David R. Henderson  

From the Vault: My 2006 Piece on Bernanke

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Every once in a while, someone asks an easy question. Scott Sumner asked one:

Are academics allowed to present someone else's paper in a seminar (if we correctly identify the author?)
The answer is unequivocally YES. Here's one of my favorite lines from a novel, a line that addresses Scott's point. Asked who would let him do what he peacefully wanted to do, Howard Roark answered:
That's not the point. The point is, who will stop me?
We still have enough freedom of speech in this country that someone can present another person's paper, properly identifying it as such.

But since what Scott is really talking about is how Bernanke's views have changed, here's a link to a piece I wrote in 2006 when I had the sense to write down my doubts about Bernanke. I didn't have enough doubts. I gave Bernanke too much credit, as you'll see, for his understanding of the Great Depression. Jeff Hummel has convinced me that Bernanke saw the reduction in the money supply during the early part of the Depression as a problem because of its effect on the supply side--causing financial disintermediation--rather than on aggregate demand. Friedman and Schwartz, by contrast, saw the decline in the money supply as a problem because it reduced aggregate demand. I didn't read Bernanke's work carefully enough.

But I did catch the hype. One excerpt from my piece:

In the introduction to his book Essays on the Great Depression (Princeton University Press, 2000), Bernanke writes: "Those who doubt that there is much connection between the economy of the 1930s and supercharged information-age economy of the twenty-first century are invited to look at the current economic headlines -- about high unemployment, failing banks, volatile financial markets, currency crises, and even deflation." (italics added.) Recall that in 1933, the worst part of the Great Depression, the unemployment rate was 25 percent. In other words, one of 4 people in the U.S. labor force was out of work. In early 2000, presumably when Bernanke wrote his introduction, the U.S. unemployment rate was about 4 percent. Most economists, if asked the U.S. economy's "natural" unemployment rate -- when the economy is humming along at so-called "full employment" -- would answer, "About 4 to 6 percent." If Bernanke believes that 4 percent unemployment is high, what might he do to the growth of the money supply if the unemployment rate is, as it often will be, 4 percent or higher?

Now, you might argue that Bernanke was engaging in hype. But surely, all other things equal, hype is not good.


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CATEGORIES: Monetary Policy



COMMENTS (4 to date)
Philo writes:

Your other reservation--that Bernanke was too worried about *deflation*--looks quite misguided now!

David R. Henderson writes:

Philo,
You're right.
David

anonymouse writes:

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Scott Sumner writes:

David, Thanks for the advice.

In fairness to Bernanke I think that he mentioned both channels, monetary policy directly affecting AD, and also the banking channel. But certainly in this crisis he seems to have paid too much attention to banking and not enough to monetary policy--so your fears were right on the mark.

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