Ben Bernanke Research Articles

Lombard Street revisited? Bagehot’s rules and Bernanke’s interpretation

Ben Bernanke first referred to Walter Bagehot’s Lombard Street when he was in the chair of the Board of Governors, and when the Federal Reserve responded to the global financial crisis that began in August 2007. While the literature has dealt with the practice of the Federal Reserve and its compliance or otherwise with Bagehot’s rules, it has not detailed Bernanke’s theory of lending in last resort and the underlying interpretation of Bagehot’s rules. Thus, our approach is not empirical but theoretical. We first recall Bagehot’s arguments especially regarding the respective levels of interest rates. Then we show how Bernanke met Bagehot and how he revisited Bagehot’s rules. We find that Bernanke’s approach can be sustained under theoretical conditions—notably working on the assumption that the fundamental value of financial assets can be identified. We conclude by emphasising that the debate can be either restricted to the question of moral hazard, or broadened to the question of the financial cycle.

Shadow Banking in the United States: Emerging Factors, Operation Modes and the Current Situation of Supervision - Based on the Comparison with Chinese Shadow Banking System and Market

In 2009, Ben Bernanke, chairman of the Federal Reserve, described shadow banking as a financial intermediary that converts savings into investments in addition to regulated deposit-taking institutions. To put it simply, the essence of shadow banking is a financial innovation that breaks through traditional financial institutions in order to maximize profits in the financial market environment. In this paper, we compare the U.S. and Chinese shadow banking system and their market system. From that, we analyze their similarities and differences from the aspects of emerging factors, classification and scale, and operation mode. Based on the above analysis, we then discuss the current situation of supervision of shadow banking in the United States and find that the U.S. shadow banking is negligent in institutional constraints and has practical difficulties in legal supervision. Finally, we put forward some suggestions on the future development and financial structure optimization of shadow banking.

Ben Bernanke's regulatory models and solving urgent problems of the financial sector of the national economy: opportunities for adaptation and application

Ben Bernanke's regulatory models and solving urgent problems of the financial sector of the national economy: opportunities for adaptation and application

James Tobin on macroeconomic instability: an old Keynesian changes ground

From 1975 onwards, James Tobin changed his interpretation of the Keynesian case that active stabilisation policy is sometimes needed to restore full employment, offering a new interpretation that drew on Keynes’s General Theory and on Irving Fisher’s 1933 debt-deflation theory of depressions to argue that wage and price flexibility could be destabilizing. Like Hyman Minsky and Peter Howitt, Tobin stressed the previously underappreciated Chapter 19 of The General Theory, where Keynes argued that faster adjustment of prices and money wages could be destabilising. The basis of Keynesian macroeconomics was coordination failure and instability, not irrational money illusion or an arbitrary assumption of a fixed money wage.

A Fed for Our Times: A Review Essay on 21st Century Monetary Policy by Ben Bernanke

This essay reviews 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19 by Ben Bernanke, a fascinating account of the evolution of the Fed since the 1950s, and a stalwart defense of the status quo: of the Fed’s remit, its independence, and the tools and practices it now uses to pursue its mandate. The essay supports many of Bernanke’s key points and brings the experience of the European Central Bank to illuminate them by contrast. However, it argues that the book understates the significance of the changes in institutional architecture that have emerged since the crisis. Questions that we thought had been settled are going to have to be addressed anew, albeit in slightly different guises. This will have implications for all aspects of economic governance. (JEL E31, E32, E52, E58, E62, N12, N22)

Borrowing Stigma and Lender of Last Resort Policies

AbstractHow should the lender of last resort provide liquidity to banks during periods of financial distress? During the 2008–2010 crisis, banks avoided borrowing from the Fed’s long-standing discount window but actively participated in its special monetary program, the Term Auction Facility, although both programs had the same borrowing requirements. Using an adverse selection model with endogenous borrowing decisions, we explain why the two programs suffer from different stigma costs and how the introduction of TAF incentivized banks’ borrowing. We discuss the empirical relevance of the model’s predictions.[Banks] deliberately did not ask for the liquidity they needed for fear of damaging their reputation—the ‘stigma’ problem… I do not think we were conscious of this before the crisis started and I do not think central banks have a convincing answer to it… This is, I think, still a challenge in how to manage the process of central bank provision of liquidity support. This is one of the big intellectual issues that has not been fully resolved. (Governor Mervyn King, Bank of England (2016))For various reasons, including the competitive format of the auctions, [Term Auction Facility] has not suffered the stigma of conventional discount window lending and has proved effective for injecting liquidity into the financial system… Another possible reason that [Term Auction Facility] has not suffered from stigma is that auctions are not settled for several days, which signals to the market that auction participants do not face an immediate shortage of funds. (Ben Bernanke, testimony to U.S. House of Representatives (2010))

Book Review: 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19

Former Fed chairman Ben Bernanke has written a retrospective on the Fed that should be of interest to those in the Austrian school tradition. Bernanke makes numerous admissions, such as the fact that several U.S. presidents pressured the Fed to pursue inflationary policies, and the fact that the Fed contributed to the Great Recession. Yet he seems incapable of comprehending the Fed's inherent problems, exhibiting a state of denial about recent failures.

Monetary policy and housing bubble

This research paper examines the relationship between monetary policy and housing prices in macroeconomics, with a focus on the United States. Housing prices play a substantial role in the consumer price index, and therefore, ensuring price stability for goods and services. The paper reviews the literature on two different perspectives: John Taylor's argument that loose monetary policy contributed to a surge in house prices, and Ben Bernanke's perspective that other factors caused the housing bubble. This paper contains the discussion on the literature of monetary policy and house prices, using the linear regression model and the idea of Taylor rule from different perspectives to identify the relationship between monetary policy and the housing prices. The analysis reveals differences in purposes of the models, which provides a basis for further discussion on the rule of monetary policy.

Reflections on the 2022 Nobel Memorial Prize Awarded to Ben Bernanke, Douglas Diamond, and Philip Dybvig

The 2022 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to Ben Bernanke, Douglas Diamond, and Philip Dybvig “for research on banks and financial crises”. Jens van 't Klooster reflects on Bernanke, Diamond, and Dybvig's work.

The fallacies of central bank independence

The fallacies of central bank independence

Book Review: 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19

Ben Bernanke's new book, _21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19_ reflects his confidence in the Fed as a living institution. There is no late professional life confession pointing to a better way forward. The author gives a blow-by-blow account of his actions as top monetary bureaucrat and the justifications. But he gives no ground in his refusal to recognize the malaise of monetary inflation, or how in time it produces the symptoms of goods inflation and asset inflation. Bernanke does not pass harsh criticism on any past chair of the Fed, and one senses that the author as historian is straining to sustain the reputation of the Fed rather than to discover what actually happened.

The Princeton School and the Zero Lower Bound

In the early 2000s, a small group of economists at Princeton University revived the debate over liquidity traps and developed a framework for monetary policy at the zero lower bound. Paul Krugman’s 1998 Brookings paper provides the basic model that underlies much of the new view, but work by Ben Bernanke, Michael Woodford, Gauti Eggertsson, and Lars Svensson also played an important role in reshaping our view of stabilization policy at the zero bound. By the late 2010s, their ideas had begun to influence policy at the Federal Reserve. Research by Krugman and other Princeton School members provided the rationale for the Fed’s new policy of flexible average inflation targeting, which is the most important shift in the Fed’s policy regime in several decades. Comparing the Princeton School to other recent developments such as market monetarism and NeoFisherism helps to illuminate both sets of ideas.

The Price of Empire

A few years before the global financial crisis of 2008, future Federal Reserve Chairman Ben Bernanke popularized the notion that the world was divided into trade surplus countries like China and trade deficit countries like the United States. Echoing John Maynard Keynes’s trade destabilization theory, Bernanke argued that this imbalance was a significant cause of global instability. But whereas Keynes saw instability as a normal product of global trade, the effects of which would be mitigated by international financial agreements putting limits on surpluses and deficits, Bernanke laid the blame squarely at the doorstep of the East Asian and German economies.

The global saving glut and the fall in U.S. real interest rates: A 15-year retrospective

The authors revisit Ben Bernanke’s global saving glut (GSG) hypothesis from 2005—which links low long-term real interest rates in the United States to excess saving in a number of non-Western countries, including, but not limited to, China. Using an analytical framework and empirical data, they find that the ability of the GSG hypothesis to explain the fall in long-term real rates between 2002 and 2006 is likely much greater than its ability to account for the further fall in these rates from the Great Recession onward.

Crisis and Credit Allocation: The Effect of Ideology on Monetary Policy during the Great Depression and the Great Recession

Both during the Great Depression and the Great Recession, monetary policy deviated from its normal course whereby the central bank would aim to provide credit to solvent institutions while allowing insolvent institutions to fail. In both cases, monetary policy was shaped by ideology that eschewed inflationary policy as remedy for economic contraction. During the Great Depression, the Federal Reserve Board of Governors, led by Adolph Miller engaged in a policy of direct pressure that denied credit to banks that had supported speculative investment. This was part of a more general program of monetary tightening implemented by the Board in the early years of the Great Depression. During the Great Recession, Federal Reserve Chairman Ben Bernanke engaged in a program of credit allocation, using deposit accounts at the Federal Reserve to sterilize the inflationary effects of expansion, a policy practically inscrutable to the public. Both policies were the result of beliefs that a general provision of liquidity is not an appropriate or efficacious means to correct an economic downturn. Both Miller and Bernanke left their mark on Federal Reserve policy by increasing the level of support provided by the Federal Reserve to the U.S. Treasury.

Evidence From Data Analysis, Fifteen Developed Countries and the United States Home Prices Increase Between 1990 to 2006 Result of Advancement In Technology, Worldwide Economic Collapse and Great Recession Result of False Information by Media and Economic Policy Failures: Walters Real Estate Bubble Impossibility Price Transparency Theory, Real Estate Bubble Is Impossible, An End to Economic Policies Based on False

Based on the findings of the current study, policymakers must take a hard look at the media and themselves, because the world can no longer blame the subprime mortgage industry for causing the Global Financial Crisis of 2007 and 2008. The public must demand answers from the media and policymakers explaining how an economic crisis that could have been avoided resulted in the collapse of the global economy. The lack of evidence supporting the theory of a financial bubble and a real estate bubble called for further investigation of factors leading to the Global Financial Crisis of 2007 and 2008. Evidence presented from data analysis in Walters (2018) suggested no financial bubble existed in developed or developing countries around the world, preceding the Global Financial Crisis of 2007 and 2008. Based on data analysis in Walters (2018) the evidence also suggested, the lasting effect of economic policies in response to the Global Financial Crisis of 2007 and 2008 for both developed and developing countries around the world, had no significant impact on the financial sector but pointed to a lack of economic growth. The findings raised significant questions about the existence of a real estate bubble in both developed and developing countries. Evidence from data analysis presented in Walters and Djokic (2019) suggested the existence of a real estate bubble in the United States real estate market preceding the Global Financial Crisis of 2007 and 2008 was a false conclusion. Data analysis in Walters (2019) resulted in, 0.989 Adjusted R-square, 194.041 Mean Dependent Variable, 5.908 Square Error of Regression, 488.726 Sum-of- Square Residual, and 0.00000 Probability (F-statistic), for correlation between the independent variable representing advancement in technology, and the dependent variable representing home purchase price in the United States preceding the Global Financial Crisis of 2007 and 2008. The findings in Walters (2019) concluded the rapid increase in home purchase price in the United States real estate market, was due to increased demand for homes from the adaptation of advancement in technology in the real estate and mortgage industries. The current study expanded the investigation of the growth in home purchase price to fifteen developed countries around the world, building on the findings of previous research by the current researcher. The researcher in the current study concluded, the existence of significant and near-perfect correlation in many cases, between the dependent variable representing growth in home purchase price, and the independent variable representing advancement in technology. The analysis was based on data analyzed from fifteen developed countries around the world, which was collected between 1990 and 2006. The data analysis included home purchase price data from, Canada, United Kingdom, Denmark, Finland, France, Italy, New Zealand, Sweden, Netherlands, Australia, Ireland, Belgium, Norway, Spain, and Portugal. Data preceding the Global Financial Crisis of 2007 and 2008 were analyzed in the current study. The researcher in the current study concluded the existence of overwhelming evidence suggesting advancement in technology was responsible for the rapid increase in home prices in developed countries around the world preceding the Global Financial Crisis of 2007 and 2008. The result of data analysis in the current study provided further confirmation of the accuracy of former Federal Reserve Board Chairmen, Alan Greenspan and Ben Bernanke 2005 assessment which concluded, the occurrence of a real estate bubble developing was impossible due to the Efficient Market Hypothesis, before reversing course subsequent their assertion in 2005 (Belke & Wiedmann, 2005; Starr,2012). The result of the current study provided additional evidence supporting Eddison Walters Risk Expectation Theory of The Global Financial Crisis of 2007 and 2008. The result from data analysis also confirmed the need for the adaptation of Eddison Walters Modern Economic Analysis Theory. As a result of the findings in the current study, the researcher concluded the development of a real estate bubble is impossible where there exists real estate price transparency, as is the case in most developed and developing countries. The researcher presented Walters Real Estate Bubble Impossibility Price Transparency Theory based on the findings. False information of a real estate bubble and predictions of a real estate crash disseminated through the mainstream media and social media can be a destructive force with a disastrous effect on the economy around the world. The failure by the media to hold themselves and policymakers to a higher standard resulted in the Global Financial Crisis of 2007 and 2008. The result of the failure by the media was a worldwide economic crisis and the Great Recession that followed the Global Financial Crisis of 2007 and 2008. Lessons learned from the Global Financial Crisis of 2007 and 2008 can assist in preventing another economic crisis in the future.

External Debt Vulnerability in Emerging Markets and Developing Economies During the COVID-19 Shock

The COVID-19 shock is threatening emerging markets and developing economies (EMDEs) in multiple ways: revealing present debt vulnerabilities and accelerating an already anticipated crisis driven by pre-existing debt conditions, pre-COVID-19 weak growth outlook, and rising geopolitical tensions. Based on the works of Irving Fisher, Hyman Minsky, and Ben Bernanke, this paper presents two indices of overindebtedness and financial fragility for a sample of EMDEs. The indices capture EMDEs’ specific debt characteristics and together illustrate their overall external vulnerability. Results show EMDEs are even more vulnerable than they were at the onset of the global financial crisis (GFC), suggesting the impact of the current shock might be more devastating and recovery more distant. An excessive fear of debt-deflation spirals after the GFC prompted EMDEs to expand their growth trajectories through a pattern of cheap private lending, loose accommodative policy measures, and in some cases unmonitored fiscal expansion. While overall debt buildup is generally alarming, current debt threats in examined EMDEs arise mainly from debt composition, architecture and the domination of volatile debt forms - primarily foreign currency denominated bonds. This emphasizes the need for country-level debt portfolio management as well as timely global actions in response to the shock. Furthermore, EMDEs need to strike a balance between temporary accommodative measures and the post-shock monetary-fiscal policy mix that prevent a deflation spiral without worsening indebtedness and financial fragility. Financial systems are further urged to maintain greater prudence in the face of growing credit demand. This is particularly important in light of the perceived too-optimistic sentiment driven by monetary expansion and injected liquidity; it already increased speculative activities and raise concerns about growing Ponzi finance activities and fears of a repeated Minsky’s moment after the COVID-19 shock.

The General Theory as 'Depression Economics'? Financial Instability and Crises in Keynes’s Monetary Thought

This paper revisits Keynes’s writings from Indian Currency and Finance (1913) to The General Theory (1936) with a focus on financial instability. The analysis reveals Keynes’s astute concerns about the stability/fragility of the banking system, especially under deflationary conditions. Keynes’s writings during the Great Depression uncover insights into how the Great Depression may have informed his General Theory. Exploring the connection between the experience of the Great Depression and the theoretical framework Keynes presents in The General Theory, the assumption of a constant money stock featuring in that work is central. The analysis underscores the case that The General Theory is not a special case of the (neo-)classical theory that is relevant only to “depression economics” — refuting the interpretation offered by J. R. Hicks (1937) in his seminal paper “Mr. Keynes and the Classics: A Suggested Interpretation.” As a scholar of the Great Depression and Federal Reserve chairman at the time of the modern crisis, Ben Bernanke provides an important intellectual bridge between the historical crisis of the 1930s and the modern crisis of 2007–9. The paper concludes that, while policy practice has changed, the “classical” theory Keynes attacked in 1936 remains hegemonic today. The common (mis-)interpretation of The General Theory as depression economics continues to describe the mainstream’s failure to engage in relevant monetary economics.

Germany and China Have Savings Gluts, the USA Is a Sump: So What?

A “global saving glut” was invented by Ben Bernanke in 2005 as a label for positive net lending (imports exceeding exports) to the American economy by the rest of the world. This trading situation had already emerged around 1980 and led to the Plaza Accord in 1985. One common explanation is based on the Mundell–Fleming IS/LM/BP model. But this model cannot be valid, since the “BP” equation is not independent of “IS.” Other champions of this saving glut hypothesis rely on loanable funds theory, which is institutionally inadequate. More plausible analyses of the persistent trade imbalance can be derived from a two-country IS/LM set-up devised by Wynne Godley, a Kaleckian description of the political economy of East Asia and the United States, and dissection of the terms of trade due to W. Arthur Lewis and Luigi Pasinetti.

Resolving the Mark-to Market vs Historical Cost debate: where do we go from here?

Mark-to-market accounting has been one of the most hotly debated changes in accounting. Some, including the past Federal Reserve Chairman, Ben Bernanke, cited it as one of the causes of the 2007-2008 U.S. economic crisis. Many in the accounting community disagree with the Chairman and feel that movement away from historical cost has been a positive for transparency. Though countless individuals have voiced either their opposition or their support of mark-to-market accounting, each of them seems to view the debate as one between either historical cost or mark-to-market. After reviewing the arguments for both historical cost and mark-to-market in detail, we conclude the production of two financial statements, a traditional Balance Sheet based on historical costs, and a Statement of Financial Condition based on mark-to-market, would be relatively inexpensive to produce and would better provide the information needed by different users employing said financial information for, invariably, different purposes.