Bonus Blog Post: My Personal Thoughts on Nobel-Prize Winning Economist Ben Bernanke
(The man also sometimes referred to as “Helicopter Ben” but we’ll get into that.)
As you know, this page was intended to be purely an amalgamation of my work and my “invisible learning”, but Ben Bernanke won a Noble Prize yesterday, and the economics community is split. I feel like in this special case, a bonus post is warranted, as I’d love to add my two cents in.
There has historically been quite a lot of controversy surrounding Ben Bernanke and his run as Fed chairman during the Global Financial Crisis (GFC). When I first learned of Ben Bernanke, however, it was his coinage of the term “savings glut” that was of interest. What Ben Bernanke pointed out — correctly I might add — is that Asian economies tend to save too much, while Western economies don’t save enough, leading to a “savings glut”. His paper (for which he is now a Nobel Laureate) served to prove that “bank runs” — when savers rush to their respective banks to withdraw money due to a poor view of banks’ futures— were the larger catalyst of the Great Depression; a cause rather than an effect.
Unlike most economists, he was able to put his theory into practice — and credit to him — that, he did. While he oversaw the Fed, Bernanke was heavily criticized for spending billions of dollars on bank bailouts. This time, at least in my opinion, he proved his theory correct. By keeping banks afloat he was able to reverse course and create incredible subsequent growth period in a situation that could’ve turned far more ugly — fast. Interestingly and a little off-topic, one of the editors of Mr. Bernanke’s prized paper is actually Rudi Dornbusch, the world-renowned economist that changed the way foreign exchange models were made by introducing the “Overshooting Model”. Both these economists have something in common: they proved something wildly accepted was incorrect, even if it meant scorn received from fellow economists.
In Dornbusch’s case, he argued volatility is a fundamental factor for foreign exchange markets and that exchange rates tend to “overshoot” in the short-run only to slowly correct course in the long-run. This means that if there is a permanent increase in the U.S. money supply, in the short-run the domestic currency will depreciate by a great amount, then — in the long run — have a subsequent smaller appreciation. However, Mr. Bernanke argued something that may have ended up being somehow even more consequential: that The Great Depression was not purely a failure of monetary policy, but instead a self-fulfilling prophecy lead by negative public perception. At the onset of The Great Depression, banks had a poor image in the public eye, leading to bank runs , which, through the media, was dramatized to a significant degree, leading to panic, leading to more bank runs. I’m sure you can see where this is going. Once one bank inevitably failed due to excessive bank runs, the public perception of banking institutions further nosedived — a self-fulfilling prophecy of desolation (or depression) is hence born.
Ben Bernanke then explains that once banks fail it is inevitable that the overarching economy will follow. Banks serve as a sort of “economic intermediary” turning short-term maturities into long-term deposits. When these banks fail, they lose their ability to establish credit-worthiness and thus spiral the economy into an economic depression. What could have been a mild recession then turns into a much less simple problem to solve. In short, Mr. Bernanke believed that banks are the most important factor in keeping an economy running, and he was willing to put his money where his mouth is.
I have a lot of respect for Ben Bernanke and believe his Nobel prize was well-earned. He earned the nickname “Helicopter Ben” due to his monetary expansion approach of printing more money, thus “helicopter-dropping” economic stimulation. Mr. Bernanke was in the unique situation where, while he oversaw the Fed and the GFC, he was able to put his thesis to the test. Most economists couldn’t dream of doing so — after all, it’s all theory. Taking any economics class you will see that every economic model comes with a disclaimer: “Not perfectly applicable to the real-world”. However, economists still believe their models are perfect, even though most can’t prove it. Bernanke bailed out banks, dropped money from helicopters onto corporations (not exactly), and led what ended up being a very fast recovery from the troughs of the Global Financial Crisis.
It is important to note, however, that Mr. Bernanke admits the Great Depression was at least partially monetary policy’s fault. He is not naive.
Milton Friedman is another economist who studied how deflation and monetary policy led to The Great Depression. He proposed the theory that the stock market speculation in the late 1920’s followed by a hike in interest rates to curb speculation was part of the root cause. The U.S. hoarded extreme amounts of gold (which its currency was backed by, at the time), which led to deflation (through means that are out of the scope of this paper), which led to the exposition of poorly designed monetary policy as banks began to fail. Then, when banks began to fail, Friedman asserted that the Fed failed in its job as “lender of final resort” because it did not step in. In a meeting with Milton Friedman — staunch opponent of the theory Ben Bernanke proposed — Bernanke admitted:
“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve System. 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.” — Ben Bernanke
In reality, both Mr. Bernanke and Mr. Friedman are right. There were a multitude of factors at play, including external factors not least of which was the end of the first World War, that turned a booming U.S. economy into a recession. Then, poor monetary policy from the Fed coupled with the earlier mentioned deflation led to a recession-turned-depression. Then, the self-fulfilling prophecy was invoked and banks began to fail at greater rates as bank runs became more prevalent — leading to a depression-turned-Great Depression.
In short, Ben Bernanke deserved his Nobel prize.
Thanks for reading,
Khalil (TheStatsGuy)