Telephone interview, October 2022
“I think that’s the real insight, that credit can help provide growth”
Telephone interview with Ben Bernanke, 11 October 2022. The interviewer is Adam Smith, Chief Scientific Officer of Nobel Prize Outreach.
In this conversation, recorded the day after the announcement from Stockholm, Ben Bernanke stresses the importance of the financial system as a critical part of the broader economy, not just a ‘side show’. “That’s the real insight,” he says, “that credit can help provide growth, but if the credit mechanism is badly disrupted it can also be a very adverse development for the economy.” He also talks about how he approached the challenge of transitioning from academic to practitioner, as Chair of the Federal Reserve: “I tried to keep my focus simultaneously on the very near term, what I had to do next; the next speech, the next testimony, the next decision, while at the same time periodically thinking about the big picture.”
Adam Smith: May I speak with Ben Bernanke, please?
Ben Bernanke: Speaking.
AS: Oh, hello, my name’s Adam Smith.
BB: I was expecting your call.
AS: Good. First of all, congratulations on the award.
BB: Thank you very much.
AS: I understand that you didn’t actually receive the news directly.
BB: No, we were not expecting this to happen. We turned off our cell phones as usual at bedtime. And we got a call from our daughter in Chicago first thing in the morning letting us know that she’d heard a news report.
AS: Have you actually spoken to the committee yet?
BB: I have not. I received the letter in an email and I replied that it was received. And I apologized for not being available, again. I did not, I was not, you know, considering this possibility, so I didn’t, you know, prepare for it. But I acknowledged the letter and thanked the committee for the honour. And of course, I will do whatever I can to, you know, participate effectively and to enjoy the whole experience.
AS: I think Barack Obama famously described you as ‘the epitome of calm’. Does that capture the situation when she told you the news?
BB: Yes. I’ve been pretty calm about it, but I think I’ve been trying to process this remarkable development. So I’ll see how I feel in a couple of days, but I’m still trying to take it all in.
AS: I suppose for many laureates, it thrusts them into the limelight. You are obviously there already, so I suppose that changes things a bit, that puts a different dimension on it.
BB: Well, I spent most of my career as an academic doing research. And then of course I got into government work. But I’m glad to be thinking again about the work that I did. And now that I’m no longer in the government, I’m doing academic research again. So that was an important part of my life and I’m glad that that was recognised by the committee.
AS: Yes, indeed. The change from being an academic and your work, your 1983 paper for instance on analysing the role of bank-runs in the Great Depression, or in exacerbating the Great Depression, is mentioned as part of the citation. It’s very rare for somebody who does that sort of work then to find themselves in the position of being a practitioner, isn’t it? And a practitioner on such a grand scale?
BB: It is rare. Perhaps it should be less rare, I don’t know. But I would say that what I did as a researcher was on the one hand very helpful in understanding the situation and responding to it. On the other hand, the real world is very complicated in issues like politics and communications and dealing with a committee of people to make decisions. All those things are complexities in a real world situation that an abstract economic model doesn’t capture.
AS: It’s calmness, again. I guess you need a very calm head to decide what to do in the face of all that uncertainty.
BB: Well, I tried to keep my focus simultaneously on the very near term, what I had to do next. The next speech, the next testimony, the next decision, while at the same time periodically thinking about the big picture. And I found that that worked for me. And the same thing is true, you know, in research, that you have a program, you have a plan, but on any given day, you have a set of specific problems you have to solve. And keeping your mind focused on those problems helps you keep things in balance.
AS: Fascinating. The award really underlines the importance of banks in society, as if that importance wasn’t obvious already. I think back to the peace prize, to Muhammad Yunus in 2006, and the emphasis that placed on the power of banks to get money into the hands of even the poorest people. Is that how you see it, as underlining the importance of the bank?
BB: Yes, and I think banks is not quite the right word, actually, because what we’re talking about here is credit. And Yunus was right that you know, the kinds of institutions that provide credit for very poor people in developing economies might be very different from a formal bank. You know, like we have in the US. It might be a small collaborative with community cooperation and enforcement. It might be in the United States, it might not be a bank formally. It might be a hedge fund, or it might be a venture capital company or a private equity company or many other forms of credit provision. So, it isn’t so much banks per se, but rather the idea that if something destroys or seriously hampers the ability of people to borrow or get liquidity when they need it, they will become very conservative, very cautious, and that will cause the economy to slow considerably. And I think that’s the real insight, that credit can help provide growth. But if the credit mechanism is badly disrupted, it can also be a very adverse development for the economy.
AS: And I realize this is too general to question, but given that people the world over are now very worried about what’s happening economically, do you think that we’re in a safer place now than we were when the crisis hit in 2008?
BB: Well, it’s inherently very hard to know, but I think that this is a different situation in that the recession and the consequences of the recession were not due to financial problems, per se. Of course, the recession was caused by an external event, the pandemic. And we came into the recession generally speaking with pretty strong financial institutions, strong banks, and the like. We did, of course, have a disruption in March of 2020 in the treasury market, which the Fed responded to quite quickly using some of the same tools we did in 2008. But again, this whole experience, recent experience, was not caused by financial weakness. But as I mentioned the other day that if things continue, if we have a bad recession, which I’m not predicting, but if that were to happen, that could weaken financial conditions and financial institutions, and that in turn could make the downturn more persistent. So it’s certainly something that the Fed and other central banks pay close attention to. They want to be sure that even as the economy slows that financial institutions and credit supply remain healthy.
AS: One of the things that the award celebrates is the working relationship between you and your co-laureates. And Douglas Diamond, when we spoke to him, emphasized that, how did he put it? That I can’t think of two people I’d rather be discussing things with than my co-laureates. Sometimes in research you just happen to find colleagues with whom it’s good to discuss things, and it’s the right time. And 1983 seems to have been the right time for the publications that the three of you produced.
BB: I’ve known Doug Diamond in particular for a very long time. And I knew the Diamond and Dybvig paper, it was about, as you say, it was published about the same time as my paper on the Depression, an extraordinarily interesting paper, which I always taught whenever I was teaching these things in graduate school. I think the reason that this was all happening in the eighties was a combination of the fact that on the one hand people were paying more attention to financial aspects of the economy rather than thinking of financial markets and financial institutions, that being sort of a background institution. They began to start thinking more about financial crises, for example, as propagators or even causes of downturns. I’m thinking of people who were looking at emerging markets, for example, which suffered periodic financial crises. And then we had crises in some advanced economies, including a little bit later, of course, in Sweden. But at the same time as people were paying more attention to the role of financial institutions, there were developments on the theoretical side of economics looking at problems of imperfect or asymmetric information and how those might be solved, and how they’re related to the resources of both the lender and the borrower, for example. So, the insight I think that is in much of the work that I’ve done, and a lot of it with Mark Gertler, is that when financial conditions weaken generally so that people have less net worth, less collateral, it becomes more difficult and more costly for lenders to make sound loans. They tend to pull back, and that creates more stress in the economy. So that theoretical approach that helps you think about lending and borrowing as a problem of imperfect information subject to the various ramifications that the theory provided, that was happening at the same time. And the combination of those two things, I think generated a lot of very interesting work in banking, in corporate finance and in macroeconomics.
AS: Isn’t it interesting how ideas have their time? All that time has to pass from the Great Depression in order for your work to come to fruition?
BB: Well, many, many people worked on the Great Depression. Of course, there was the famous work by Friedman and Schwartz, for example, which was being debated when I was in graduate school. And then later there was a lot of very important work on the gold standard and other causes of the Depression. So it was something that people have been working on for many years. And I hope that this, you know, my work contributed to the understanding of the Depression, but the directions we took it were more general than that. We wanted to think, we, referring to my various co-authors, and I wanted to think about how fluctuations in financial conditions can affect not only the economy in a deep depression, but also how they play a role in more ordinary recessions or fluctuations in the economy.
AS: Lastly, the Swedish Academy of Sciences clearly have a vision of what they mean to say by awarding this prize. What message do you hope that the prize sends?
BB: I think from a real world perspective, I hope it does underscore the importance of a stable and healthy financial system, both for long term growth and also for short term stability. And I think that we’ve made a lot of progress there. Bank regulation is much better than it was in when I wrote the 1983 paper. But I think there’s also lot of work to do, and I think there’s still parts of the financial system that could use a stronger oversight, particularly with respect to their solvency, this safety and soundness. And I hope that as a practical matter that regulators and policy-makers will continue to think about the financial system as being a critical part of the broader economy and not just a a side show. It’s really one of the things that makes the economy successful, makes it work. And by the same token, if the financial system is breaking down, then the economy will feel the effects of that.
AS: Thank you very much indeed. So, we very much look forward to welcoming you to Stockholm in December. I assume you’ll be coming.
BB: Yes, of course. And my wife as well, and perhaps my daughter who phones us with the news. But I will say that I’ve been to Stockholm a couple of times and I think is a lovely city, but I’ve never been there in December. So, we’ll see what that is like. But, I think it’s a very nice city and I’m looking forward to coming back there.
AS: Thank you very much indeed for taking the time to talk to me, and we look forward to seeing you in December.
BB: My pleasure.
AS: Thank you.
BB: See you then. Bye-bye.
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