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View Full Version : Why "It's 'Chairman Bernanke' to you, bub!"



Polish_Silver
07-14-12, 12:00 PM
Mulitple Choice Quiz:

Why is Benjamin Shalom Bernanke (http://en.wikipedia.org/wiki/Ben_Bernanke) the president of the federal Reserve Board, and not you, me, or my dog? (To score high on the quiz, read this fine article by Jeffrey Hummel (http://www.independent.org/pdf/tir/tir_15_04_1_hummel.pdf))

A) He is an expert on the great Depression.

B) He was chairman of the department of Economics at Princeton University.

C) His reputation for easy money, partly due to his "Helicopter (http://www.youtube.com/watch?v=tqTLTHEJEI8) Ben" speech.

D) None of the above.

____________keep reading for the answer__________

Regarding (A), self proclaimed "experts" on the Great Depression are a dime a dozen. Also remember than when Bernanke was chosen, the country was still in denial. Bernanke himself denied on national TV that a nationwide decline in housing prices would occur. He later said the damage was "contained to sub-prime". All these "experts" start thier analysis with 1929 or 1930, and then say what the fed should have done. They almost never talk about what caused the problem, or what the fed could have done to prevent it. They seem to think financial crashes just come out of nowhere, and public policy is just "damage control", not preventive. Like Greenspan saying "you can't identify a bubble until it pops."

Regarding (B), chairmen of econ departments are also a dime a dozen. They are not the most distinguished people in the department, but people who get along with others and like to beg for contributions. High achieving people (when recognized) have titles like Professor Emeritus (http://en.wikipedia.org/wiki/John_Bardeen), or billionaire-benefactor (http://en.wikipedia.org/wiki/Nick_Holonyak) Chair of Amazing Stuff.

Regarding (C), you are much closer to the truth. However, easy money economists are about 1 cent/dozen these days.

The right answer is (D), none of the above, but you get partial credit for (C).

Hummel explains that "depression experts" are divided into two camps. The Friedman camp thinks the problem was a decrease in prices (deflation), due to a sudden shock increase in the demand for money, which caused a lower velocity of money. People started saving more, spending and borrowing less. This caused prices to go down, because less money was circulating.

The Bernanke camp thinks that prices decreased because of a sudden shock decrease to the supply of money, which caused a decrease in monetary velocity. The supply of money decreased because borrowers were defaulting, banks were going bankrupt, and they were afraid to make loans. They could not perform intermediation between savers and borrowers, causing money supply to contract. This caused prices to go down, which made lending ever more difficult. A self reinforcing deflation spiral.

The explainations are not contradictory, but overlapping. Both can be true. It is a difference of emphasis.

If Friedman is right, the solution is for congress to spend like crazy, pumping up the money supply and raising prices. This does not require bailing out banks or any action by the federal reserve, except printing money to fund congress. In fact, it would be better to just print money, not borrow from the fed. (Borrowing increases future deflationary forces)

If Bernanke is right, bailing out banks is essential. They must continue to lend money, no matter what. To lend during bad times, they must know that they will not go belly up if loans default. So it is not just a "one time rescue", but a policy of guaranteed bailout, so that banks will continue lending. This makes the banks activities "risk free". This is the reason that EJ says something like "They (the banks) had found their man". It is also the reason the Fed refuses to disclose their "emergency loans" etc.