Economic Reform Australia Blog

Governments ‘too focused on budget cuts’ says Bernanke

An interview on 26 October by BBC economics editor Robert Peston with former Fed chairman Ben Bernanke [1] has revealed that the latter thinks there should have been a stronger fiscal response to the global financial crisis in most countries, rather than their obsession with budget cuts, which left central banks with the primary responsibility of trying to pick up the pieces and keep their economies functioning — despite the moral hazard attached to bailing out the banks with public money.

As chairman of the U.S. Fed during the crash and its aftermath, Bernanke is the most influential central banker of our age, and so his opinions on economic policy should be taken seriously.

What was not discussed in this brief interview was the alternative — which would be anathema to most main-stream economists — of allowing the failed U.S. banks to go to the wall with their shareholders wiped out, and nationalising those banks with the application of government guarantees for all existing bank liabilities and assets.

The money directed to recapitalizing the newly nationalised banks could be repaid to the central government Treasury over time from the banks’ profits, after which time some consideration could be given to re-privatising them.

The response of governments, and especially the U.S. government, to the next financial crisis will demonstrate whether any lessons have been learnt. We might not have much longer to wait, in order to find out.

1. Source: http://www.bbc.com/news/business-34641850

John Hermann