Bernanke on the Crisis

 

Ben Bernanke gave a speech in New York, transcript here, on the pre-crisis vulnerabilities in the financial sector, on the triggers for the crisis, and on the policy responses – what and why.  Clearly reasoned from economic models and closely related to the canonical (Bernanke the academic) understanding of the first part of the Great Depression.  The Federal Reserve’s actions where Bagehot’s rule in practice and are ultimately defended by saying “ . . .the responses to the failure or near failure of a number of systemically critical firms reflected the best of bad options.”

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Bernanke Teaches Again

 

When I first showed up at Princeton as an Assistant Professor, Ben Bernanke was teaching WWS 512b (Macroeconomics for the Master’s program at the Woodrow Wilson School of Public and International Affairs) and I was to teach WWS512c (same course, mathematical version).   As I figured out what and how to teach policy macroeconomics for master’s students, I leaned on Ben, who I quickly realized was an exceptionally clear teacher.  Professor Bernanke is now Chairman Bernanke, but he is back to teaching macroeconomics.  He is lecturing at GWU, but really for the world as the class is on-line here.  I highly endorse these lectures: Ben is a clear teacher with an intellectual (non-partisan) approach to central banking; he was an expert in banking crises and got the U.S. through this latest one; he not only believe in the benefits of central bank transparency, but has moved the Fed to being much more transparent in many dimensions.

 

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Bernanke on Financial Reforms

While Congressional extremists look to undo what Congress just did on financial reform, Bernanke offers a measured take on the economics and incentives of a few aspects of the regulation of systemic risks in the financial system, here.

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Bernanke’s confirmation

Will the Senate approve Bernanke’s appointment to a second term? The latest estimates suggest 55 senators committed or leaning toward voting in favor, 23 senators have said they will oppose, and 22 undecided.  Senates rules require 60 votes in favor for Bernanke to be appointed to a second term.  A vote is likely tomorrow, Friday January 29.

Should he be re-appointed?  That certainly is the consensus among economists. (Disclaimer, Ben was chair when Princeton economics and WWS hired me and I know him reasonably well as former colleagues and office neighbors.)  I can think of no one better to run the Federal Reserve at this point. One can complain about the Fed’s inadequate supervision of bank lending (not commercial banks, only traditional banks) pre-crisis, both from the perspective of consumer protection and bank exposure. But I dock Ben only a few points for not being ahead of a crisis which so few people even saw the possibility of (this includes all the doomsayers like Roubini who predicted an exchange rate crisis when the dollar gained value and Krugman who foresaw many possible crises but not a banking crisis). What has been amazing is Ben’s rapid and largely (not completely) mistake-free expansion of non-traditional monetary policy on the fly with no precedent to follow.  And he understands like almost no one else, the policies in place, the dimensions of the traditional and shadow banking systems, and the dangers and benefits of the unwinding of the policies.  Who in the private sector could replace him who is not tainted by their role in the crisis or compromised by conflicts of interest?

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The Future of the Federal Reserve

Martin Feldstein has written a very nicely argued proposal for reform of the Federal Reserve.  The piece is probably close to the view of the vast majority of economists – certainly mine. First leave the Federal Reserve many of its current powers – seeking low inflation and full employment through the purchase and sale of Treasury debt (which it uses to set interest rates), providing lender-of-last-resort services to the banks and its necessary complement banking supervision, monitoring lending practices, and watching for systemic risk exposures.

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Monetary Policy

Traditional monetary policy has been blamed for the financial crisis because it kept interest rates too low for too long following the end of the 2001 recession. Ben Bernanke answers this charge and discusses his views on the causes of the housing price bubble, and the future in this speech.  A great read for anyone interested in the economy and economic policy over the last decade. Bernanke concludes

The lesson I take from this experience is not that financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter. . . . However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risk. . .

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