Young Ben Bernanke, Economist

In 1983, Ben Bernanke published an interesting article in which he proposed that the real service that banks perform is the development of long-term working relationships, which give them the informational wherewithal to allocate capital efficiently.

Bernanke, Ben S. 1983. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression” American Economic Review, 73: 3  (June): pp. 257-76.

He elaborated on this idea in:

Bernanke, Ben. 1993. “Credit in the Macroeconomy.” Federal Reserve Bank of New York Quarterly Review, 18: 1 (Spring): pp. 50-70.

Surprising, then that today Bernanke is so protective of a banking system dominated by firms that rely on fees and trading profits rather than the traditional function of banks, which was to take in deposits, which they supposedly doled out to the businesses that were potentially the most efficient users of that money based on their accumulated information.

Since then, banks have changed and so has Bernanke.  This new generation of banks perform no such service. Instead, they mostly dominate a zero-sum game in which come at the expense of others, who lack the same access to information and economies of scale.

Obviously, these large banks perform some services, which are of use. I have two questions.  Is it possible that another kind of financial provider could offer the same services with less risk?  Even more broadly, is it possible that these large banks in fact the economy was so much risk, that whatever services they may provide does not offset the damage is that they create?

4 comments so far

  1. Jurriaan Bendien on

    The “bottom line” is that the world gets less risk if people compete less, and cooperate more. If investment priorities shift from what makes the most money in the shortest time to what is actually good for people and their society, the level of risk is reduced. If capital markets are better regulated, risk is also reduced.

    But, actually, although the propaganda is about risk, the real concern is with the costs of insuring against risk. More funds than ever before are committed to the insurance against risk, and in that sense there is actually less risk than there was before. If risk makes money, of course people will talk about risk a lot.

    The main “risks” are uncontrolled greed and social disintegration, resulting out of the search for maximum yield in the shortest possible time.

  2. mperelman on

    In Manufacturing Discontent, I made the point that you can insure against risk only if those who sell insurance are themselves ensured against risk. Later, AIG proved my point.

    You are correct in your idea that none of this nonsense would occur in a cooperative society.

  3. Jurriaan Bendien on

    One way I have of thinking about the neoliberal “more market” era that began around 1980 with Reagan, is that it involved a redistribution of risk – less risk for the wealthy, and more risk for the have-nots.

    What else does the whittling away of social insurance provisions mean other than that workers face more risk than they did before? The paradox is that the lucrative business of insuring capital against risk actually ended up creating more risks for everybody! The discussion about risk becomes somewhat ludicrous at times. Trichet remarked “The root cause of the crisis was a widespread undervaluation of risk. This included an underpricing of the unit of risk and an underassessment of the quantity of risk that financial operators took upon themselves.” – Jean-Claude Trichet, “Macroeconomic policy is essential to stability”, ”Financial Times”, November 12 2008.

    You might well ask, what is a “unit of risk”? It is a bit like a “util” in marginal utility theory, a unit of measurement which does not exist!

    According to the Stanford Encyclopedia of Philosophy,

    “When there is a risk, there must be something that is unknown or that has an unknown outcome. Therefore, knowledge about risk is knowledge about lack of knowledge. This combination of knowledge and lack thereof contributes to making issues of risk complicated from an epistemological point of view.”

    The question then is, why are there these “unknowns”? Are they a physical reality, or are they the product of a social-institutional framework which blocks us from obtaining the relevant knowledge?

  4. mperelman on

    Economists distinguish between risk and uncertainty. Someone who rolls dice encounters risk. Someone who tries something entirely new or which depends upon the unpredictable actions of others encounters uncertainty.

    My book Manufacturing Discontent spent a lot of time dealing with the redistribution of risk from the rich to the poor.

    The Confiscation of American Prosperity dealt with the redistribution of wealth and income.

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