Lessons galore from Bernanke’s Nobel prize

Nobel prize committees are responsible for briefly focusing the world’s attention on some pretty recondite stuff.  Sometimes with comic results.  But occasionally, they get it just right.

As the years rack up since 2008 global financial crisis, Ben Bernanke’s economics prize – resting in part on his work on the financial collapse of the Great Depression – looks righter and righter.

It was certainly the world’s good fortune (that or G. W. Bush’s foresight) that put the leading contemporary scholar of the monetary and banking disasters of the 1930s in the chair of the US central bank at the right time.

Your correspondent can assure you that when consequential decisions needed to be made on judgment and trust during the dark moments of 2008 and 2009 at least one person (and probably a whole lot more) took measures of courage from the knowledge that Bernanke had spent his entire career meditating deeply on the ramifications of just such a situation.

It gave him clarity of the problem and helped him not lose sight of it. Not remarked on much at the time, but could anyone else have worked so effectively with his changing Treasury Secretaries – first, Republican Hank Paulson and then (after a blessedly smooth presidential transition – remember those) Democrat Tim Geithner?

As time goes by, his achievements seem to grow, while his successors’ failures to see the trend and take the better path become a little more pronounced.

Applying full hindsight, 2008 looks more and more like a common-or-garden case of over-lending (albeit on a scale amplified massively by twenty good years). One which was largely managed by the book, with the authorities holding their nerve and freely extending liquidity support to the (potentially solvent) banking sector. (With Bernanke and colleagues making sure that this included the rest of the world’s banking sector).

For sure, there was the traditional high-profile nationalisation of well-connected losses, benefitting inter alia General Motors, Goldman Sachs (via AIG), the US Congress (via Freddie Mac and Fannie Mae) and the creditors of sundry European banks.  But perhaps it was on a scale less than traditional – as the shareholders and creditors of Lehman Brothers might bitterly attest.

Having digested this, future economic historians of the Bernanke legacy will naturally want to examine what came next. A balancing of the books and redoubled search for sustainable market-led growth?  Err – not quite.

And for that we should look to an even earlier turning point in the global political economy at the dawn of the century: the point at which the marginal voter no longer accepted the mantra that there is no alternative.  Politicians like Helen Clark and Tony Blair proved that in the short run – and perhaps even longer – it was possible to have cake and eat too.  

After the GFC, that approach blossomed. Thanks to borrowing, even taxpayers could get a bailout.

But Bernanke’s prize is a reminder that imbalances can build up, even when you think you’ve got them under control. And that there comes a point where even the most heroic tinkering can’t protect the status quo.

Troubled times are normally accompanied by some or other financial crisis – normally the one few would have predicted.  Although, this time the unlikelihood of Ukraine (and other belligerents) paying back their debts seems an easy bet.

Meanwhile, Britain’s recent little difficulties with pension fund solvency are so arcane that it’s hard to assess the size of the financial holes lurking below the waterline.  But Bernanke’s work suggests that financial crises really get a move on when the consensus switches to being more negative than the likely reality.

There seems an inevitability that at some point, some governments are going to raise hands and say, sorry, we can’t make this good (presumably with a script somewhat different to that first tried by the hapless Liz Truss).  Not our fault, they’ll tell the voters (it’s yours of course, but best not to mention that).

Because, sometimes, there is no alternative.

The timing of Bernanke’s prize is so exquisite, it almost makes the waiting worthwhile.

Except perhaps that an earlier award could have been used to ameliorate the longstanding failure to co-award the 1976 Nobel prize to Anna Schwartz, Milton Friedman’s collaborator on monetary policy and the Great Depression.  She died in 2012, aged 96.

But deal with the problem you’ve got, as Bernanke might say.

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