The Nobel for Bernanke

The 2022 Nobel Prize in Economics was awarded to Professors Douglas Diamond (69 years old, University of Chicago), Philip Dybvig (67 years old, Washington University of St. Louis) and Ben Bernanke (69 years old, Brookings Institution). Of the first two I do not know their works; I am familiar with Bernanke’s investigations. When this award was announced, I was just finishing reading his latest book: 21st Century Monetary Policy. True to his style as an economic historian, this book is an analytical review from the Great Inflation of 1979 to the actions of the Federal Reserve (FED) during the Covid-19 pandemic. The chapters that describe the Great Crisis of 2008-2009 certainly have a large dose of apology for his decisions as president of the FED at that time, although also with a retrospective lens, he recognizes some errors.

A professor at Princeton University for many years, he extensively studied the reasons for the Great Depression and the financial crisis of the early 1930’s. The Prize Committee explained that these studies made him a Nobel laureate. His various essays sparked controversy at the time, as they contradicted what the monumental work of Milton Friedman and Anna Schwartz, (A Monetary History of the United States, 1867-1960, published in 1963), proposed as the cause of the Great Depression: FED actions. Bernanke instead, rather than emphasizing the role of the central bank, focused on the responsibility of private banking and financial institutions.

Many have criticized this Nobel award due to the controversial role that Bernanke played in the Great Crisis of 2008-2009. But you have to separate his research on the history of the Great Depression, reason for the award, from his responsibility as president of the FED during the crisis.

Regarding the latter, various decisions are demanded of him: not having recognized the problem of moral hazard when rescuing Bearn Sterns in March 2008, as he did in September when letting Lehman Bros. go bankrupt; having authorized the bailout of insurer AIG, despite advice to the contrary; having favored the rescue of the automobile companies; and finally the extraordinary monetary expansion through the phases of Quantitative Easing (quantitative easing) that brought interest rates to practically zero. With this, the FED planted the seed of future inflationary pressures. He is also blamed for having postponed the cycle of interest rate increases too long, something that his successor Yellen also postponed.

Bernanke was a heterodox central banker trained in the neo-Keynesian school, supporting the role that monetary expansion along with fiscal policy could play in overcoming the financial crisis. Be that as it may, he had to handle a very complex event. Without a doubt, the result could have been worse and, with everything, we must not spare his historical role in that crisis. I highly recommend the 2018 HBO documentary on the crisis that is on YouTube: https://www.youtube.com/watch?v=QozGSS7QY_U which I always recommend to my students.

Twitter: @frubli