Bernanke: How to avoid a Great Depression - Better bankruptcies and More Efficient Foreclosures

[leveymg]

In Ben Bernanke's book, the Great Depression wasn't really the result of crashing markets, shuttered factories, and millions of homeless. No. The problem was that markets for liquidated assets of bankruptcies and home foreclosures weren't sufficiently "efficient" in the 1930s. Not efficient way back then, of course, but we know better now, don't we?

No wonder we're in this mess, again. No wonder Bush picked Ben Bernanke to succeed a fleeing Alan Greenspan.

Bernanke made his name as an economist after he published a paper about the role of bankruptcies in recessions. In the June 1983 American Economic Review, the future Fed Chairman wrote that the reason the 1929-33 recession turned into systemic bank failure and a Great Depression was that bankers didn't have enough information about the returns they could realize from liquidating customer assets.

Bernanke offered a nice, neat explanation for why the Great Depression lasted so long. The freeze-up in the credit markets that resulted in the March 10, 1933 "Bank Holiday" was unnecessarily protracted and severe because markets for the disposal of bankruptcies and foreclosures were insufficiently developed. Lenders, not having sufficient information about the money they could have been making, essentially stopped lending. That, he surmised, snowballed into a deep, downward spiral of industrial failure, protracted unemployment, and lowered output of goods and services.

In other words, what bankers didn't know about bankruptcy could destroy the American economy. And, did. And, did again. . .

The solution Bernanke suggested is more up-to-date and accurate reporting of distress sales -- i.e., a well-managed recession under all-seeing Fed supervision. No need for any fundamental reforms in banking practices or intervention to assist homeowners. The market is perfect, bankers are perfect, and with enough information they will surely correct themeselves.

Bottom line, the Fed Chairman thought that jobless recovery and the mortgage crisis were quite manageable (not a real problem) and that the answer was an efficient reporting system and market for foreclosures.

You're a great humanitarian, Ben. Tell that to six million Americans who will be out in street by the end of the year because of your policies, and because Congress will drag its feet in granting relief to distressed homeowners.

Bernanke's thinking can be discerned quite plainly by the second page of Bernanke's 1983 paper, which is surprisingly readable. See, Ben S. Bernanke, "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June. http://fraser.stlouisfed.org/docs/MeltzerPDFs/bernon83.pdf


Here's a string of citations that shows the evolution of Bernanke's thinking on the subject. His emphasis on bankruptcy is clearly seen in a paper he wrote two years earlier,

Article
Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June. (restricted)
This item is featured on the following reading lists:

Barro, Robert J, 1978. "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 549-80, August. (restricted)
Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April. (restricted)
Bernanke, Ben S, 1981. "Bankruptcy, Liquidity, and Recession," American Economic Review, American Economic Association, vol. 71(2), pages 155-59, May.
Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. (restricted)
Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. (restricted)
Abel, Andrew B. & Mishkin, Frederic S., 1983. "An integrated view of tests of rationality, market efficiency and the short-run neutrality of monetary policy," Journal of Monetary Economics, Elsevier, vol. 11(1), pages 3-24. (restricted)
Other versions:
Andrew B. Abel & Frederic S. Mishkin, 1983. "An Integrated View of Tests of Rationality, Market Efficiency, and the Short-Run Neutrality of Monetary Policy," NBER Working Papers 0726, National Bureau of Economic Research, Inc. (restricted) Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January. (restricted)
Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
Other versions:
Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. (restricted)
Robert J. Gordon & James A. Wilcox, 1981. "Monetarist Interpretations of the Great Depression: An Evaluation and Critique," NBER Working Papers 0300, National Bureau of Economic Research, Inc. (restricted)
Full references

[Andy823]

1. Is there any way

To get rid of this guy? Does Obama have to keep him in his position, or can he replace him?

[CountAllVotes]

3. Obama is keeping him around until 2010

that is what I heard. He is an idiot and isn't living in the real world. He has lived life with a silver spoon in his mouth.

His paper can be found online. I read it.

He spends a hell of a lot of time talking about gold gold gold.

>> Abstract:
Recent research has provided strong circumstantial evidence for the proposition that sustained deflation - the result of a mismanaged international gold standard - was a major cause of the Great Depression of the 1930s. Less clear is the mechanism by which deflation led to depression. In this paper we consider several channels, including effects operating through real wages and through interest rates. Our focus, however, is on the disruptive effect of deflation on the financial system, particularly the banking system. Theory suggests that falling prices, by reducing the net worth of banks and borrowers, can affect flows of credit and thus real activity. Using annual data for twenty-four countries, we confirm that countries which (for historical or institutional reasons) were more vulnerable to severe banking panics also suffered much worse depressions, as did countries which remained on the gold standard. We also find that there may have been a feedback loop through which banking panics, particularly those in the United States, intensified the worldwide deflation.

READ MORE HERE: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=226690

So much for this "expert" on the Great Depression.

To me, Bernanke is a Great Depression!

:kick: him to the curb would you MR. PRESIDENT!

[Andy823]

5. I don't recall

Ever hearing anything from him that makes any sense. It's obvious he is not on the side of the people of this country, but in the pocket of corporate america.

[leveymg]

4. "For cause". Nobody knows what that means in practice.

If Obama and Congress wanted him replaced loudly enough, one would think Bernanke would be relieved to return to the private sector.

[Andy823]

6. I would think

That as you said, if the wanted him out, they could do so. Maybe they need someone to replace him and haven't found the right person, but this guy sucks big time!

[BlueJac]

2. Just another Kool-Aid drinking fool..........

Why hasn't he been replaced yet?? Oh, we must not be able to find another Greenspan!!

[On the Road]

7. I Can't Understand Why Bernanke is Being Pilloried for This

regardless of whether you agree with him about the depression.

As I understand Bernanke, he is not writing about the initial causes of crashes or recessions, but about why they sometimes last indefinitely and at other times. Everyone remembers 1929 because of the decade that followed; no one remembers 1907 because there was a quicker recovery. That's what his papers are about.

How to sort through bankrupticies and foreclosures is crucial if this recession is going to be brought under control and stabilized. I think we're lucky to have someone in his position who has studied the process so extensively.

As far as his being born with a silver spoon in his mouth (as another poster claimed), Bernanke's father was a pharmacist in South Carolina. His career has been in academics and government, not in the financial industry. If he is such a tool, why did Krugman have this to say when he was appointed?

By Bush administration standards, the choice of Ben Bernanke to succeed Alan Greenspan as chairman of the Federal Reserve was just weird.... For one thing, Mr. Bernanke is actually an expert in monetary policy.... there's not a hint in his work of support for the right-wing supply-side doctrine.... Nor is he a laissez-faire purist.... Last but not least, Mr. Bernanke has no personal ties to the Bush family. It's hard to imagine him doing something indictable to support his masters.

All of this raises a frightening prospect. Has President Bush been so damaged by scandals and public disapproval that he has no choice but to appoint qualified, principled people to important positions?

http://select.nytimes.com/2005/10/28/opinion/28krugman.html?_r=1

[wimpy77]

8. term limit

i think bernake's position is term based.

[On the Road]

9. Right -- Wikipedia Says It's a Four-Year Term

although renominations are common.
The only exception I know is when Jimmy Carter early in his term appointed William Miller, who was not well known and not a popular choice. Miller was reappointed to Treasury within about a year and the position was open again. Carter chose Volcker under great outside pressure to control inflation.

Volcker served for eight years, after which Greenspan served for about 18 years. Chairmen are supposed to be able to serve until their 14-year term as Fed governors expires, so I don't know how Greenspan lasted that long. Leaving after 14 years would have been much better in this case.