Ben Bernanke and the Nobel Prize
Updated: Nov 9
Last week, the Nobel Prize in Economics went to Ben Bernanke, our Chairman of the Federal Reserve between 2006 and 2014, who formed our policy response to the financial crisis of 2008-2009 and beyond and did a superb job.
I like to make fun of the Nobel Prize in Economics. Did you know that it's not a Nobel Prize? Alfred Nobel died in 1896, without ever even hearing the word economics, which did not yet exist as an academic discipline. He certainly did not endow a Nobel prize for it.
The Nobel Prize in Economics was created in 1968 by the Bank of Sweden, which, in a stroke of PR genius for economists, donated the endowment for the prize to the Nobel Foundation, in exchange for license to use Nobel's name. In doing so, the bank elevated economics to the level of chemistry, physics, literature, medicine, and world peace, where I'm not sure it belongs.
The prize is formally called The Bank of Sweden Prize in Economic Sciences, in Memory of Alfred Nobel. Since then, in my opinion, and with a few big exceptions, such as Friedrich Hayek and Milton Friedman, it has gone to a long list of mediocrities: mostly academic theorists of whom you have likely never heard, because they didn't make a mote of difference.
However, I approve of the award to Ben Bernanke. He made a big difference. As Fed Chairman, Bernanke more or less invented a set of policy responses to the financial crisis which averted a second Great Depression. He acted promptly in a leadership void, taking actions which went well beyond the Fed's mandate, in the interest of stabilizing markets and the world economy. He led western nations into a 14-year stretch of uninterrupted growth with very low inflation and low interest rates, the best of all possible worlds. If Paul Volcker was the Babe Ruth of central bankers, as I think, then Ben Bernanke is Mickey Mantle, or perhaps Hank Aaron - one of the greats.
While I was celebrating for Bernanke and the Nobel Committee, for the latter that they finally made a good choice, I was surprised to read a set of scathing criticisms from conservative sources. The Wall Street Journal said that it was unseemly for central bankers to award a prize to another central banker. More substantively, the Journal opined that the prize was not deserved because the Fed created the financial crisis in the first place, before solving it.
There’s a long tradition in conservative, especially monetarist circles, of blaming the Fed for inflation, for crashes, for pretty much everything which goes wrong. According to these people, policy is always either too tight, or too loose, for the circumstances of the day. The most ardent monetarists would like to abolish the Fed entirely, replacing it with a currency board or some other inelastic mechanism for setting monetary policy. Although I admire Milton Friedman for many things, he led the charge in this mistaken direction.
It's ridiculous. Prior to the crisis, interest rates were low because inflation was very low. In retrospect, for sure, a bubble developed in the market for mortgage-backed securities and their derivatives. But bubbles are hard to discern before they pop. Is the Fed responsible for monitoring inflation and investors, and spanking them every time they become enthusiastic for something?
No, and it would be a sad state of affairs if they tried. They would wind up raising rates, slowing the growth of prosperity and putting people out of work, every time the stock market rallied. Inevitably, they would make mistakes, and would receive even more blame and opprobrium than they already do. That is not their role.
Like it or not, investors are herd animals. Until human nature changes, manias and panics will punctuate the economic story every few years. The Fed exists to regulate and maintain a healthy banking system, to moderate inflation and to forestall depressions - already a gigantic mandate. Until very recently, it has done a superb job, and Bernanke deserves a large portion of credit during and after the time that he served.
The one thing which Bernanke did of which I do not approve, is that he let all of the Wall Street CEOs keep their jobs even as he bailed out their firms. Plumbers, dentists, investment advisors (!) and many others lost their jobs during the financial crisis and the recession which followed. No one bailed them out. But the Wall Street CEOs, who arguably created the mess, and then accepted from taxpayers multi-billion dollar bailouts of their firms, not only kept their jobs, they paid themselves millions of dollars in bonus at the end of the year for a job well done. Allowing them to keep their jobs has poisoned the well, by enhancing the distaste and suspicion which many average Americans feel for Wall Street and the Fed.
That's too bad, because Wall Street is one of the most beautiful, fair and equitable systems for building wealth on the planet. Absolutely anyone may participate, without regard for what they look like or from where they come, at very low cost. Even the smallest investors, holding only one share of Amazon or Facebook, profit tick for tick with Jeff Bezos or Mark Zuckerberg. But the bailouts of 2008/2009, left in many Americans the lingering suspicion, with some reason, that it's a racket. Although it was not technically inside his brief to fire the Wall Street CEOs, Bernanke could have done so, and he should have fired them all.