Ben Bernanke and the hubbub around his Nobel

The conferment of the award to Bernanke has reopened, so to say, a debate on his performance as the Fed Chair. Opinion is sharply divided between two camps.

By and large, Nobel awards have maintained the highest standards of assessment of the candidates’ achievements and the transparency of the selection process. It is important to note that there is no “real” Nobel for Economics; it is called ‘The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’, instituted by Sweden’s Central Bank. However, about the prize for Economics, there have been allegations and rumours. F A Hayek, the reputed economist, said: “If I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it.” This year’s prize has fluttered a few dovecotes.

The awards were announced on October 10. The awardees of the Sveriges Riksbank Prize were: Ben S Bernanke, the former Federal Reserve Chair, Douglas W Diamond of the University of Chicago, and Philip H Dybvig of the Washington University. In its citation, the Nobel Committee said that the research insights of the three economists have helped better manage financial crises. In a Popular Science Backgrounder (The Prize in Economic Sciences 2022), they explained, at length, the key role played by banks in generating and spreading the crises. On Bernanke, they said, “Through statistical analysis and historical source research, (he) demonstrated how failing banks played a decisive role in the global depression of the 1930s.” The Committee leaned heavily on the research of these economists in the Eighties.

The University of Chicago issued a special news bulletin on October 10 (Douglas Diamond wins Nobel Prize for research on banks and financial crises, Louise Lerner). The university is proud to be associated with 97 Nobel Laureates, of whom 33, including Diamond, are economists. As the bulletin elaborated: “Diamond is considered a founder of modern banking theory. He is known for his research into financial intermediaries, financial crises and liquidity; his research agenda for the past 40 years has been to explain what banks do, why they do it and the consequences of these arrangements.”

The pioneering nature of the work of these economists may be better appreciated if we compared the earlier studies of economic cycles or depressions with the studies made in the post-Diamond years. In the past, the emphasis was on over-investment of the irrational Tulip mania kind, under- consumption, or external shock trajectories. Now, it is realised or has become apparent that crises could erupt endogenously from within the banking system due to asset/liability mismatches and liquidity traps. Commencing in banks, they would spread to and engulf other sectors. Indeed, these findings are original, far-sighted and worthy of a Nobel.

While the awards to Diamond and Dybvig have been received well, the prize to Ben Bernanke has met with consternation and loud protests. This is perhaps based on the misapprehension that the award is for his role as the Fed Chair.

This is not so. As records show, the Committee went only into the academic work of the Eighties on the Great Depression. Even so, did Bernanke bring to bear his research background when he was functioning as the Fed Chair? This has raised questions.

Reacting to the award, the New York Post wrote on October 11 that “Ben Bernanke belongs in the Economics Hall of Shame”.An opinion piece, (America has paid dearly for Nobel winner Ben Bernanke’s many mistakes, Desmond Lachman), borrowing a jibe from Bernard Shaw, castigated him as a “brilliantly wrong” economist. It referred to his stint for long years as a member of the Fed when Alan Greenspan held fort, pointing out how Bernanke did not observe the bubbles bellowing and caution Greenspan about the rising risks in the financial market.

In 2005, at a Jackson Hole Economic Symposium, when he was a professor at Chicago University, Raghuram Rajan expressed concern about asset inflation. He read his paper, Has Financial Development Made the World Riskier? He was attacked as an anti-market Luddite and silenced by seniors, including Bernanke. Later, in 2013, when the fear of Taper Tantrum was looming large, Rajan raised the issue. He was then the governor of the Reserve Bank of India (RBI) and requested consultation and coordination of monetary policy with other countries, which, like India, were adversely affected. Bernanke rebuffed him and said that the Fed was under no statutory obligation to coordinate with others; its objectives are to maintain price stability and employment in the US. It is this tunnel vision of the Fed that has created mayhem in the currency market now.

The conferment of the award to Bernanke has reopened, so to say, a debate on his performance as the Fed Chair. Opinion is sharply divided between two camps: Those who support him, referring to the timely and aggressive steps taken by him to prevent the depression turning into a severe recession, and others referring to his missteps, especially the Quantitative Easing (QE) policies, especially after 2010.

For emerging markets like India, the problem is more acute. At one level, when dollar floods are in force, capital rushes into stocks and debt due to interest differentials. When the Fed commenced to unwind, it created the dreaded “Taper Tantrum”. The Fed does not believe in consulting or cooperating its policies with others. Unwittingly, the Fed’s policies have led to a bizarre situation. The dollar is hardening, with more and more easy money getting back home to the US (safe haven!), lured by higher rates. It is a weird mixture of currency turbulence and inflation.

Many critics, including this columnist, relate this situation to the policies of Bernanke and the US Treasury. The policymakers in the US may be working on the assumption that the dollar is the only leverage they have to control other countries.

One may well ask: Should Bernanke be denied the Nobel? The answer is a categorical “No!” It was for his research work which is still valuable. His later stint as the Fed Chair is another matter.

Kandaswami Subramanian

Served in the Ministry of Finance, GOI, and retired as Joint Secretary

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