With the tenure of Fed Chief Ben Bernanke almost surely ending in about six months, between now and then, we are likely to hear lots of retrospectives on the job that he’s done and Floyd Norris gets the ball rolling in this New York Times article that features none other than Australian economic Steve Keen who, along with a few others, saw what was coming.
It is amazing that a lot of criticism of the Federal Reserve today focuses on what it clearly got right — the response to the debt crisis in 2008 and thereafter, a response that may well have prevented Great Depression II — and not on what it got wrong: policies that allowed the dangerous imbalances to grow and bring on the crisis.
When I talked to Mr. Keen this week, he called my attention to the fact that Mr. Bernanke, in his 2000 book “Essays on the Great Depression,” briefly mentioned, and dismissed, both Minsky and Charles Kindleberger, author of the classic “Manias, Panics and Crashes.”
They had, Mr. Bernanke wrote, “argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behavior.” In a footnote, he added, “I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.”
The current period is not unlike the Great Depression in that, for most economists, all the bad stuff started in 2007-2008, rather than in the years leading up to the crisis. Most of the Bernanke legacy talk will center on the post-2008 period and that’s a real shame because central bank policy was instrumental in creating the mess that Bernanke inherited.
One need look no further than the 2006-era thinking that financial innovation in the form of subprime lending, etc. was really Technology-Driven Wealth Creation.