The difference between the Bernanke and Friedman/Schwartz views was that Mr. Bernanke thought providing more liquidity during a crisis wasn’t enough; he emphasized the importance of salvaging particular financial intermediaries, even if some of them arguably should have gone bankrupt. While his academic work on this issue was deep and impressive, it unfortunately caused him, as Fed chairman, not to focus on liquidity during the financial crisis. Many monetary economists at the time, including Jeffrey Hummel, then of San Jose State University, and Scott Sumner, a Bentley University economist who had studied under Friedman, recognized that the key was expanding the money supply rather than choosing specific firms to help.
As for Messrs. Diamond and Dybvig, their 1983 model purports to give a theoretical explanation of how bank runs occur, but what it calls “banks” are like no banks we know of. As Lawrence H. White of George Mason University points out in his 1999 book, “The Theory of Monetary Institutions,” the model imagines an economy with a single bank that doesn’t make loans and doesn’t issue checking accounts. The reason for bank runs, according to the model, is that investors (not account holders, since there are none) get nervous and try to cash in their investments. The Diamond/Dybvig model uses this bank-run potential to justify deposit insurance.
Mr. White points out that there are ways to make actual banks “run-proof.” One is to make checking accounts more like money-market funds. While the Fed, mistakenly in my view, opposed “breaking the buck” during the financial crisis, allowing money market funds to be redeemed at 97 or 98 cents on the dollar would have stopped a run. Another way to prevent runs is for banks to stipulate that depositors can’t access their deposits until they mature. Yet another, which happened before the Federal Reserve was founded in 1913, is to suspend convertibility of deposits into currency. That way, people could still write checks, but the bank, if simply illiquid but not insolvent, wouldn’t suffer a loss.
The Nobel Prize in economics is funded not by the Nobel Foundation but by Sweden’s central bank. I don’t usually think that matters, but in this case I wonder if it does. The 2022 award seems to be an affirmation by central bankers of the value of central banking.
Going back farther in history, I would suggest that the economic consensus that emerged after World War II was a response to the charm of Franklin Roosevelt. Roosevelt was groping for a “third way” between small-government capitalism and Communism. His policies veered from the corporatist (the National Recovery Administration and the “Blue Eagle”) to the populist (Social Security).
Paul Samuelson, Robert Solow, and others built an economic framework around Roosevelt’s improvisations. Their set of theories and policy prescriptions, unlike Roosevelt’s, was coherent. I believe that they strongly wanted the country to follow in Roosevelt’s footsteps. In this regard, they were like many other Jewish intellectuals of that era.
Notwithstanding vociferous criticism of the politicized use of the Strategic Petroleum Reserve by the Biden administration, such drawdowns have been employed for decades by Democratic and Republican administrations alike as an ad hoc and futile response to short-run increases in fuel prices.
Unlike the case for all previous administrations, which viewed the domestic production of fossil fuels as a positive or at least necessary objective, the major difference introduced by the Biden administration is the incoherence of its policies on conventional energy. To wit: a combination of “net-zero” climate policies supposedly ending the use of fossil fuels and desperate attempts to avoid sharp increases in gasoline prices in the here and now. These goals are impossible to reconcile; that is how we wind up with constraints on domestic oil production combined with supplication to the Saudis for increases in output. But careful thinking about the purpose and efficient use of the SPR leads to a surprising conclusion: The Biden SPR drawdown policy on net is likely to improve allocational efficiency in the narrow context of emergency preparation.
Aaron Kheriaty deplores the lockdowns. A slice:
When the COVID-19 pandemic began, Dr. [Jay] Bhattacharya turned his attention to the epidemiology of the virus and the effects of lockdown policies. He was one of three co-authors—along with Martin Kulldorff of Stanford and Sunetra Gupta of Oxford—of the Great Barrington Declaration. Many more lives would have been saved, and much misery avoided, had we followed the time-tested public health principles laid out in this document. Jay is professor of health policy at Stanford and a research associate at the National Bureau of Economic Research. He earned his M.D. and Ph.D. in economics at Stanford.
In recognition of his consequential research focusing on the economics of health care around the world with a particular emphasis on the health and well-being of vulnerable populations, Loyola Marymount University presented him with the 16th Doshi Bridgebuilder Award on September. Named for benefactors Navin and Pratima Doshi, the award is given annually to individuals or organizations dedicated to fostering understanding between cultures, peoples and disciplines.