Ben Bernanke - Economic Views

Economic Views

Bernanke has given several lectures at the London School of Economics on monetary theory and policy and has written three textbooks on macroeconomics, and one on microeconomics. He was the Director of the Monetary Economics Program of the National Bureau of Economic Research and the editor of the American Economic Review. He is among the 50 most published economists in the world according to IDEAS/RePEc.

Bernanke is particularly interested in the economic and political causes of the Great Depression, on which he has published numerous academic journal articles. Before Bernanke's work, the dominant monetarist theory of the Great Depression was Milton Friedman's view that it had been largely caused by the Federal Reserve's having reduced the money supply. In a speech on Milton Friedman's ninetieth birthday (November 8, 2002), Bernanke said, "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna : Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

Bernanke has cited Milton Friedman and Anna Schwartz in his decision to lower interest rates to zero. Anna Schwartz, however, is highly critical of Bernanke and wrote an opinion piece in the New York Times advising Obama against his reappointment as chair of the Federal Reserve. Bernanke focused less on the role of the Federal Reserve and more on the role of private banks and financial institutions.

Bernanke found that the financial disruptions of 1930–33 reduced the efficiency of the credit allocation process; and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand, identifying an effect he called the financial accelerator. When faced with a mild downturn, banks are likely to significantly cut back lending and other risky ventures. This further hurts the economy, creating a vicious cycle and potentially turning a mild recession into a major depression. Economist Brad DeLong, who had previously advocated his own theory for the Great Depression, notes that the current financial crisis has increased the pertinence of Bernanke's theory.

In 2002, following coverage of concerns about deflation in the business news, Bernanke gave a speech about the topic. In that speech, he mentioned that the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money. He said "The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost."

He referred to a statement made by Milton Friedman about using a "helicopter drop" of money into the economy to fight deflation. Bernanke's critics have since referred to him as "Helicopter Ben" or to his "helicopter printing press." In a footnote to his speech, Bernanke noted that "people know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."

For example, while Greenspan publicly supported President Clinton's deficit reduction plan and the Bush tax cuts, Bernanke, when questioned about taxation policy, said that it was none of his business, his exclusive remit being monetary policy, and said that fiscal policy and wider society related issues were what politicians were for and got elected for. But Bernanke has been identified by The Wall Street Journal and a close colleague as a "libertarian-Republican" in the mold of Alan Greenspan.

In 2005 Bernanke coined the term saving glut, the idea, which does not take into account time preference, that a worldwide oversupply of savings finances the current account deficits of the United States and keeps interest rates low.

As the recession began to deepen in 2007, many economists urged Bernanke (and the rest of the Federal Open Market Committee) to lower the federal funds rate below what it had done. For example, Larry Summers, later named Director of the White House's National Economic Council under President Obama, wrote in the Financial Times on November 26, 2007—in a column in which he argued that recession was likely—that "... maintaining demand must be the over-arching macro-economic priority. That means the Federal Reserve System has to get ahead of the curve and recognize—as the market already has—that levels of the Federal Funds rate that were neutral when the financial system was working normally are quite contractionary today."

David Leonhardt of The New York Times wrote, on January 30, 2008, that "Dr. Bernanke's forecasts have been too sunny over the last six months. the other hand, his forecast was a lot better than Wall Street's in mid-2006. Back then, he resisted calls for further interest rate increases because he thought the economy might be weakening."