Ben There, Done That: A Nobel Conundrum

Earlier this week, an announcement in the news sphere took me completely by surprise. It was that Ben Bernanke, former US Federal Reserve Chairman, has been awarded the Nobel Prize for Economics.

Isn’t it the same Ben Bernanke who headed the US Fed when that nation went through a huge financial crisis that had ripple effects over the rest of the world? If yes, how did things come to such a pass? Was I missing something here?

Bernanke was awarded this year’s Nobel prize in economics alongside two other leading economists for their work on financial crises. The former head of the world’s most powerful central bank, who was at the helm during the 2008 financial crisis and helped oversee the global response, shared the prize with the economists Douglas Diamond and Philip Dybvig.

The Nobel foundation said the three had “significantly improved our understanding of the role of banks in the economy, particularly during financial crises”, and that their work had shown why avoiding bank collapses was vital. Bernanke oversaw the Fed slashing interest rates close to zero and pioneered the use of ‘quantitative easing’ in an attempt to prevent the last recession from turning into a repeat of the 1930s Great Depression.

According to the New York Times, “Of the three people who won the Nobel prize for economics yesterday, the one who stood out was the former Fed chair Ben Bernanke. Unlike the vast majority of laureates, Bernanke was able to actually apply his research — on banks and financial crises — to a real-world scenario: the 2008 market meltdown. Bernanke’s work as head of the Fed was given only a glancing reference in the prize citation, but the award resurrected the debate over his handling of the financial crisis.”

While Bernanke’s supporters say he helped prevent the Great Recession from turning into a Great Depression, his critics point out that as Federal Reserve governor from 2002 to 2005, he missed the warning signs inherent in the subprime housing crisis.

Sridhar Vembu, CEO of the software company Zoho, even termed it “a bankruptcy moment for central banking and the economics Nobel”. He also said, “Ben Bernanke wins the economic Nobel Prize at the very moment when the global financial system is (once again) on the edge due to the misguided monetary policies he and other central bankers spearheaded.”

According to the Free Press Journal, “In a tweet about the Nobel committee’s decision, Vembu blamed Bernanke’s policies for the current crisis that the global financial system is facing. Vembu wasn’t alone, as investor Peter Schiff also added that Bernanke helped his predecessor (Alan) Greenspan create the 2008 financial crisis, and also blamed him for the current turmoil.”

Schiff put out a tweet on October 10, 2022 saying, “How fitting that #BenBernanke would win a Nobel Prize in Economics for his research on the Financial Crisis that he helped (Alan) Greenspan create. Ironically, the bigger financial crisis that awaits is mostly on him. Too bad the Nobel committee is as clueless on #economics as Bernanke.”

(Alan Greenspan is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He now works as a private adviser.)

Any debate on Bernanke’s legacy is bound to factor in his supporters’ contention that he helped prevent a meltdown and that his work also pioneered a set of tools for central banks, including ‘quantitative easing’.

(Quantitative easing—QE for short—is a monetary policy strategy used by central banks like the Federal Reserve. With QE, a central bank purchases securities in an attempt to reduce interest rates, increase the supply of money and drive more lending to consumers and businesses. The goal is to stimulate economic activity during a financial crisis and keep credit flowing.)

Greg Ip of The Wall Street Journal notes, “The Nobel committee dwells at length on the relevance of the work of Mr. Bernanke, Mr. Diamond and Mr. Dybvig to the global financial crisis. Outside of a footnote, though, it manages to ignore Mr. Bernanke’s central role in responding to that crisis. Yet Mr. Bernanke’s contribution to economics can only be understood as a function of both, combining intellectual heft with small-p political acumen. From chairing Princeton University’s economics department to running the Federal Open Market Committee and negotiating with Congress, Mr. Bernanke, now at the Brookings Institution, had a knack for eliciting cooperation from people with much bigger egos and sharper elbows than he.”

However, his critics draw a direct line from his actions in 2008 to soaring inflation and economic woes of present day. He has a lot to answer for. For example, The Wall Street Journal’s editorial board observes, “Suppressing interest rates to historic lows and flooding the economy with bank reserves via quantitative easing distorted markets for every form of credit in ways economists still don’t understand — and then the Fed did the same only more so when the pandemic hit in 2020.”

John Authers of Bloomberg Opinion has this to say about the decision, “Bernanke’s role in causing the crisis and then attempting to end it will doubtless be debated for decades, and it’s strangely provocative for the Nobel committee to decide to make (sic) him the award at this juncture. The hours after the announcement have already seen many fascinating takes. An ultimate answer is going to be elusive, however, because we cannot know the counterfactuals. The damage of the Great Recession was terrible, but much more limited than had been feared. That said, crucially, it was the Fed’s monetary policy over the preceding decade, in which Bernanke had played a part as a Fed governor, that created the conditions for the crisis in the first place. Bernanke was plainly too slow to see the systemic risks building, particularly in the sub-prime credit market.”

Incidentally, this is not the first time that a decision of the Nobel Prize Committee has come in for criticism. Awarding the Nobel Peace Prize to then US President Barack Obama in 2009 and the Literature Nobel to singer-songwriter Bob Dylan in 2016 were met with more strident castigation accompanied by much shock and censure.