(1) Why didn’t they prevent any of the other recessions we had, if it was possible to just prevent a recession?
In the past, the Fed has TRIED to prevent recessions, but obviously hasn’t always succeeded. Volcker was the last great Fed chairman. He understood the cleansing aspects of recessions and let the ’81-’82 recession crush both inflation and a lot of balance sheets. At the time he was unpopular and didn’t care. But ultimately his actions were vindicated. Fast forward to Greenspan. After the first recession of his tenure (’90-’91) he decided he didn’t like not being liked. Consequently, he decided that lowering interest rates at the mere hint of any bad news was how he would run the Fed, giving rise to the “Greenspan Put,” the stock market bubble, the real estate bubble, etc. All Greenspan cared about was the applause from Wall Street. Based on his comments, I’d say Bernanke is in the Greenspan mold, but only time will tell.
(2) What tools would the Fed use to prevent a recession?
Lower and lower and lower interest rates (again).
(3) What makes anyone think that we can have repeated asset bubbles that never are allowed to burst, that this is even sustainable?
No one with a functioning brain believes this. The only issue is TIMING, which is critical. There were lots of stock market bears as far back as 1995… most of them are now out of the asset management business, despite being fundamentally “correct.” They had to wait SIX YEARS for some measure of vindication. That’s a career down the drain in asset management unless you’ve been around a LONG time and can withstand the criticism. If you haven’t already noticed, bubbles can last A LOT longer than anyone would think. They all burst in the long run, but that long run can be an awfully long time.