-resort” tactics not been employed (“jobs saved”).

The public was never fully informed of this radical change, at least not in any straightforward manner. By and large central bankers have been wholly content to let regular folks – you and me – continue to believe it behaves like a central bank right down to its archetypal practices.

Nothing could be further from the truth. 

Part 2 is here.