George Bush famously told an assembled group of Congressional leaders in the aftermath of the Lehman filing that unless they immediately passed an open-ended Wall Street bailout “this sucker is going down”.

They blindly complied. Yet for awhile it seemed of no avail.

By the post-crisis bottom in Q1 2009, household net worth had plunged from $68 trillion to $55 trillion or by nearly 20%. That reflected a 60% collapse in the stock averages and a 35% meltdown of housing prices.

For a fleeting moment it appeared that economic truth had come home to roost. Namely, that permanent gains in wealth and living standards cannot be achieved by the kind of rampant speculation and debt-fueled financialization that had generated the phony boom of the Greenspan era.

But that didn’t reckon with the greatest and most unfortunate accident of modern financial history. The clueless White House advisors who counseled George Bush in September 2008 to violate the free market in order to save it, had also advised him to appoint Ben Bernanke to the Fed in 2002, and then to promote him to the post of Chairman of the Council of Economic Advisors in 2005 and finally to become head of the Fed in January 2006.

But here’s the thing. Bernanke was an academic hybrid of the two worst economic influences of the 20th century—the out and out statism of John Maynard Keynes and the backdoor statism of Milton Freidman’s central bank based monetarism.

Both of these grand theoreticians got the causes of the Great Depression wrong, and Bernanke did doubly so. You can reduce all of his vaunted expertise about the 1930s to a single proposition.

To wit, the Fed should have bought up the entire $17 billion of government bonds outstanding at the time in order to liquefy the banking system and thereby arrest the plunge in economic output.

I have refuted that hoary tale in detail in the Great Deformation. The short of it is that the banking system collapsed because it was insolvent after the 15-year, debt-fueled boom of World War I and the Roaring Twenties, not because it was parched for liquidity or because the Fed had been too stingy in the provision of reserves.

In fact, money market interest rates barely exceeded 1% during the 1930-1932 period when Friedman and Bernanke claim the Fed was too tight; and excess (i.e. idle) reserves in the banking system soared by 15X.

There is no evidence that any solvent bank that was a member of the Federal Reserve System was denied discount loans or that solvent main street business that wanted more credit couldn’t get it.

Instead, what happened was that the reckless expansion of bank credit during the years prior to the 1929 crash was liquidated because it couldn’t be serviced or repaid.