Just at a time when central banks are playing a leading role in the crisis that is keeping the global economy in suspense, the Nobel Prize in economics has arrived for a former central banker.
But this is not just any central banker, he is someone very relevant not only because he was the head of the most influential monetary institution on the planet, but also because his theories and practices are those that are in force today to try to contain the crisis.
Ben Bernanke is the first former chairman of the Fed to receive the Nobel, but contrary to what one might think, the work that earned him the distinction was not for his role as head of the Fed, at least it was not considered for that purpose, but because, according to the Swedish academy, along with his colleagues Douglas W. Diamond and Philip H. Dybvig, laid the groundwork for managing global financial crises through central banks.
Bernanke published his work in 1983, by then he was a student of the Great Depression of 1929, and his conclusions led to demonstrate that the actions of the central bank at that time deepened the crisis that began in the late 1920s. In fact, he was guilty of what came after, a Great Depression, because he was able to avoid it with a different strategy than the one he assumed, that is, by doing nothing.
In those laps that life gives, 23 years after publishing his work, already as head of the Fed, a position he held between 2006 and 2014Bernanke had the opportunity to face a crisis that threatened to turn into something similar to that of 1929, but he put his theories into practice. The Great Depression did not happen, but a Great Recession did, which fortunately did not last long. In the summer of 2009, shortly before the one year anniversary of the outbreak of the subprime crisis, signs of recovery began in the US economy.
The Nobel for Bernanke can have several readings; The news was first received in the markets yesterday with a certain embarrassment, to make way for some explanations.
1. Back to current monetary policy
Although the Swedish Academy does not evaluate the current geoeconomic context to award the Nobel, without a doubt it is a boost to the current monetary policy of the central bankswhich is based on nothing more and nothing less than the work and guidelines of today’s brand new winner and his two colleagues.
2. Central banks will follow the recipe
Central banks will follow Bernanke’s recipe. Today they are managing a global crisis that is not over and, as current Fed Chairman Jerome Powell has said, they will make sure the job is done.
3. Interest rates as a monetary policy instrument
Although Bernanke’s work speaks of the central banks’ efforts in monetary matters, that is, quantitative easing, injecting money into the economy in the amount and time necessary, it also emphasizes the management of the interest rate, to the extent as needed, as needed. Rates will therefore go up today, as much as necessary, it’s part of the “medicine”.
4. After raising rates, it will be time to lower them
It was the same Bernanke in the 2008 crisis when he lowered the interest rate to a level close to absolute zero, and raised it when he deemed it necessary. The advantage of those years is that the crisis in the mortgage sector was not combined with crises in other parts of the world, much less with an inflationary outbreak, as is happening today. But once the first stage has passed, that is, that of monetary easing that prevents major collapses, the management of the interest rate follows.
5. Recession at the door
Perhaps an indirect consequence of the Nobel prize awarded to Bernanke will be the recession the following year, which almost everyone is already expecting. It will be because with the award there is no doubt about what the Fed will do in the following months.
6. Fight inflation, at any cost
Both Bernanke and Powell are admirers of Paul Volcker, the legendary Fed chairman in the 1970s, who did not win a Nobel, but it also laid the foundations for considering inflation as the greatest enemy of economic growth and development. His fierce fight against inflation in those years led the US economy into a deep recession. Therefore, it is very clear what the Swedish Nobel Academy indirectly endorsed: The current moment deserves to fight inflation to the fullest, that includes a recession. The recession is already looming, there seems to be no other option.
7. More recessions will come, the key is how to manage them
The next global crises, which hopefully will be less frequent, already have a clearly marked “road map”. Quantitative easing is the first phase (both in its monetary phase and in cheapening money even to extraordinary levels, or if necessary, turning its cost negative), then come rate adjustments, as much as possible. If the economy enters a recession, the monetarist schools of today (endorsed and laureate by the Swedish Nobel Academy), estimate that a recession is less costly, compared to the second version of the brutal Great Depression of 1929, which marked history of the economy forever.
The Nobel for Bernanke seems like a coincidence, we never know if it is or not, but it comes just at a time when his work becomes relevant because it is what is current today; his “recipes” and that of his fellow laureates together with him will try to steer the global economy ship into less turbulent waters, was successful in 2009, but the complexity of the moment will put the Nobel Prize itself to the test and will tell us how successful the prize that was awarded was.
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