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**OCTOBER 12, 2022**
Kuttner on TAP
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**** Bernanke's Odd Nobel Prize
As a close student of the Great Depression, he knew enough to prevent a
repeat of it-but forgot the lessons about the need for tougher
regulation of the financial system.
In awarding the Nobel Prize in economics, the Swedish committee wrote
that Ben Bernanke's 1983 paper, for which he was given the prize,
showed that the Great Depression "became so deep and so protracted in
large part because bank failures destroyed valuable banking
relationships, and the resulting credit supply contraction left
significant scars in the real economy. These were new insights ..."
New insights? By 1983, this was standard economic history. So I went
back and read the paper ,
"Non-Monetary Effects of the Financial Crisis in the Propagation of the
Great Depression."
What is striking about the paper is how conventional it is. Bernanke
begins, "We argue that the financial disruptions of 1930-33 reduced the
efficiency of the credit allocation process; and that the resulting
higher cost and reduced availability of credit acted to depress
aggregate demand."
The paper then goes on to describe the various channels by which bank
failures and credit contraction contributed to the downward spiral of
the rest of the economy. The 38-page paper, narrative and almost
journalistic, is familiar to anyone who has read economic history.
In 1983, Bernanke was a 29-year-old junior economist at the Stanford
Business School and the conservative Hoover Institution. He did one
brave thing in the paper. Sounding almost Keynesian in his discussion of
aggregate demand, Bernanke politely demolished what was then the
reigning theory in conservative circles, the argument of Milton Friedman
and Anna Schwartz that the Great Depression was mainly the result of a
contraction in the money supply.
Bernanke wrote, "There is much support for the monetary view. However,
it is not a complete explanation of the link between the financial
sector and aggregate output in the 1930s," adding disingenuously that
his paper "builds on the Friedman-Schwartz work ..."
In a section acknowledging other work on banking and economic collapse,
Bernanke wrote, "Minsky (1977) and Kindleberger (1978) have in several
places argued for the inherent instability of the financial system, but
in doing so
**have had to depart from the assumption of rational economic
behavior**"
****(emphasis added). Damn right they did! Anyone who thinks the system
behaves "rationally" in a banking panic is a fool. It was Hyman Minsky
who deserved the Nobel.
Bernanke went on to do more research on the financial system and the
Great Depression. By the time he became Fed chair in February 2006, and
the extreme deregulation of finance was incubating the 2008 financial
collapse, Bernanke was worrying about the potential of a repeat of 1929.
In a 2007 speech , he warned of
the fragility of the shadow banking system. But he did nothing to
restrict the general over-leveraging, though the Fed had plenty of power
to crack down on the subprime scam.
When the crash did come, it was providential that the Fed chair was a
close student of the 1930s. He used everything in the Fed's arsenal,
including some new inventions such as massive purchases of valueless
securities, to keep bank insolvency from producing general collapse. For
this, he does deserve some kind of prize.
But when it came to breaking up the giant banks, or using strong
regulation to prevent further cycles of euphoria and crash, the
conservative Bernanke flinched. For that, given all that he knew,
Bernanke should be awarded the Ig-Nobel.
~ ROBERT KUTTNER
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