Ben Bernanke: ‘Nobel’ Service of Capitalism

November 1, 2022 0 By Yatharth

Nobel in Economics

M Aseem

‘The superficiality of Political Economy shows itself in the fact that it looks upon the expansion and contraction of credit, which is a mere symptom of the periodic changes of the
industrial cycle, as their cause.’

– Marx, Capital, Volume 1

The Nobel prize in Economic Sciences for 2022 has been awarded to Ben Bernanke, Douglas Diamond, and Philip Dybvig “for research on banks and financial crises.” The committee says that the research of the three laureates has “significantly improved our understanding of the role of banks in the economy, particularly during financial crises. An important finding in their research is why avoiding bank collapses is vital.” “The laureates’ insights have improved our ability to avoid both serious crises and expensive bailouts,” says Tore Ellingsen, Chair of the Committee for the Prize in Economic Sciences.

The citation further says, “Modern banking research clarifies why we have banks, how to make them less vulnerable in crises and how bank collapses exacerbate financial crises. The foundations of this research were laid by Ben Bernanke, Douglas Diamond and Philip Dybvig in the early 1980s. Their analyses have been of great practical importance in regulating financial markets and dealing with financial crises.”

This citation reveals the complete bankruptcy of what is called “Economic Science” through such complete and shameless denial of the history of the political economy. If such denial of all the pathbreaking research of past – from the role of money and money dealing to modern banking to bank credit, both commercial and industrial, and the emergence of financial capital, not only in the Marxist political economy, but in that of the bourgeois classical political economy itself, can pass without much comment, what to say of being challenged, even I can lay a claim to discover General Theory of Relativity!

Such denial of history is never a coincidence. It must have some purpose. We all know that ‘Nobels’, especially those for Peace and Economics, have a definite political purpose. Let us recall the ‘Peace’ Nobel to US president Barack Obama in 2009, after less than eight months in office, for his “extraordinary efforts to strengthen international diplomacy and cooperation between peoples”. People around the world were incredulous. Those instinctive reactions were later proved sound because when Obama left office in 2017 the US had been at war for the entire eight years of his presidency.

The committee goes on, “For the economy to function, savings must be channeled to investments. However, there is a conflict here: savers want instant access to their money in case of unexpected outlays, while businesses and homeowners need to know they will not be forced to repay their loans prematurely. In their theory, Diamond and Dybvig show how banks offer an optimal solution to this problem. By acting as intermediaries that accept deposits from many savers, banks can allow depositors to access their money when they wish, while also offering long-term loans to borrowers.

However, their analysis also showed how the combination of these two activities makes banks vulnerable to rumours about their imminent collapse. If a large number of savers simultaneously run to the bank to withdraw their money, the rumour may become a self-fulfilling prophecy – a bank run occurs and the bank collapses. These dangerous dynamics can be prevented through the government providing deposit insurance and acting as a lender of last resort to banks.”

Less said the better if it is claimed as “foundational research”. While the prize-winning duo might have formalised some “mathematical model” per the current fashion for it, all this is known for centuries! They have also presented a solution for bank failures via deposit insurance which was also introduced long back before their research. In 1933, the US was the first country to adopt deposit insurance, followed by India in 1962. Both adopted deposit insurance after a significant number of banks failed in these countries.

However, such memory losses always have a political purpose. Banks have been falling since banks exist. Banks fail as they face liquidity issues as some debtors fail to meet their obligations and, in turn, banks are unable to pay their own creditors (or depositors). However, except in a few cases where the crisis might erupt in the monetary arena itself, more often this default in payments arises from an underlying crisis in the capitalist production system as, usually at the peak of the boom-bust cycle of capitalist economy, inventories start to pile up and some capitalists start to fail in converting their commodity capital, along with the embedded surplus value, back into money capital. This failure of realisation compels them to default on their payment obligations starting the domino like defaults which are bound to show up in a banking crisis, since banks function as the veins and arteries of the capitalist money-commodity-money circulation. But the bourgeois economists these days do not want to study and discuss the objective reasons for this underlying crisis of capital political economy because that will reveal the truth that capitalism has now become a completely moribund system. Bernanke and the others also couldn’t do that. What is then the importance of their research?

Till the great depression of 1930s bourgeois political economy accepted that weak capitals having gone bankrupt should be allowed to die. Bourgeois state was not expected to rescue these through bailouts, incentives and subsidies. Even John Maynard Keynes who suggested the state to step up fiscal expenditure to increase effective demand to rescue economy from crisis, did not suggest to bailout individual capitals.

However, when the global capitalist system, having grown out of its ‘Golden Age’ found itself in a mortal crisis in 1970s-80s in which hundreds of banks went under, bourgeois political economy took refuge in neoliberalism, which, in its verbiage, is the theory of liberating the private capital enterprises from the suffocating clutches of state regulation to allow the full flow of its ‘animal spirits’ in the free market. But, in reality, it is the modus operandi for crushing the collective resistance of the workers with the full might of bourgeois state in unashamed service of the private capital to shift the full burden of capitalist crises upon the working class.

Hence more interesting is the decision to award the prize to Ben Bernanke who has also worked as the Chair of the Federal Reserve (the Fed), the US central bank, from 2006 to 2014. Bernanke played a major role in creating and furthering the crisis. Before becoming the Chair, Bernanke was a Federal Reserve board member and part of the team which kept interest rates low, fueling the housing bubble which eventually led to the crisis. During the crisis the central bank passed a high monetary stimulus to prevent bank failures. However, the monetary stimulus continued to create financial bubbles in the economy.

Thus, Bernanke was the architect of the bank and corporate bailouts of 2008 and initiated the program of quantitative easing through which the Fed and other central banks poured trillions of dollars into financial markets, sending stock markets to record highs, facilitating an orgy of speculation, the like of which has never been seen, while widening social inequality to unprecedented levels.

In Bernanke’s case the award cites a paper he wrote in 1983 on the effect of bank collapses in the US in turning what began as a recession into the Great Depression of the 1930s. Announcing the award to Bernanke, Stockholm University economist John Hassler said: “At the time, this was a break with the current view. Banks fail, but it was thought that was a consequence of crisis, rather than a cause of crisis.” However, Bernanke’s research on the course of the Great Depression was not conducted to disclose the underlying contradictions in the economy which had produced such devastation. He never seriously posed the question of how it was that the economy of the richest country in the world, abounding in natural resources, with a powerful and skilled labour force and in possession of great advances in science and industrial technology, had disintegrated. Bourgeois economics had long before given up any scientific pursuit of such issues, lest it called into question the very foundations of the profit system.

Bernanke’s research in 1983 was to lead him to conclusions and prescriptions that were put into practice during his term as Fed chair in response to the crisis of 2008. His views were clearly outlined in a speech he gave on the 90th birthday of the right-wing “free market” monetary economist Milton Friedman, the intellectual godfather of the economic suppression of the Chilean working class following the 1973 Pinochet coup. Bernanke’s speech honouring Friedman centered on A Monetary History of the United States, the book he co-authored with Anna Schwartz. Describing this work as “impressive in its erudition and development of historical details,” he said Friedman and Schwartz “made the case that the economic collapse of 1929–33 was the product of the nation’s monetary mechanism gone wrong.” The conclusion of his speech left no doubt as to the direction of his policy when he became Fed chair four years later after serving from 2002 on its board of governors. The best thing central bankers could do avoid crises was to provide the economy in Friedman’s words a “stable monetary background.”

“I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

Prior to becoming Fed chair, Bernanke was the author of the thesis of the “Great Moderation”. He claimed that the inflation dragon had been slayed and the central bank, through its adjustment of interest rates, could bring stability to financial markets. In 2007, when problems began to emerge in the sub-prime housing market Bernanke ruled out any wider effects. “We believe the effect of the troubles in the sub-prime sector on the broader housing markets will be limited and we do not expect significant spill-overs from the sub-prime market to the rest of the economy or to the financial system,” he said in March of that year.

However, it is worth mentioning here that sub-prime was no aberration or ‘irrational exuberance’ as the bourgeois experts tell us. Sub-prime is an old usurious modus operandi of criminal nature to rob poor working class, those who are ignorant of the tricks of financial markets. Sub-prime loans especially the home loans have long been advanced in US in a way that these could never be repaid. As soon as the default happens, the home is repossessed, painted over and resold with another sub-prime home loan to another unsuspecting poor family. We can’t go into details of it here. But great socialist writer Upton Sinclair, in his famous novel ‘Jungle’, described the tragic consequences of this very brutal operation in early 20th century Chicago, the same city as that of Milton Friedman, of Chicago School. The story had shaken the conscience of US society in early 20th century. But neoliberal US of 21st century repeated that very cruel and inhumane modus operandi.

Despite denials by Bernanke, the crisis ripped through the financial system, just a year and a half later, because the methods used to reap profits in the sub-prime market, often of a criminal character, were employed in all areas of the financial system. Bernanke, supposedly the chief guardian of financial stability, with a vast array of data and computers analysis available to him and his staff, either did not comprehend its significance or chose to ignore it. When the crisis erupted and Lehman Brothers collapsed, the Fed rushed into action to save Wall Street through a humongous ‘Quantitative Easing’ programme of several trillion USD. Several banks became dependent on public but remained privately owned. It was socialism for capitalists, but capitalism for workers. Not a single executive was punished. Most were rewarded with huge bonuses and pensions.

Bernanke’s rescue operation for Wall Street had major and deadly consequences.

Close to 10 million workers lost their jobs and 3.1 million lost their homes. Huge numbers were pushed below the poverty line. The abatement of the crisis led to what has been characterised as the longest period of growth in American history. But it was growth for the stock markets and the financial speculators not the mass of the population. Wall Street soared and company profits rose, while inequality deepened, spending on education and other social services was cut, real wages stagnated and workers struggled to get back on their feet, sometimes taking years, after being made unemployed in the aftermath of the crisis. The effect on the working class continue to push then down even now.

Bernanke has been awarded for putting forward the idea that in an economic crisis the State should use its monetary policy and resources to rescue bankrupt finance capital and shift the entire burden of this on the working class. Therefore, Bernanke’s ‘foundational research’ is of great service to the capitalist class in this period of almost unending economic crisis. He has been rewarded with Nobel for it. Obama received the peace prize as he steered the US ever more directly on the road to war. Bernanke has received the Economics prize as the measures he initiated have laid the conditions for a collapse going even beyond that of 2008.