• This is a rush transcript from "The Journal Editorial Report," October 11, 2008. This copy may not be in its final form and may be updated.

    PAUL GIGOT, FOX HOST: Coming up next on "The Journal Editorial Report," the economic turmoil continues. Is it 1929 all over again or can we learn from past mistakes?

    Plus, he says raising taxes on the middle class is the last thing we need in this economy. But just what will Barack Obama's tax plan do?

    And John McCain's new strategy? The underdog is on the attack linking Barack Obama to '60's radical Bill Ayers. Is it the right way to go?

    "The Journal Editorial Report" begins right now.

    Welcome to "The Journal Editorial Report." I'm Paul Gigot.

    It was another tumultuous week for the American economy. As stocks continued their downward spiral, Treasury Secretary Henry Paulson signaled that the government may take the unprecedented step of investing directly in U.S. banks as a way of easing the deepening credit crisis. Some say it feels like 1929 all over again. But are we really headed toward another Great Depression?

    Here with some historical perspective is Amity Shlaes, a syndicated columnist for Bloomberg and a senior fellow at the Counsel on Foreign Relations. She's author of the book, "The Forgotten Man: A New History of the Great Depression."

    Amity Shlaes, welcome.

    AMITY SHLAES, AUTHOR, "THE FORGOTTEN MAN": Thank you.

    GIGOT: You studied the history of previous financial panics, as has Ben Bernanke, chairman of the Federal Reserve. Do you think Bernanke is applying correctly the lessons from those previous crises to this one?

    SHLAES: Yes, he is. Roosevelt took a bucket and Hoover took at bucket to put out a big fire. Bernanke's bringing out all the hoses. That's what you do have to do in a credit crunch. It's what comes after though, Paul, that's important.

    GIGOT: Well, that's the hose. Is what is — I guess that's liquidity, it's opening the banks' borrowing window to — the Federal Reserve bank's borrowing window to commercial banks?

    SHLAES: It's all different kinds of hoses. If you look at what — the things Treasury is doing, what the Fed is doing with interest rates, they're playing every hose they have. It's a giant fire and they're doing it. Afterwards, you have a lot of water damage, if you want to continue our metaphor, and then what do you do?

    GIGOT: Is that because you cannot afford to let the banking system fail in a free market economy? Because some free marketers might say why is the government playing any role at all. Let some of these banks fail.

    SHLAES: We learned in the depression, if you let too many fail, and more failed then than even exists now, you do tighten up. To switch metaphors, it's like a car when the oil runs out, all of a sudden you're pushing on the pedal and going nowhere. It's a good thing to do when you get to a crisis moment like this. But the Great Depression was much longer than just a credit crisis. There were intervention missteps that made it great in magnitude. Bernanke is going to want to be aware of that, too.

    GIGOT: What were the biggest mistakes of that era, mistakes that we ought to avoid?

    SHLAES: Too much discretion for government. I'm the emergency government, come to me and I'll decide what I do in the morning.

    GIGOT: Make it up as we go.

    SHLAES: Roosevelt set the price of gold after he had the cigarette and his egg, and he did it arbitrarily. He said let it go up 21 cents and Morgenthau, the future treasury secretary, said why. He said, well, it's seven times three, and it's a lucky number. And Morgenthau said, well, the markets would be frightened if they knew. And they were.