My Grouchy Reaction to the 2022 Nobel
Fine with Diamond, Neutral with Dybvig, negative on Bernanke
I always preferred Diamond’s “Delegated Monitoring” piece to the Diamond-Dybvig piece. The way I summarize the microeconomics of banking, and of finance in general, is that households want to issue risky, long-term liabilities (take out a mortgage to buy a house, raise funds to start a business) while holding safe, short-term assets (money in a checking account). Financial intermediaries do the opposite. The intermediaries take advantage of scale and the law of large numbers (diverisification, which is the Diamond-Dybvig story as I read it), and comparative advantage in selection and monitoring (Diamond’s delegated monitoring). I have a chapter in Specialization and Trade that talks about this.
I think of Bernanke as being famous for saying that bank failures in the Great Depression caused relationships to disappear, which caused lending to decline. When First National Bank of Podunk goes bust, no one knows which farmers in Podunk are good credit or not.
During the financial crisis of 2008, the press said that Bernanke went for bank bailouts because of his work on the Great Depression. If so, then he did not read his own research the way I read it. Citigroup in 2008 was nothing like First National Bank of Podunk in 1932. Citigroup’s executives did not have personal knowledge of its customers. It was investing in mortgage securities and had no idea who the ultimate homebuyers were.
Bailouts of financial sector customers in 2008 was OK. Bailing out the shareholders was not. They were responsible for management not taking systemic rick into effect If not for regulators letting them do it). The Fed's error (Bernanke's error? Who knows what politics was going on inside the Fed?) was allowing a financial crisis from turning into a recession. ST interest rates did not go to even near zero until much later. QE, announced to be "whatever is necessary" not amounts limited in time and amount, should have begun in September 2018, not January 2019. TIPS inflation expectation should never have been allow to drop as far and as rapidly and to remain below target for as long as the did.
I was waiting all morning for this.