Saturday, July 10, 2010

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?


BenL8 said...

There is too much private surplus in the economy. So much that the banks are co-delinquent in a 'securitization' mania that threatens to engulf the viable working world economy. I'm reading Peter Barnes Capitalism 3.0. Makes sense to me. I'm a little off focus, sorry.

Eleanor said...

Have you seen seen Galbraith's new article in Common Dreams: "...We need to create new, policy-focused financial institutions like the Reconstruction Finance Corporation to take over the role that the banks and capital markets have abandoned. Thus, as part of the reconstruction of the system, we need a national infrastructure bank, an energy-and-environment bank, a new Home Owners Loan Corporation, and a Gulf Coast Reconstruction Authority modeled on the Tennessee Valley Authority. To begin with." Sounds good to me.