"Bernanke Admits Fed Made Mistakes Combating Crisis 10 Years Ago"
"...Former Federal Reserve Chairman Ben Bernanke acknowledged that policy makers made two critical errors fighting the financial crisis a decade ago: They failed to see it coming with such force then underestimated how much economic damage it would cause later..."
First, if you want to be pedantic it's actually the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel". But nobody cares about about formal names if they're unwieldy[1].
Second, the comittee based the award on academic works from the 1980s. For Bernanke, that would be mostly his AER papers [2,3,4,5]. (The AER is one of the top journals in economics and 2 or 3 publications will probably get you a tenure position at most top universities.) The full papers are paywalled, but the interested can get the unpaywalled NBER versions of them (with the same title) for free.
The scientific background of this year’s prize cites the work of the 3 economists in the 1980s.
> Specifically, Diamond and Dybvig (1983) presented a theory of maturity transformation and showed that an institution using demand deposits to finance long-term projects is the most efficient arrangement, but that, at the same time, this arrangement has an inherent vulnerability: bank runs may arise
> Diamond (1984) developed a theory of a bank’s provision of delegated monitoring services and showed that banks can ensure that projects with high (but risky) long-run returns obtain funding by monitoring borrowers on behalf of lenders.
> Bernanke (1983) showed, in particular, that the downturn became so deep and so protracted in large part because bank failures destroyed valuable banking relationships, and the resulting credit supply contraction left significant scars in the real economy.
Its the prize from the central bank of Sweden for bailing out banks with tax money and giving them clear sign they can leverage and risk as much as they want, if anything goes bad tax payers will have to pay for it.
Bernanke’s research shows that bank crises can potentially have catastrophic consequences. This insight illustrates the importance of well-functioning bank regulation, and was also the reasoning behind crucial elements of economic policy during the financial crisis of 2008–2009. At this time, Bernanke was head of the US central bank, the Federal Reserve, and was able to put knowledge from research into policy. Later, when the pandemic hit in 2020, significant measures were taken to avoid a global financial crisis. The laureates’ insights have played an important role in ensuring these latter crises did not develop into new depressions with devastating consequences for society.
The consequences of the FED money printing are just starting to show. The everything bubble this time might become much worse than the housing bubble of 2008.
You think the recession now is bigger than what we would have had in 2008, without intervention at that time? I suspect that your memory fails you as to what 2008 was like.
> The consequences of the FED money printing are just starting to show.
So having an economy in with the unemployment rate being the lowest it's been in decades is a bad thing? Would you rather have low economic growth and millions of people out of work? Would that that make you happy?
I'd rather have an economy that's "too hot" with inflation that needs to be slowed down than having people not getting a pay cheque at all. Slowing down an economy that's doing "too well" is preferable IMHO to one that's causing suffering.
The slowing down now will cause more suffering than a slow economy during covid would have been.
They are raising rates but inflation is not going down at all.
Until it does there is not just "low economic growth" but rather economic contraction and even more out of work than if they did just let economy take its natural course and correction during covid.
A slow economy during a pandemic would create so much social strife and unrest... Imagine for a second if people didn't have a job, couldn't get out of the house, didn't get any money to buy food and/or pay rent. Do you think any society would have endured 2+ years of pandemic emergency actions while going through a deep recession?
The economy are people's lives, not just numbers to be balanced. Keep that in mind, empathy goes a long way to help understand human systems.
You can feel however you feel about Bernanke during his tenure as Fed Chair. He was certainly hard to like at times, perhaps sometimes too smug. But his work laying out the pernicious effects of deflationary feedback loops as as an academic is probably one of the most influential works of monetary economics out there.
I suggest people actually reading his papers before making a knee jerk reaction.
> pernicious effects of deflationary feedback loops
Serious question: were those results really put to the test? Apart from looking back at the New Deal era and getting from there whatever it's politically convenient at any one point.
Serious answer: you can't properly test anything in macro-economics. Just think about it, we can't implement rigorous (randomized controlled) experiments and we can never observe the counterfactuals. The only thing we have are observational data with tons of endogeneity problems (fiscal/monetary policy makers react to movements in the economy as much as that the economy reacts to policy). So all validation comes from comparisons with other countries (or states within the US) and/or prior historical episodes, but there is an endless and unresolvable debate on how comparable other countries or history actually are.
So I identify when people who question if (macro-)economics should be considered a science or even has anything useful to say at all. Especially when the commenter shows that they've done some grad level econ courses / understands published academic journal papers, rather than regurgitating pop-sci articles / blogs. But I also sympathize with academic and central bank/ministry of finance macro-economists, who are faced with questions of huge social impact, that are probably unresolvable at a fundemental level.
> Serious answer: you can't properly test anything in macro-economics. Just think about it, we can't implement rigorous (randomized controlled) experiments and we can never observe the counterfactuals.
Some places can raise taxes and others can lower them, and we can see what happens:
Bernanke has his fingerprints on every large central banks' response in the wake of the 2008 Global Financial Crisis. He flooded the system with liquidity to prevent what he observed in the Great Depression. Was he successful? Yes. We didn't suffer from a recession anywhere near the magnitude of the depression. Did you like how he did it and what happened as a result? I'm guessing you didn't.[1]
Part of the fun of economic and monetary history is following the umpteen competing explanations for recessions and bubbles and piecing together a mosaic of all that seems to make sense. Bystanders have the luxury of not writing those papers unlike academics, who often chain themselves to their own work/school of thought.
Every monetary theory is based on a very limited set of observations. Policies borne out of those theories are even more scarce. I don't expect anyone to be right or wrong all the time. In my opinion, the best way to understand economics is to have a base set of principles and be theoretically promiscuous.
[1] I tend to be a free market fundamentalist so I didn't like it either. That doesn't mean it didn't work.
> Was he successful? Yes. We didn't suffer from a recession anywhere near the magnitude of the depression.
So he diagnosed the problem, set the goal (avoid recession), and the time frame (no immediate recession) and judged his success (no recession so yesss!).
Sounds a bit arbitrary to me, especially as now it becomes evident even to his disciples (Yellen, Kashkari, Powell) that the thing was merely postponed and aggravated.
Given that the alternative was immediate recession (or worse, immediate collapse), a recession 14 years later is a win.
And, aggravated? You think the recession now is worse than what we would have had in 2008? I'm pretty sure you don't remember 2008 very accurately. Bernanke short-circuited a hurricane then, and you're complaining that it spawned a tornado 14 years later. Yes, the tornado is damaging. No, it's nothing like the hurricane.
> Serious question: were those results really put to the test?
Bernanke was already considered one of the foremost experts on the Great Depression when he was appointed Fed chairman. From a 1993 paper he co-authored on central banks' reaction to the situation (when things were still on the gold standard):
> The initial contractions in the United States and France were largely self-inflicted wounds; no binding external constraint forced the United States to deflate in 1929, and it would certainly have been possible for the French government to grant the Bank of France the power to conduct expansionary open market operations. However, Temin (1989) argues that, once these destabilizing policy measures had been taken, little could be done to avert deflation and depression, given the commitment of central banks to maintenance of the gold standard. Once the deflationary process had begun, central banks engaged in competitive deflation and a scramble for gold, hoping by raising cover ratios to protect their currencies against speculative attack. Attempts by any individual central bank to reflate were met by immediate gold outflows, which forced the central bank to raise its discount rate and deflate once again. According to Temin, even the United States, with its large gold reserves, faced this constraint. Thus Temin disagrees with the suggestion of Friedman and Schwartz (1963) that the Federal Reserve's failure to protect the U.S. money supply was due to misunderstanding of the problem or a lack of leadership; instead, he claims, given the commitment to the gold standard (and, presumably, the absence of effective central bank cooperation), the Fed had little choice but to let the banks fail and the money supply fall.
> For our purposes here it does not matter much to what extent central bank choices could have been other than what they were. For the positive question of what caused the Depression, we need only note that a monetary contraction began in the United States and France, and was propagated throughout the
world by the international monetary standard.
Flooding the market with liquidity when US inter-bank flows seized up, as well as opening international swap lines with ECB, Bank of England, Bank of Canada, etc:
was a direct result of understanding what went wrong during the Great Depression (at least from a banking point of view), and what could be done to prevent that part of the problem.
In March 2020, when economies were being put on lock down, similar things were done:
Bernanke is part of the reason we haven’t seen a correction in the market since 2008. The needed correction didn’t happen and now we have a debt bubble and instead of wealth being redistributed it was centralized. I largely think
Bernanke's research is fine, but the policy decisions based on the research didn’t take into account second order effects.
Now we will have a very difficult time.
The theory that the fed (and treasury) can actual impact real market decisions seems generally not to be true given all evidence. Nature eventually calls, so to speak.
Reading these comments make me feel sad about the state of Hacker News. As with any large public forum, it's turning into an anti intellectual space where takes like "economics is not a science, it's a social science!" are the best we have to offer. It's either engineer syndrome, or it's brigading from other niche political forums. I'm tired of reading knee jerk reactions to fields from commenters that have zero experience in but have all the conviction in the world.
To me as outsider economics often seems more like an ideology vs reproducible science. As far as Bernanke goes none of his work helped him to recognize a monstrous real estate bubble that was building. And when it popped all he could come up with was to shovel money to the banks and wealthy people. What was his work good for?
It has really gotten out of hand. I'm no fan of Ben Bernanke there's a way to have a constructive discussion about his work and waving a wand of preconceived notions is not one of them.
> turning into an anti intellectual space where takes like "economics is not a science, it's a social science!" are the best we have to offer
A bank taking an endowment awarding a prize and money to physicists, chemists and biologists, and ramming in to it a prize for economists saying nonsense the bankers like to hear, is the definition of anti-intellectual.
The physicists, chemists and biologists are the intellectuals and scientists, the economists are frauds telling the bankers what they want to hear.
> turning into an anti intellectual space where takes like "economics is not a science, it's a social science!" are the best we have to offer
Evidence: VictorPath's reply
> A bank taking an endowment awarding a prize and money to physicists, chemists and biologists, and ramming in to it a prize for economists saying nonsense the bankers like to hear, is the definition of anti-intellectual.
The physicists, chemists and biologists are the intellectuals and scientists, the economists are frauds telling the bankers what they want to hear.
Maybe this will remind people what the Fed of former years was like. I suspect Powells tenure will eventually be looked upon with scorn. I deeply suspected the market was overvalued in 2018.
They should have been raising interest rates well before the pandemic. Then they wouldn’t have had to do quite as many unprecedented things, most likely.
You do not want a Fed simply trying to time the market cycle around election cycles. And one has to wonder what they were up to in 15-16. And 17, 18, 19, etc.
Edit-but not to say Bernankes time was great. Just that sometimes a historical contrast to the present makes things really stick out. I can never forgive bailing out banks, inventing the concept “too big to fail”, and pushing people out of their homes and into the streets. I was directly affected by that and just might never own a house as part of the long term fallout.
> They should have been raising interest rates well before the pandemic.
Should have, but could not. They did not let the recession of 2008/2009 play out, and the whole system has since only been propped up by the fed. They knew that a recession would commence the second they took their foot off the gas.
Bernanke's memoir is good. Easy to take shots at someone like him, but he was one of the most important decision makers in the world post-financial crisis and the world would likely be worse off today if someone else were in his spot. The memoir explains his decision making process and also some of his past research which was relevant to the GFC (he specialized in the great depression).
> Their discoveries improved how society deals with financial crises
> This year’s laureates in the Economic Sciences, Ben Bernanke, Douglas Diamond and Philip Dybvig, have significantly improved our understanding of the role of banks in the economy, particularly during financial crises. An important finding in their research is why avoiding bank collapses is vital.
> Modern banking research clarifies why we have banks, how to make them less vulnerable in crises and how bank collapses exacerbate financial crises. The foundations of this research were laid by Ben Bernanke, Douglas Diamond and Philip Dybvig in the early 1980s. Their analyses have been of great practical importance in regulating financial markets and dealing with financial crises.
> For the economy to function, savings must be channelled to investments. However, there is a conflict here: savers want instant access to their money in case of unexpected outlays, while businesses and homeowners need to know they will not be forced to repay their loans prematurely. In their theory, Diamond and Dybvig show how banks offer an optimal solution to this problem. By acting as intermediaries that accept deposits from many savers, banks can allow depositors to access their money when they wish, while also offering long-term loans to borrowers.
> However, their analysis also showed how the combination of these two activities makes banks vulnerable to rumours about their imminent collapse. If a large number of savers simultaneously run to the bank to withdraw their money, the rumour may become a self-fulfilling prophecy – a bank run occurs and the bank collapses. These dangerous dynamics can be prevented through the government providing deposit insurance and acting as a lender of last resort to banks.
> Diamond demonstrated how banks perform another societally important function. As intermediaries between many savers and borrowers, banks are better suited to assessing borrowers’ creditworthiness and ensuring that loans are used for good investments.
> Ben Bernanke analysed the Great Depression of the 1930s, the worst economic crisis in modern history. Among other things, he showed how bank runs were a decisive factor in the crisis becoming so deep and prolonged. When the banks collapsed, valuable information about borrowers was lost and could not be recreated quickly. Society’s ability to channel savings to productive investments was thus severely diminished.
> “The laureates’ insights have improved our ability to avoid both serious crises and expensive bailouts,” says Tore Ellingsen, Chair of the Committee for the Prize in Economic Sciences.
> These dangerous dynamics can be prevented through the government providing deposit insurance and acting as a lender of last resort to banks.
Not really. The https://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_model argues that a better way of preventing bank runs is *deposit insurance* backed by the government or central bank. Such insurance pays depositors all or part of their losses in the case of a bank run. If depositors know that they will get their money back even in case of a bank run, they have no reason to participate in a bank run.
So, not necessarily the government. In practice it's always one of the central banks, either US or Europe. In the US it's the Federal Deposit Insurance Corporation.
Bernanke maybe wrote some nice papers. I remember him being called the "scholar of the Great Depression" but when it was time to use his research and to recognize the 2008 bubble he completely failed. I still remember him proclaiming how everything was just fine while things were already falling apart. And his response was to shovel even more money at the banks and wealthy people while they let regular people lose their houses left and right. And let's see how the current credit bubble that got started by Bernanke will end.
In my view Bernanke was a total failure when it counted. This is almost as bad as giving the Peace Prize to Obama.
His works was useless in recognizing the 2008 bubble. He may have written some nice papers but when he was in charge he failed completely. He is simply not a good economist and his work didn't help with making good decisions.
He failed at seeing it coming. Once it came, he did really well at damage control. That's not as good as preventing the crisis in the first place, but it's far more than nothing.
First of all, it didn't help him with avoiding a bank run when he was actually put in charge of almost the whole thing a few decades later, which is a thing that happens to very few "Nobel"-like economists (Keynes and his involvement in Bretton-Woods comes to mind, and that's about it as far as I know).
Second, I've always found those Great Depression/New Deal studies a little questionable when it comes to the science of economics, like I've partially hinted in another comment. It looks like the conclusion almost always aligns with the political leanings of those carrying out the study.
Sure, maybe he deserves the Nobel for an interesting work of economic history (or whatever the official term is), but I have the impression that his papers on that period were used as "inputs" for his relatively recent economic decisions, so not as a history artefact.
Economics is not a science. Most papers in finance/economics are not repeatable or even applicable in real life - as was displayed when the worlds number one hedgefund started the process of reading published financial papers and trying to apply them [1]
do they use the scientific method? yes. it's science.
is it good science? that's of course a bit subjective, but the trend in looking for clever natural experiments is, IHMO, a good direction. of course there is a long way to get there as you point out, replication, due to confounders and whatnot is still a big issue.
"Economics is generally regarded as a social science, although some critics of the field argue that economics falls short of the definition of a science for a number of reasons, including a lack of testable hypotheses, lack of consensus, and inherent political overtones. Despite these arguments, economics shares the combination of qualitative and quantitative elements common to all social sciences..."
I remember participating in many experimental economics experiments (think behavioral psychology experiments and other such ways to test micro economic theory) that were very reproducible while in College.
>do they use the scientific method? yes. it's science.
"The scientific method is the process of objectively establishing facts through testing and experimentation" [1]
But economics does not objectively establish facts, it establishes subjective facts.
Since every "experiment" is conducted in theory or in a simulation at best, and not in the real market - it pretends to investigate reality when in fact all it experiments with is pick-and-choose model of that reality. That picking and choosing is a very subjective process, hence why we can have chicago and marxists economists both claiming each their "scientific" correctness.
Take a look at the papers that just won the nobel prize. Not a single one of them is a repeatable experiment, because such a thing is impossible in real-market economics. The market changes at all times, and is unique at all times. Economics can only be a science if we accept that science does not have to able to produce repeteable experiments, merely the attempt of doing so is enough to qualify as science.
If we didn’t know the rules of chess or go and merely watched the games of various skill levels might we come up with something similar? Eventually we’d get the rules, I think.
But with people and money there are few rules written down and even the goals of the decision makers are as varied as the decision makers themselves. The things used to facilitate trade themselves vary over time and nature.
Probably why Econ theory tends to better characterized as Econ philosophy. It might need/probably has to be studied with something like science but modified to be able to study the phenomena of scarce resource allocation.
I would argue that Marx’s process-based description of the dynamics of Capitalism have proven to be much more valid (e.g., coercive law of competition, declining rate of profit) than those of neoliberal economics. Are either a science? No. They are schools of thought within political economy. Are they useful? Well, I’ve just stated my opinion above. YMMV.
When post-GFC QE was enacted one group of people (Keynesians) said no inflation would occur, and another (right-leaning) group said all sorts of things would happen:
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
>Really? Because post-GFC there was all sorts of economic experimentation with regards to austerity:
You can't just spam out a number of articles and expect me to read them all and make out your point for you. Please, this is not reddit.
If you have a counterpoint to make to the fact that no economic experiment can be conducted in real time in the market, and also be repeated, then please share it. I'd love to hear it.
From your first source, just as an example.
>we explore the correlations in the data starting from the simplest and gradually building up – in a step-by-step, transparent manner – to multivariate regressions based on various samples of countries for different periods.
So they looked at data from one unique timeperiod in history. This is not a repeatable experiment.
As an academic field, too, I found it to be quite toxic. You can get published in the best Econ journals by merely being the only person with the data. So of course it won’t be reproduced.
That said, it is understandably hard to run economic experiments. No one’s going to stand up a couple countries to then poke around with policy and see what happens. (Though maybe simulations will or have made this sort of thing possible.)
Semantics… even the Associated Press calls it the Nobel Prize in Economics:
> STOCKHOLM (AP) — This year’s Nobel Prize in economic sciences has been awarded to the former chair of the U.S. Federal Reserve, Ben S. Bernanke, and two U.S.-based economists, Douglas W. Diamond and Philip H. Dybvig, “for research on banks and financial crises
"The interest is to be divided into five equal parts and distributed as follows: one part to the person who made the most important discovery or invention in the field of physics; one part to the person who made the most important chemical discovery or improvement; one part to the person who made the most important discovery within the domain of physiology or medicine; one part to the person who, in the field of literature, produced the most outstanding work in an idealistic direction; and one part to the person who has done the most or best to advance fellowship among nations, the abolition or reduction of standing armies, and the establishment and promotion of peace congresses."
You are stretching the definition of Nobel Prizes to only be considered in its original form. Other prizes were included over time and are considered Nobel Prizes by the institution that awards them.
You are creating a strawman to attack it. By any definition in 2022 the Economics prize is a Nobel Prize.
You not recognising it due to your strict definition doesn't really change the reality that it's called a Nobel Prize.
https://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Econom...
"Bernanke Admits Fed Made Mistakes Combating Crisis 10 Years Ago"
"...Former Federal Reserve Chairman Ben Bernanke acknowledged that policy makers made two critical errors fighting the financial crisis a decade ago: They failed to see it coming with such force then underestimated how much economic damage it would cause later..."
- https://www.bloomberg.com/news/articles/2018-09-13/bernanke-...