One POV I've seen and am sympathetic to is that the banks should have taken severe haircuts on their debts by forgiving some % of mortgages/troubled assets in return for bailouts. They made bad business decisions and should have suffered for it as most other businesses do (frankly, the Park Chung-Hee method of tossing executives into nasty jail cells has merits to encourage some clarity). I think Iceland did a better job of liquidating their banks.

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Oct 11, 2022Liked by Noah Smith

When people ask me why I am so confident that my long term stock investments will do okay and that we are not in for a long bout of stagflation I say “we understand economics better these days”. This is one outstanding example.

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Outstanding post Noah

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Oct 11, 2022Liked by Noah Smith

Nice post.

But for fun let me turn the screw a bit. Would it fair to say that Diamond-Dybvig (1983) gave theoretical support to a view of banks that had been widely held for a long time but that economists (and bankers!) had been slow to accept? Similarly, was the heavy lifting of Bernanke's paper to give a convincing historical example of the need for a type of central bank policy response that had been known anecdotally since Bagehot, but that economists - you mention Feldstein and Hubbard - (and bankers!) had been slow to accept? (Of course, I meant "certain economists" or "some economists" - but we are talking about a very influential group.) I learned about the importance of deposit insurance in high school in the 60s, but the moral hazard gang never stopped carping about it. but at least they carped less after Diamond-Dybvig!

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Seriously, are you being paid by Wall Street, Bernanke, and the Obama admin? Because it's either that or you are willfully obtuse. First you construct this false Binary, 1. point and laugh as banks go under or 2. just hand the banks an unlimited supply of free money and poor black people's houses.


If Bernanke was an amazing scholar, as opposed to Wall Street's bag man, you think he might have come across this widely publicized IMF Paper Studying 124 banking crises. They found, rather definitively, that the least costly way to handle a banking crisis was to fire the entire C-Suite, set strict guidelines, and separate out the bad loans and investments in order to restructure and sell them.

A process the FDIC knows well, though admittedly on a much smaller scale. As opposed to what the worthless, money-grubbing, miss-leadership class of this country went with; regulatory forbearance. Of which that IMF study said:

“The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred…”

Enough with the 'repaying TARP' charade. That was little more than Uncle Sam switching his bank bailouts from the very public Treasury Department to the very private FED purely so that the Wall Street executives who blew everything up could wiggle out of the restrictions TARP put on them paying insane bonuses to themselves.


But who can blame them? This is America. We don't allow rich people to suffer any consequences. Ever. For Anything. No matter how many millions of lives they ruin in the process. https://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/?utm_source=pocket_mylist

(Even if you hate everything I just wrote, read that Atlantic Article, It's worth it.)

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Oct 11, 2022Liked by Noah Smith

Nice explanation!

We could say that these economists are really the gold standard of the profession, for lack of a better figure of speech...

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Oct 11, 2022Liked by Noah Smith

It's a nice take on things, I appreciate it. Funny how fascism is rising anyway though....

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This is terrific, thanks!

Can you do an explainer some day on 100% reserve banking? It's one of those things I keep trying to understand and can't, like not being able to reach something on a high shelf.

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While your overall thesis is sound, there remains no excuse for not prosecuting those bankers who brought about the problems.

I’m the S & L fiasco under George H. W. Bush,

Over 60 bankers went to jail, under Obama, no one went to jail over ratings, selling, or malfeasance. That needs to be changed for the next crisis.

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Nice article as always from Noah but this is is a very generous assessment of Bernanke's work in the federal Reserve.

I've seen some people claiming that Bernanke had nothing to do with the crisis and did the best he could.

We can debate the second premise but the first is utterly untrue.

Although it's not mentioned here, Bernanke joined the federal reserve

from Princeton six years before 2008, so he was around a full six years before the crisis and played his role in creating it.

And he was no different, despite being a scholar of the great depression, in tirelessly claiming before the recession that the problem of stabilizing the economy and avoiding major economic crises were now solved.

In fact, in 2006, as Alan Greenspan himself began to express doubts over the state of the housing market, Bernanke was supremely confident and gave a speech to Congress confidently stating that the housing market ' largely reflects strong fundamentals'.

We all know how that turned out a mere two years later.

I think the default story of the great recession of 2008 as the actions of greedy bankers converting subprime mortgages into risky gambles has obscured how much of a role the federal reserve played as well.

It was the federal reserve that supported the gambling activities of these banks in the name of market efficiency.

It was the federal reserve that kept policy interest rates lower than the growth rates of the economy for a decade, depressing yields on safer investments and forcing investors to seek for higher returns in riskier investments.

It was the federal reserve that adopted the rather fatuous idea that bubbles cannot be stopped as they are developing. This was even more damaging as the housing bubble was completely unproductive unlike the dotcom bubble.

Allowing it to play out to its full consequences caused the great recession.

And Bernanke was responsible throughout all of this.

In no small way, it was Bernanke and the Fed's pursuit of price stabilization that led to the crisis. Bernanke had adopted a monetarist view of the great depression of 1929, stating repeatedly that it was caused by a severe contraction in the money supply.

This conveniently ignores that throughout the 1920s, there had been a decade of low and easy interest rates fuelling a stock bubble while the attention of the Fed was directed elsewhere at stabilizing customer prices.

How different was this from the Fed's actions prior to 2008

It's not a new insight. In 1937, Chester Arthur et al in his wonderful book, Business and the banking Cycle, had already fully demonstrated the dangerous implications of price stabilization.

And as Mervyn King pointed out, who is going to clean up the mess of quantitative easing. I would agree that Bernanke solved the crisis to a degree in the short term. But there is a convincing case to be made that his actions have had damaging consequences, especially for pension funds and retirees, in the long term.

I'm not going to debate on whether he merits the Nobel economic prize. In my opinion, it is not a Nobel at all. It is a memorial prize created by bankers to reward other bankers and theoreticians.

And that's fine. Nobody should lose sleep over it. But claiming that Bernanke solved the crisis without mentioning his substantial role in creating it and the substantial mess he left afterwards does a disservice to history, to the people whose lives were fundamentally changed for the worse, and to the truth.

Although, with regard to the last, that's usually the first casualty of these things

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Oct 11, 2022Liked by Noah Smith

The link to a review is wrong (leads to Investopedia entry on "TALF"). Link on the old blog is also broken: cfr.org/content/newsletter/files/Smith-2016-International_Finance.pdf

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There should have been a comment in this post about the lack of punishment for the bad financial actors vis a vis whether Bernanke had feelings about it.

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Only problem with saving the bad actors is they're still with us. Business cycle flushes would normally 'clean' the system and reset values. Greenspan/Bernanke have created a scenario for housing bubbles, stock bubbles, massive deficits and have and expanded the divide between rich and poor all in the name of saving us.

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Unbelievable. Three guys, economists, who stood by and let the 2007 mess happen, causing much poverty and misery in the US and elsewhere in the world, get a Nobel-prize ???

Well, many others involved got rewarded too, so why not.

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A lot of popular anger about the bailouts were that they bailed out the banks rather than the mortgage holders.

Would that have worked instead? I think our current inflation situation shows that bailing out both would have caused massive inflation (QE plus widespread consumer demand).

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Truly, it is ironic how many people in this comments sections are worried about the rise of facism while calling for bankers to be jailed without due process, or in some cases, even conviction.

That many banks and bankers bear moral responsibility for the 2007-8 financial crisis is undoubtable. However, the simple fact is that very little of what individual bankers did was illegal. The subprime crisis was not caused by fraud, but by shoddy deregulation and poor enforcement—both of which are the responsibility of Congress, the President, and to a lesser extent, Alan Greenspan.

Jailing bankers merely to meet the mob’s demand that there be blood in recompense for their suffering is one of the most fascistic things I can imagine, and it is on full display here in this comments section, among those who ostensibly call themselves liberal.

Shame on you all.

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