With the international financial system still poised on the brink of total collapse, Fed chairman Ben Bernanke holds the future of the global economy in his hands.

If he gets it right then the worst effects of the sub-prime crisis should have blown over by the end of 2008. If he gets it wrong, the world could be facing into the worst economic downturn since the Great Depression of the 1930s.

It is only now, almost five months after it first erupted last August, that the full seriousness of the sub-prime credit crisis is becoming apparent. Estimates of the total losses suffered by banks on sub-prime US mortgages are now running at up to $500bn. However, banks have owned up to less than $50bn of these losses.

With most of sub-prime losses suffered by banks all around the world still to surface, there has been a complete breakdown in trust between banks. As a result the interbank market, where banks borrow from and lend to one another, has almost completely seized up.

No bank wants to lend to another bank, no matter how good its reputation, for fear that the bank it is lending to might suddenly announce huge sub-prime losses which destroy its balance sheet and damage its ability to repay the money.

These fears are by no means fanciful. Since last August a parade of apparently blue-chip international banks including Citigroup, Merrill Lynch and UBS have announced massive sub-prime losses and have had to go cap in hand to Arab and Far Eastern governments for new capital to shore up their shattered balance sheets.

Citigroup boss Chuck Prince and Stan O'Neal, the head of Merrill Lynch, have lost their jobs as a result of the sub-prime crisis.

Everyone is expecting further blood on the boardroom carpet as other major banks are forced to come clean on their sub-prime losses in 2008.

And the crisis just keeps going on and on. The $2.2 trillion US commercial paper market, where banks and companies lend their surplus cash to one another, has been effectively closed since August and has shrivelled by over $400bn as banks refuse to roll over their short-term loans to other banks.

Only huge injections of liquidity by the US central bank, the Federal Reserve, and the ECB have stopped the world's financial markets from grinding to a complete halt.

The man at the eye of this storm is Fed chairman Ben Bernanke. For the first 18 months after he took over from his more famous predecessor Alan Greenspan, Bernanke kept a low profile eschewing Greenspan's central-banker-as-celebrity style in favour of a much more reticent personal manner. The events of last August and their aftermath changed all of that.

Central bankers everywhere are haunted by memories of the Great Depression of the 1930s. Obsessed by fears of non-existent inflation the Fed and the other central banks kept interest rates too high for too long. The result was that what should have been a normal cyclical downturn following the 1929 stock market crash had by 1931 morphed into a full-scale international banking crisis.

It was the 1931 banking crisis, not the 1929 crash, which led to the Great Depression. It dragged on for over a decade and was only brought to an end by the Second World War.

The time around ECB president Jean-Claude Trichet shows disturbing signs of suffering from such 'inflation-itis'. However, the good news for the world economy is that Bernanke clearly does not.

While Trichet was still threatening to raise euro interest rates even after the sub-prime crisis first broke last August, Bernanke moved quickly to cut US interest rates. The Fed has since cut US interest three times, from 5.25pc to 4.25pc.

Even before the current crisis, Bernanke had shown that he fully understood the dangers of central bankers becoming fixated on inflation at a time when the wider economy was threatening to collapse all around them. Addressing Nobel Prize winning economist Milton Friedman's 90th birthday party in November 2002, Bernanke, who was then a member of the Fed's board of governors, was quoted as saying:

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna. Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

And these weren't just off-the-cuff remarks. He has in fact studied and written extensively on the origins of the Great Depression.

In 2002, he also gave a speech on deflation, a topic which then greatly exercised the financial markets in which he stated that a government can always avoid deflation by the simple expedient of printing more paper money. This sense of historical awareness is something for which the rest of us should be truly grateful.

Bernanke was born in Augusta, Georgia in December 1953 where his father, a pharmacist, owned a drug store. After finishing high school he enrolled at Harvard, from which he graduated with a BA in economics in 1975. He then went on to complete a PhD at MIT in 1979. Bernanke and his wife Anna have two children.

Unlike Greenspan, who until he was appointed Fed chairman in 1979 spent most of his career as an economist in the private sector, Bernanke opted for a life in academia.

He taught at Stanford University's Graduate School of Business from 1979 to 1985. In 1985 he was appointed an economics professor at Princeton at the age of just 31.

He stayed at Princeton until 2002 when he was appointed a member of the Fed board of governors. In July 2005, he left the Fed and moved to the Bush White House as chairman of the Council of Economic Advisors.

His stay at the White House was to be a brief one. In February 2006 he returned to the Fed as chairman, taking over from Alan Greenspan who was stepping down after almost 18 years in harness.

While Bernanke is also a Republican his politics are of a far less severe cast than Greenspan's, who as a disciple of Ayn Rand had strong libertarian tendencies. In some of the economic textbooks he wrote while still an academic Bernanke distanced himself from his predecessor's libertarianism and stressed that Adam Smith, the patron saint of economic liberals everywhere, was in fact quite concerned by relative income inequality.

When Greenspan finally stepped down at the end of January 2006 he was widely praised for his stewardship of the Fed and the American economy. Almost two years later it can be seen that his legacy was far less positive than appeared at the time.

After spending most of the 1990s encouraging Bill Clinton to run budget surpluses and bringing down long-term interest rates he showed his true partisan colours when he supported President Bush's tax cuts in testimony to Congress.

These tax cuts were unmatched by public spending reductions and as a result the US once again started running huge budget deficits.

By not increasing interest rates aggressively in response to these deficits Greenspan bears a large part of the responsibility for the post-2000 surge in US house prices.

This in turn fuelled a consumer boom funded in large part by homeowners borrowing against the increased value of their houses. It could only end in tears.

Bernanke now finds himself having to clean up the mess left by his celebrated predecessor. It won't be easy. Even when the credit crunch eases, the likely scale of sub-prime losses will have an enormous impact on the capacity of US banks to lend for years to come. His only policy weapon will be to keep cutting interest rates in an effort to gradually restore confidence. This means that US interest rates will probably fall to 3pc or even less this year.

The good news for those of us on this side of the Atlantic is that, while lower US rates will probably initially send the euro even higher against the dollar, they will almost certainly force the ECB to follow suit and cut euro interest rates whether it wants to or not.

If this happens, not alone will Bernanke end up saving the ECB from itself, he will also prevent the credit crunch from turning into something much worse.