For Chairman Bernanke (1983), monetary shocks caused the Great Recession. Frictions in financial markets (the credit channel) were important as a propagation mechanism. Later, as FOMC chairman and in the context of the 2001 and 2008–2009 recessions, he adopted the view that the initial shocks originated as the bursting of bubbles in asset markets. In response to a question from Henry Kaufman asking “[H]ow will the Federal Reserve respond to further financial speculative activities,” Bernanke (2009d) responded:
You just introduced perhaps the most difficult problem in monetary policy of the decade, which is how to deal with asset bubbles. We’ve had two big asset bubbles in this decade, and both have resulted in severe downturns, particularly the credit bubble.
Based on the assumption that the 2008–2009 recession originated in a disruption in financial markets, Bernanke (2008b) provided the rationale for the unprecedented intervention into credit markets by central banks and governments in fall 2008:
History teaches us that government engagement in times of severe financial crisis often arrives late, usually at a point at which most financial institutions are insolvent or nearly so. Waiting too long to act has usually led to much greater direct costs of the intervention itself and, more importantly, magnified the painful effects of financial turmoil on households and businesses.