O.K., it’s not precisely the Nobel Prize. It’s the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. So, it’s something like winning the McDonald Hamburger Football Inflation Prize in Honor of John Heisman instead of the Heisman Trophy.
But hey, it’s worth $885,000, so just call me “jealous.”
My only question is, why didn’t John Maynard Keynes win it? Or, perhaps Warren Mosler and Bill Mitchell (no relation) for founding Modern Monetary Theory?
Ah, but I digress. I really want to talk about this article:
Bernanke shares economics
Nobel Prize for crisis research
Ott Ummelas and Niclas Rolander,
Former Federal Reserve Chair Ben S. Bernanke and two U.S.-based colleagues won the 2022 Nobel Prize in economics for their research into banking and financial crises.
Douglas Diamond, Philip Dybvig and the one-time central banker will share the 10-million-kronor ($885,000) award, the Royal Swedish Academy of Sciences announced in Stockholm on Monday.
“The laureates have provided a foundation for our modern understanding of why banks are needed, why they are vulnerable and what to do about it,” John Hassler, professor of economics and member of the prize committee, told reporters in Stockholm.
“In the laureates’ work, it is shown that deposit insurance is a way of short-circuiting the dynamics behind bank runs. With deposit insurance, there is no need to run to the bank.”
And there it is, the startling discovery that deposit insurance helps prevent bank runs by reassuring depositors their money is safe. Who’da thunk?
Diamond and Dybvig were lauded for their research identifying the vulnerability of banks to rumors of collapse, and how governments can prevent that. Bernanke’s studies meanwhile analyzed the Great Depression, and how bank runs ensured that crisis became so extended.
“Prior to Bernanke’s study, the general perception was that the banking crisis was a consequence of a declining economy, rather than a cause of it,” the committee said. “Bernanke established that bank collapses were decisive for the recession developing into deep and prolonged depression.
Bernanke demonstrated that the economy did not start to recover until the state finally implemented powerful measures to prevent additional bank panics.”
While Bernanke, Diamond, and Dybvig rush to the bank with their winnings, I will tell you, in just three words, the real cause of the Great Depression:
LACK OF FEDERAL DEFICITS
And what cured the Great Depression?
O.K., will you send me my Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel money, or must I travel to Sweden to pick it up/
Ask most people what caused the Great Depression, and they will answer:
- I have no idea
- Stock market speculation
- Bank failures
- I still have no idea
Numbers 1 and 5 are the most accurate, while numbers 2, 3, and 4 are small parts of the problem. But the Depression actually was caused by a lack of money.
Readers of this blog have seen these numbers:
1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.
And this graph:
The blue line shows the annual percentage of economic growth. The red line shows the rate of money growth. Note how parallel they are.
If you want to learn whom to blame, here (from Self Financial, Inc.) they are:
Calvin Coolidge and Warren Harding did exactly what today’s economists would have told them to do: Eliminate federal deficits and run federal surpluses. It all sounds so economically prudent, doesn’t it?
I’m not sure what they thought taking more than $7 billion out of the economy would accomplish, but perhaps “thought” isn’t the appropriate word.
And who should get credit for ending the Great Depression:
Yes, the much despised Herbert Hoover actually, sort of, kind of was on the right track, but it was the much beloved Franklin D. Roosevelt who understood that what the economy really needed was money, lots of money.
Fortunately for the execution of that realization, Hitler and Hirohito gave Roosevelt the excuse to run a monster (for those days) $236 billion deficit. The economy recovered big time.
For the past 82 years, we endured the continual warnings that the federal debt is a “ticking time bomb,” while the economy grew when the government continued to run ever bigger deficits and only has faltered when deficit growth was insufficient.
Do economists learn from experience? Uh, not so much.
Annual percentage changes in federal debt. Recessions are vertical gray bars
Here is a stunning visual showing that federal debt growth falls before every recession. That’s called “lack of money.”
Further, because the cure for lack of money is more money, federal debt growth increases during recessions. That’s when the federal government pumps money into the economy to cure the recession.
Odd, isn’t it, that Congress and the President seem to understand that the cure for a recession is increased federal deficit spending, but don’t seem to understand that the cause of recessions is insufficient federal deficit spending.
It’s as though someone knows that the cure for starvation is food, but doesn’t understand that the cause of starvation is lack of food.
Anyway, back to Bernanke and his award-winning realization that people trust the federal government’s finances more than they trust the private banks’ finances.
The former Fed chief, who pioneered the use of unconventional monetary policies, in particular deploying large-scale asset purchases, is now at the Brookings Institution in Washington. Diamond is at the University of Chicago, while Dybvig is at Washington University in St. Louis.
Under Bernanke’s tenure, the Fed’s balance sheet soared to more than $4 trillion from less than $1 trillion as the central bank sought to foster growth in the U.S. economy pummeled by the global financial crisis.
Diamond explained what his research showed about financial turmoil, and how to avoid it. Crises happen “when people start to lose faith in the stability of the system,” he said.
“The best advice is to be prepared for making sure that your part of the banking sector is both perceived to be healthy and to stay healthy, and respond in a measured and transparent way to changes in monetary policy.”
He didn’t explain specifically how depositors, banks, or the government are supposed to “be prepared.” Amazingly:
He added that the world is “certainly much better prepared” for any new crises than in 2008.
“Since then, both recent memories of that crisis and improvements of the regulatory policies around the world have left the system much less vulnerable.”
He said that at a time when the Republican Party, which could win the House and the Senate, is 100% opposed to federal spending (though perhaps that is only because a Democrat is President).
Frankly, recent memories and long-term memories don’t seem to be working, or else the politicians would remember the events that preceded every recession and every Depression in U.S. history.
The entire Congress seems hypnotized by the false notion that federal deficits (which add dollars to the economy) are bad and federal debt should be reduced, if not eliminated by federal surpluses (which take dollars from the economy).
In some respects, the risk of such turmoil is even necessary for the financial sector to provide vital functions to society.
“It’s possible, but it’s not necessarily desirable, to never have a financial crisis,” Diamond said. “I think we will probably always be subject to low-probability unexpected crises.”
If he is referring to a recession, we have one of those “low-probability unexpected crises” about every five years on average and are entering one right now.
But let’s get back to his prize-winning discovery that the federal government has more money than any bank and that banks having government-funded deposit insurance are more trusted than were banks without government aid.
It’s a truly revolutionary idea, but here’s another revolutionary idea: Rather than having the federal government go to all the trouble of financially supporting banks, insuring banks, and regulating banks, by investigating and prosecuting bad banks,
Why not just have the federal government own all the banks?
Private banking is having the great Michael Jordan on your basketball team, but instead of letting him play, you tell him to sit in the stands and critique.
The federal government already does the important things. It sets the banking rules. It sets the interest rates, and it manages the nation’s money supply.
It essentially does everything except extract money from suckers who buy into crazy bank derivatives. The ostensible purpose of derivatives is to spread risk, which wouldn’t be necessary if the government were taking on all the risk.
There is no economic purpose served in putting the nation’s finances into the greedy hands of private bankers. “Lead us not to temptation . . .” indicates that humans have difficulty resisting temptation. Where is the temptation greater than managing a bank and all that money?
Banks should be non-profit, infinitely solvent banks, with most services free to the public, i.e., Federally owned banks.
Where do I get my Sveriges Riksbank Prize?
Rodger Malcolm Mitchell
Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell
The Sole Purpose of Government Is to Improve and Protect the Lives of the People.