“... the Fed should stay out of it. The free economy, left to its own reactions, will solve the problems quickly.”
Of course that’s exactly what the Fed did do in the 1930s, as Friedman and Schwartz documented extensively in their massive “A Monetary History of the U.S.”.
The 1930s Fed failed to act at all. It sat immobile and did nothing as a cascading series of bank failures destroyed fully 30% of America’s banks and money supply.
So your recommended solution was tried, not by overt design, but because the rudderless 1930 Fed didn’t know what it should do. And the American banking system, free from Fed intervention, went into a self reinforcing destructive spiral that lasted a decade and took the real economy down with it. The biggest and longest deflation in American history.
Bernanke, having learned from Friedman and Schwartz’s excellent study, did exactly the opposite of the 1930’s Fed and massively intervened to prevent a deflationary collapse. That’s what TARP, QE, and ZIRP were all about. And it worked.