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How do we fix Ben Bernanke's fixes? That's for a future Nobel

This year’s Nobel laureates in economics underscore the consequences of monetary policy

October 11, 2022 / 10:46 AM IST
Well done to Bernanke and his fellow winners. But let’s not forget that the former Fed chair was at least partly to blame for the conditions that led to financial fragility in the early 2000s in the first place

Well done to Bernanke and his fellow winners. But let’s not forget that the former Fed chair was at least partly to blame for the conditions that led to financial fragility in the early 2000s in the first place

Congratulations to Ben Bernanke, Douglas Diamond and Philip Dybvig, this year’s Nobel laureates in the Economic Sciences. As the citation reads, the trio have “significantly improved our understanding of the role of banks in the economy, particularly during financial crises.”

Few of us in life, and vanishingly few economists, get to put their work into practice on the largest stage Bernanke did in 2008. The former chair of the US Federal Reserve wasn’t merely debating hypotheticals with his grad students. He made critical decisions under the most intense pressure. And there is no doubt that his understanding of the precise nature of the crisis saved the global financial system in 2008.

Keeping the credit creation process intact by bailing out the large US banks was a critical element in fostering the subsequent recovery. Unlike many of his peers, Bernanke grasped what was at stake. As his citation notes, bank collapses involve losing valuable information about borrowers that can’t be recreated quickly. The credit creation process is best handled by banks, but when they are weighed down by nonperforming loans and a lack of capital, they can’t perform that vital role.

In Europe, measures to support the banking sector were less structured and comprehensive, with the emphasis as much on “punishment” of those perceived to have been culpable for the crisis. As a consequence, Europe’s undercapitalized banks played no useful role in the post-crisis recovery. Instead, many countries remained in or near recession, ultimately leading to a series of sovereign crises, the echoes of which are still apparent today.