13 Things Bernanke Believes (That I Don’t)

Ben Bernanke is obviously a very intelligent guy. And I am inclined to believe he is a good person (i.e., honest, well-intentioned, etc.). So it is a bit unsettling to find that we seem to disagree on so many fundamental issues. In what follows, I will list several. Some of our disagreements are about the necessity and effectiveness of Fed policy during his tenure. Some are about macroeconomics and monetary economics more generally. All quotes come from this Freakonomics interview.

There are several possibilities for the disagreements. It is possible that I am wrong. It is possible that Bernanke is wrong. Perhaps it is a little of both. It is also possible that Bernanke does not really believe what he says he believes. Perhaps stating the truth would mean admitting error, or booking fewer talks, or selling fewer books, or … the list goes on. Likewise, it is possible that I do not really believe what I say I believe. But I do believe what I say I believe. And I have little to gain from being dishonest. (Of course, that’s exactly what I’d say if I were being dishonest … so you are welcome to check my feet.)

My hope is that others will weigh in. Let’s try to sort these things out. I am more concerned with whether Bernanke’s stated view is correct than whether he actually holds it. I’d prefer not to walk around holding a bunch of wrong ideas, so please try to persuade me if you think I’m wrong. Still, if you know that Bernanke’s stated views here are out of sync with his stated views elsewhere, that would be interesting to learn, too.

Without further ado, here is the list:

1. Leaving the gold standard was a good idea.

“One would have been to prevent the collapse in the money supply, and in doing that, more could have been done even in the context of the gold standard that existed in the early ’30s. But, getting rid of the gold standard or abrogating the gold standard — which is what the U.K. did in 1931, for example — would have been very helpful.”

2. Bailouts would have been desirable during the Great Depression.

“The other thing the Fed could have done more — and why they didn’t actually is a bit of a puzzle — they could’ve done more to prevent the collapse of so many banks. They could’ve done what we did — what the Federal Reserve did — in 2007-2008, which was to make loans to banks that were suffering from runs by their depositors, taking as collateral their loans and other investments. And by providing more liquidity to the banking system, they could have likely slowed the panic, slowed the bank runs, and avoided so many failures.“

3. Bailouts, like those in 2007 and 2008, provide liquidity to the banking system.

“…in 2007-2008, which was to make loans to banks that were suffering from runs by their depositors, taking as collateral their loans and other investments. And by providing more liquidity to the banking system…”

4. Introducing federal deposit insurance was a good idea.

“The second was putting in deposit insurance which brought the bank runs, the banking panics, to an end. And I think that those two things — I think almost any economist, particularly those who have studied the Depression would agree that those were very important, positive steps to stopping the collapse.”

5. More fiscal policy would have been desirable during the Great Depression.

“…one would be that he didn’t do enough with fiscal policy, that he still had a balanced-budget mentality (he campaigned on a balanced-budget platform when he ran for president) — that there wasn’t enough done on the fiscal side. […] The general recollection people have, or the vision they have of the ‘30s, was that the government employment programs like the WPA and the building of the Hoover Dam and things like that were a big deal. And they were important, but relative to the size of the problem they were actually quite small. And as early as the 1950s, economists pointed out that the fiscal programs of the ’30s were actually very modest compared to the size of the problem.”

6. Fiscal policy improved matters in Germany.

“Ironically — and please take this the right way — the person who sort of most understood fiscal policy, in some sense, was Adolf Hitler. Because the rearming of Germany in the ’30s was so big and so extensive — of course, he had other objectives in mind — but the side effect of that re-arming, together with a big highway building program, was such that Germany, which had a very deep depression, actually came out of it much quicker than other countries, and suggested that a more aggressive fiscal program would have helped the United States as well.”

7. WWII ended the Great Depression.

“And of course, what ultimately brought the United States out of the Great Depression was World War II which was, unintentionally, a huge fiscal program.”

8. The primary cause of the Great Recession was inadequate regulation, not monetary policy.

“So, what I would argue is that, while it may have been the case that one of the factors that supported more risk-taking was the stability of the economy overall — which, in some sense, ironically was, in fact, a result of successful monetary policy — that the true policy-failing leading up to the great crisis was the regulatory and supervisory side, that we didn’t — and now I’m talking about the regulatory community in general — didn’t fully appreciate the risks that were building up, nor did the banks themselves. And they weren’t tough enough about preventing them.”

9. In the aftermath of the Great Recession, monetary policy has been good and financial markets regulation has improved.

“And so, I think that today, for example, I think monetary policy is still good and is working to help keep our economy growing and keep inflation low. But what we’ve done is we’ve greatly strengthened the regulatory system. That’s the right tool. So if you ask the question, you know, ‘What should have been done different?’ I don’t think you should’ve had bad monetary policy to keep the situation unstable so that people wouldn’t take risks. I think that’s crazy. I think the right thing to have done would have been to have much stronger regulatory policy, and that’s the right tool to focus on that particular problem.”

10. Bailing out Bear Sterns was a good idea.

“We were very concerned about it because it was very interconnected with many other firms. And we were afraid that if it failed in a conspicuous collapse, that it would trigger fears about other financial institutions. […] In retrospect, you know, when we were going into these situations with Bear Stearns and Lehman and AIG and so on, there was a lot of debate before the fact about whether or not it was safe to let these companies just fail. And we, if anything, were — when I say we I mean Geithner, Paulson and I — were very much on the side of, ‘no it’s not safe to let them fail, it’s just going to make the panic much worse and really have a bad effect on the whole economy.’ And so, in retrospect it’s evidently clear that we had to do something to prevent these companies from failing.”

11. The collapse of Lehman demonstrates that bailing out banks is a good idea.

“The experiment was the collapse of Lehman, which we tried desperately to prevent but were unable to prevent. When it collapsed, the panic — by all kinds of objective indicators in terms of the volatility in markets and the collapse of credit and so on — jumped to a whole new level. And immediately after that the global economy begin to fall off a cliff. I mean, almost immediately. The fourth quarter of 2008, which followed Lehman, was the worst quarter, really, since the early 1930s. It was a terrible collapse, millions and millions of jobs got lost. And then the first quarter of 2009 was also very very bad.”

12. Recapitalizing banks promoted financial market stability.

“We intervened, took various actions including the passage of the TARP bill which, allowed the government to put capital into banks and try to stabilize them. But, you know, and after we intervened and the system began to stabilize in the spring of 2009, then the recession stopped and we began to grow again in the second half of 2009. So the timing is almost perfect.”

13. Quantitative easing helped the economy recover.

“So what we did was what’s called quantitative easing, which was that the Fed basically bought, on the open market, it bought Treasury securities and some government-guaranteed mortgage-backed securities. And in doing so, by buying those securities, by increasing the demand for those securities, it pushed down longer-term interest rates. And that led more people to buy houses and helped the economy recover.” I will not attempt to explain my disagreements with the aforementioned beliefs here. But you can look forward to future posts where I will follow up on one or another. In the meantime, I look forward to reading what others have to say about Bernanke’