The strange Nobel Prize for Economics to Bernanke

What is striking about Bernanke’s essay, for which he was awarded the prize, is how conventional it is.

In awarding him the Nobel Prize for Economics, the Swedish committee has written that Ben Bernanke’s 1983 paper, for which he was awarded the prize, showed that the Great Depression “became so deep and prolonged largely because Bank failures destroyed valuable banking relationships, and the consequent contraction in the supply of credit left significant scars on the real economy. It was these new perceptions…”

New insights? In 1983, this was run-of-the-mill economic history. So I have reread the article, “Nonmonetary Effects of the Financial Crisis on the Spread of the Great Depression.”

What is surprising about the document is how conventional it is. Bernanke begins by stating: “We argue that the financial disturbances of 1930-33 reduced the efficiency of the credit allocation process; and that the resulting higher cost and lower availability of credit acted to depress aggregate demand.”

The paper then describes the various channels through which bank failures and the credit crunch contributed to the downward spiral of the rest of the economy. The 38-page document, narrative and almost journalistic, is familiar to anyone who has read economic history.

In 1983, Bernanke was a 29-year-old junior economist at Stanford Business School and the conservative Hoover Institution. A brave thing did have the article. With almost Keynesian overtones in his discussion of aggregate demand, Bernanke politely demolished what was then the reigning theory in conservative circles, Milton Friedman and Anna Schwartz’s argument that the Great Depression had resulted primarily from a contraction in supply. monetary.

Bernanke wrote: “The monetary viewpoint is widely supported. However, it does not provide a complete account of the relationship between the financial sector and aggregate output in the 1930s,” adding insincerely that his paper “is based on the work of Friedman-Schwartz…”

In a section acknowledging other work on banking and economic collapse, Bernanke wrote: “Minsky (1977) and Kindleberger (1978) have argued elsewhere for the inherent instability of the financial system, but in doing so have had to depart from the assumption of rational economic behavior“(italics mine). Boy, have they! Anyone who thinks the system behaves “rationally” in a bank run is foolish. Hyman Minsky was the one who deserved the Nobel.

Bernanke continued to research the financial system and the Great Depression. When he became president of the Fed (US Central Bank) in February 2006, and the extreme deregulation of finance was already incubating the financial collapse of 2008, Bernanke worried about the possibility of a repeat of 1929. In a 2007 speech warned of the fragility of the shadow banking system. But he did nothing to curb overall over-leveraging, even though the Fed had plenty of power to crack down on subprime fraud.

When the crisis hit, it was providential that the Fed chairman was a great student of the 1930s. He used the entire arsenal of the Fed, including some new inventions such as massive purchases of worthless securities, to prevent bank insolvency from occurring. a general collapse. He deserves some sort of award for it.

But when attempts were made to break up the giant banks, or to put in place strong regulation to prevent new cycles of euphoria and bust, the conservative Bernanke backed down. Therefore, considering everything he knew, Bernanke should receive the Ig-Nobel [parodia estadounidense del premio Nobel].

Coda: Last Wednesday I wrote about the strangeness of Ben Bernanke’s Nobel Prize. It’s based on a flimsy article on banking and the Depression, using dubious Chicago school economic assumptions, published by a 29-year-old Bernanke in 1983. I heard yesterday that I’m in great company.

Bernanke once asked the great scholar of the Depression, Charles Kindleberger, for some comments prior to publication. [de su artículo]. My old friend, Perry Mehrling, who teaches economics at Boston University, rummaged through the Kindleberger archives and found a carbon copy of Kindleberger’s letter. The comments, which must be read, are withering, accurate and a delight to read.

(“You ignore Minsky and me for moving away from rational assumptions. Don’t you admit that it is possible for every participant in a market to be rational, but for the market as a whole to be irrational because of the fallacy of composition? Yes isn’t it, how do you explain chain letters, lottery bets, panic in a burning theater, stock and commodity bubbles like the Hunt brothers’ silver [en 1980, el llamado Jueves de Plata]those of gold throughout the world, etc.?).

The document published by Bernanke dismissed these and other devastating comments, to the discredit of himself and the Nobel committee.

The American Prospect. Translation: Lucas Antón for Sinpermiso.

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The strange Nobel Prize for Economics to Bernanke