Harris: Get to Know Bernanke's Fed

A look at Bernanke's background makes it clear why he has been so aggressive in battling the capital markets crisis. Bernanke is an expert on the financial accelerator model: He believes it is impossible to understand the business cycle without a clear understanding of the linkages between credit and the economy.

He is an expert on the Great Depression. What is his main lesson from that period? Here is what he said to Milton Friedman about the Fed's role in the Depression: "You're right, we did it. We're sorry. But thanks to you, we won't do it again." Specifically, by stepping aside and allowing the collapse of the banking system the Fed was a major factor in the Great Depression.

Third, Bernanke is a close student of Japan's deflation of the 1990s. As a Fed Governor in 2003 Bernanke went over to Tokyo and essentially called for a nonviolent revolution. Here was nothing less than an official of the Federal Reserve urging Japanese economists to "speak out and present clear, persuasive arguments that will help guide the policy debate and urge leaders to effective action."

For Bernanke, the lesson from Japan was simple: Move decisively before confidence and capital seep out of the system.

The battle plan he laid out for Japan sounds just like what we are seeing today. Step one: Push short-term rates down to zero. Step two: Drive down long term rates by buying longer-dated debt. Step three: Push down interest rates on private securities. Step four: Have a coordinated easing of monetary and fiscal policy. Finally (and this is where Bernanke got his "helicopter Ben" nickname), step five: Argue for "a money-financed tax cut," which is like Milton Friedman's famous "helicopter drop of money."

While there have been some missteps along the way, I think Bernanke has been just as aggressive as I would have expected. However, he has made some tactical errors. Like most economists -- including yours truly -- he initially greatly underestimated the scope of the financial crisis. Like most central banks the Fed was head-faked by the inflation scare this summer. At least Bernanke bended, but did not break, refusing to follow the hawks on his committee and in Europe and hike rates. And the Fed and other central banks clung to the "moral hazard" argument too long.

Looking ahead, my motto is: If they have proposed it, it will probably happen. The Fed and Treasury will continue to hit the financial accelerator until the markets respond. Sitting back is not in Bernanke's DNA. This does not mean a quick turn in the economy, but it does mean the job will get done.