To put it another way, Friedman and Schwartz argued that the deflationary impact of banking panics on the price level is what increased the severity of the Great Depression. Bernanke appears to believe that individual bank failures could so impede financial intermediation that even without any price deflation they will generate a severe depression. Otherwise, why did he sterilize the effect on the money stock of his early bailouts, particularly of Bear Stearns?
My question for Tyler: which of these views do you think is correct? Also, a related question, do you see any distinction between propping up particular banks and reflating the system as a whole?
Tyler's answer confirms what I was starting to think about our differences. He wrote on September 2:
On the right and wrong of the matter I side with Bernanke and the bailing out of at least some of the insolvent banks. I also think that the more modest Friedman recipe is still fine for most "panics," just not this one.
In other words, he agrees that there is some difference in viewpoint between Bernanke and Friedman, and takes the Bernanke side.
I will post soon on why I think Friedman's policy preference would have worked better in the current crisis than Bernanke's has.