And now something from the Ivory Tower file

October 7, 2008

While doing some additional research for a paper I am writing this afternoon, I stumbled upon something too timely and revealing to keep to myself: a paper by Chairman of the Federal Reserve, Ben Bernanke, entitled “Financial Fragility and Economic Performance.”  The paper was written in 1990, while Bernanke was a professor of economics at Princeton, and looks at how stock market tumbles can develop into crises which depress the real economy.  Sound familiar?

Bernanke writes in the opening paragraph: “Is there some sense in which general financial conditions (e.g., the creditworthiness of borrowers or the “soundness” of banks) exert an independent effect on the macroeconomy? Policy makers appear to think so: concerns about financial stability-motivated in large part by the experiences of the Depression and earlier episodes of financial crisis-are a principal rationale for the regulation of banking and securities markets. Preservation of financial stability is also an important goal of monetary policy (as when the Penn Central crisis of 1970 or the stock market crash of 1987 induced the Federal Reserve to supply extra liquidity) and fiscal policy (as in the “bailouts” of Chrysler, Lockheed, and the savings and loans).”   Oh sometimes academia is so relevant.  One has to wonder whether he’s re-read this paper recently and if he’s thinking about how it could be easily updated to incorportate information about a new crisis and bailout plan, with a clearer insider’s account of the thinking of policy makers.

Digging a bit further, it turns out that Mr. Bernake is quite an expert on the Depression, an academic qualification he may be feeling increasingly squeamish about having to call upon in his current post.  Let’s hope that his knowledge of the period, and how it unfolded, is an asset in his management of the current crisis, and that we don’t end up with an expert on the Great Depression presiding over an even greater depression.

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2 Responses to “And now something from the Ivory Tower file”

  1. Steve H. said

    I’ve been listening to the “Planet Money” podcast from NPR as of late. They’ve had some pretty interesting episodes. In the following one, they talk about Bernanke’s work on an economic model called the Financial Accelerator which also has particular application to the current situation:

    “The Week America’s Economy Almost Died”
    http://www.npr.org/blogs/money/2008/09/hear_the_day_americas_economy.html

    Also available on iTunes:

    http://phobos.apple.com/WebObjects/MZStore.woa/wa/viewPodcast?i=40066470&id=290783428

  2. […] to be.  While we’re all hoping that Fed Chairman Ben Bernake doesn’t have to put his expertise on the Great Depression to much use, it’s unclear whether the massive bailouts being announced by European […]

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