A comment on Bernanke’s Nobel lecture

James K. Galbraith

There is no doubt that Ben Bernanke is a nice fellow, unpretentious despite having held high positions in powerful institutions, and so far as known, ethical in his personal and public lives. I’ve met him only once that I remember — he was hawking a textbook at the annual meetings of the American Economic Association, down in the basement with the bookstalls and other obscure professors. That was a long time ago.

Bernanke’s “Nobel” lecture reflects his personal qualities. It is free of self-advertisement, indeed practically self-effacing, which is perhaps suitable when one considers that Bernanke was Chair of the Board of Governors of the Federal Reserve System when the greatest financial crisis of our lifetimes hit, which by his own words, then and later, he did not see coming. His lecture does not dwell on his own work. It is far more notable as an avatar of a much larger phenomenon, to wit the massive, stubborn, fiercely defended and never-corrected ignorance of “mainstream” economists on money, banking and finance.

Bernanke is very clear on this point. He states:

“When I was 29 years old and wrote the paper that was cited by the Nobel Committee, there was very little attention paid to financial instability as a factor in macroeconomics … So in particular, and I tell you this from personal experience, when the financial crisis hit in 2008, the Fed’s models consistently underestimated the impact on the economy.”

The passive voice, “there was very little attention paid” is the key here. By whom? By mainstream economists, is the obvious and correct answer. And why was that? Because mainstream economists, then and since, endorse a sugar-coated view of banks and have long pursued a project of censorship, historical suppression and career oblivion for all who feel differently about “financial instability as a factor in macroeconomics.”

To begin, there was Walter Bagehot a name still noted, but unread; he is explicit on the risk of panics getting out of hand. Henry George also comes to mind, the great enemy of land speculation. Where in the mainstream economics syllabus does he appear? And Charles Kindleberger is revered but unheeded. There was Hyman Minsky, a banker himself and author of the “financial instability hypothesis.” Paul Krugman recently wrote that Minsky is “unreadable.” There was John Kenneth Galbraith, whose book The Great Crash 1929 has almost never been out of print since it appeared in 1955.

And there was John Maynard Keynes, whose Treatise on Money, published in 1930, deals thoroughly with bank money and its risks; these are also covered in Keynes’s essay on the collapse of money values in Essays in Persuasion in these words: “A ‘sound’ banker, alas! is not one who foresees danger, and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can readily

blame him.” Sound economists are conventional and orthodox, but they are never ruined. Quite the contrary as the case of Mr. Bernanke shows.

A key insight of these works was that usury, speculations and frauds can lead to panics and crashes, with severe and lasting effects on real activity. The only apparently-educated people who do not know this, it seems, are mainstream economists. It is well-covered in the Bible, and in histories of the Roman Empire. In his Nobel lecture, Bernanke rediscovers the point even mentioning the Romans while seeming blithely unaware that, outside his circle, it has been a commonplace for millennia.

Ben Bernanke, the academic, wrote his paper in 1982. That year, at 30, as Executive Director of the Joint Economic Committee of the United States Congress, I mounted a desperate battle against the brutal interest rate policies of the Federal Reserve, which first destroyed the North American industrial heartland and proceeded to unleash panic and depression throughout Latin America and the Third World, nearly to the point of bankrupting their creditors, the New York money center banks.

This was only the beginning: financial crises have reverberated around the world for decades, bringing on the collapse of Yugoslavia, the crises of Mexico, Thailand and Indonesia, the secular stagnation of Japan, the savings-and-loan debacle and the corporate scandals of Enron, WorldCom and Tyco, leading up to the Great Financial Crisis of 2007–2009 and the European crisis thereafter. One could make a career (I did) out of chasing financial instabilities and debt crises.

Today there are many excellent academics who work on these questions. Post Keynesians, Modern Monetary Theorists and New Development economists have studied panics, frauds, and crises for decades. They are never cited by the mainstream. Nor are they ever hired by economics departments that rank themselves highly in the mainstream. Bernanke, in a lecture on financial instability, seems to have missed them all. His bankers are all Jimmy Stewart nice guys; Leonardo DiCaprio might have passed him by.

Indeed, Bernanke’s only serious historical references are to the Great Depression on which he is not a reliable guide, to the Great Financial Crisis, and briefly to Enron and WorldCom; he remarks that “these companies came under pressure because of the fraudulent activities they were doing.” This is backwards: Enron and the others were richly rewarded by financial markets for their frauds. Their valuations collapsed only after the frauds were exposed, which was in no case achieved by regulators. By then the regulators, under the same presidency that brought Ben Bernanke into government, had been defanged.

However I will close on a gentler note.

Mr. Bernanke’s Nobel is entirely in line with the traditions of the Riksbank Prize. He assuredly does not lower the standard. The Riksbank Committee could have done worse, and often has.

1. Source:

Monetary Policy Institute Blog,16 Dec 2022 https://medium.com/@monetarypolicyinstitute/a-comment-on-bernankes-nobellecture-9dd96c3de81d