Takeaways from Ben Bernanke’s press conference on the Nobel Prize in Economics
Ben Bernanke, Distinguished Senior Fellow in Residence at Brookings’ Hutchins Center on Fiscal and Monetary Policy, is among three winners of this year’s Nobel Prize in Economics. The Royal Swedish Academy of Sciences has awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2022 to Dr Bernanke, Douglas Diamond and Philip Dybvig for having significantly improved our understanding of the role of banks in the economy, by especially during financial crises.
On Monday, October 10, the Brookings Institution hosted a press conference to hear his thoughts on the award and discuss his research on banks and financial crises.
The simple idea that the financial system can be a driver of economic activity and unemployment was not conventional wisdom at the time.
In the announcement, the Royal Swedish Academy of Sciences cited Bernanke’s 1983 American Economic Review article on banking and the Great Depression. Bernanke noted that looking back on the study, although it looked “a bit primitive”, it contained many fruitful ideas. At the time he was working there, “people didn’t think the financial system was a big part of the business cycle or a big part of what drove the economy.” However, he argued in the paper “that developments in the financial system can have significant macroeconomic effects. They can affect the economic cycle, as well as of course create major crises as we saw in 2008.”
The asymmetric information economy
In good times, when banks and borrowers are in good financial health, “the credit process is smooth, loans happen, people are aware that credit is available if they need it, and that supports the ‘economy”. In times of crisis, credit mechanisms break down, Bernanke said: “Nobody knows for sure who is solvent, nobody knows for sure what the wealth and collateral of other agents in the economy is, and that can create huge problems in the credit mechanism”. , and in turn have economic effects.
He reflected on his most recent research published in the Brookings Papers on Economic Activity in 2018 which found very strong links between different phases of the global financial crisis and their effects on the US economy. His previous research was put to the test when he served as Chairman of the Board of Governors of the Federal Reserve System from February 2006 to January 2014. During the Great Recession of 2007-09, problems in the financial sector caused problems in the real economy. Partly because of his research, Bernanke says, “I firmly believed that [a financial meltdown] would bring down the rest of the economy. He therefore proposed to the Fed ways to support the functioning of the financial system; he also tried to maintain an expansionary monetary policy to avoid deflation or disinflation which would have exacerbated the financial difficulties.
At the end of his opening remarks, Bernanke said, “The world is a very complicated place, and models have no place for politics… But it helped me think about these questions in 2008. »
When asked if the reversal of inflation risks suggests there is less risk of these financial dynamics being created in the current environment, Bernanke replied, “In the sense that owners have more equity in their home than two years ago, protects debtors from these problems. And as good news, “banks are better capitalized than they were during the global financial crisis and should therefore be better prepared to meet the challenges they face”. He noted that the term “banks” is used in this type of literature broadly to refer to any lender. However, in America, non-bank lenders, including so-called “shadow banks”, play a significant role. “When we look at the safety and soundness of the financial system, we shouldn’t just look at the banks but also at the non-bank lenders who were a big part of the problem in 2008,” Bernanke said.
Bernanke’s work on financial crises and banking bears heavily on the current moment, as the United States battles several risks to financial stability emanating from abroad and at home. He said that although there are financial stability issues in various markets, the causes of the 2008 crisis and the current crisis differ significantly, and “we are not in the dire straits we were in 14 year”. The United States entered the pandemic with strong banks and financial system, however, there are “many other places where financial stability issues are a concern…emerging markets are facing a very strong dollar and many capital outflows.
Although he did not have any specific risk to report, he pointed out that “even if financial problems do not start an episode, over time, if the episode worsens financial conditions, they can make the problem worse and intensify it”. Bernanke said: “This is something we need to pay close attention to”, as policymakers approach this moment of crisis.
Given the high level of inflation and how difficult it can be to bring it down, Bernanke was asked if the 2% target was too low. During his tenure at the Fed, he sought to make the Fed and its processes more transparent, and inflation targets were an important part of the communication process. But, he says, “it was the inflation target itself that was important to me, not the particular number.” He explained that the inflation target is a medium-term objective and “it is not necessary to achieve it all the time”. As the Fed’s policy actions begin to have their effect on the economy, the Fed can then make a decision as to how quickly it should return to the 2% target. “I think changing the target in the midst of a situation where inflation is well above target would not be good for the Fed’s overall credibility.”
Should monetary policy take into account risks to financial stability? Bernanke noted that we don’t know much about how changes in interest rates affect long-term financial stability, so it’s hard to make trade-offs between interest rate effects plus lower or higher rates on the economy and their effects on financial stability. “Strong regulation should be the first line of defense for financial stability,” Bernanke said. Beyond that, he’s open to learning more about using monetary policy to fine-tune financial stability, but said we don’t yet know enough about the relationship to trust it.
Learn more about Bernanke
Dr. Bernanke has published widely on a wide variety of economic issues, including monetary policy, macroeconomics, and economic history, and is the author of several scholarly books and two textbooks.
More recently, he published “21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19”, explaining the evolution of the Fed over the past seventy years, showing how changes in the economy have drives Fed innovations. It also outlines new challenges facing the Fed, including the return of inflation, cryptocurrencies, increased risks of financial instability, and threats to its independence.
From February 2006 to January 2014, he served as Chairman of the Board of Governors of the Federal Reserve, having been appointed to this position by Presidents Bush and Obama. In 2017 he published “The Courage to Act: A Memoir of a Crisis and Its Aftermath”, chronicling the 2008 financial crisis, providing an insider’s account of the political response.
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