## Thursday, August 27, 2009

### From ivory tower to ground zero

I have a column in Financial Express today about Ben Bernanke, titled From ivory tower to ground zero.

1. Dear Sir,
Your concluding comments in the column in Financial Express "From ivory tower to ground zero" are neither thoughtful nor factual. The observation that people like
Bernanke, Summers, and Mervyn King do not man key policy functions is inaccurate insofar as the present set of policy makers are concerned. Prime Minister Manmohan Singh; Planning Commission Deputy Chairman Montek Ahluwalia and Chairman of PM's Economic Advisory Council C. Rangarajan came out of academics. Regarding the wisdom of Bernanke,Paulson et. al and their comparision with Indian policy makers; I am not sure that you have enough evidence to rate one over another.

2. Here is an example, of the academic contribution of Ben Bernanke. The number of citations is a measure of influence. Sadly, there are no economists in India in this league.

3. I second Prof Shah and couldn't agree more...

@Rajendra:

Bernanke is ranked at 37th position among the 50 most published economists in the world according to IDEAS/RePEc.

In addition to scholar.google.com output pointed out by Prof Shah, kindly have a look at:

Top 5% Authors, as of July 2009 @ideas.repec.org

Our very own Prof Raghuram Rajan is at rank 51 on that list with a lot of thought and time left in him, to easily reach top 50 by breaching the cusp.

No wonder, he is advisor to Indian PM

India PM appoints ex-IMF chief economist as adviser

We are way away but not quite astray yet requiring a hundred small steps, as they say...

Check out Raghuram Committee report

CFSR Report

We will strive and arrive in due course...

Best,
Manu Bhat

4. Handling the crisis is one thing. But, why did Ben with all his wisdom fail to anticipate the problems as compared to some other economists (and yes there were a few - I don't agree with the view that no one saw the crisis coming)?

Shouldn't the Fed been able to evaluate the riskiness of the finance industry and the high levels of debt in the private and domestic sector? Should there have been proactive policies by the Fed (or should the Fed have been vocally critical to start with) to limit debt in the economy and rein in the banks?

Ben has a lot of intellectual firepower but I speculate that he did not understand today's financial industry and neither did he look at debt/leverage as risks of a deflationary cycle. He did get educated real fast in how the finance industry works but only over the last year. This also speaks to the initial lack of expertise in the Fed and the flaws of a Fed with primarily academic credentials.

Was it the case that Ben after joining the Fed continued to live in his ivory tower until the crisis hit? Couldn't the Fed have done better pre-crisis?

Ben is now pushing for the Fed mandate to include consumer protection - that seems to be an unwarranted increase in bureaucratic powers of the Fed.

5. I would say that the comparison is out of place. US symbolizes global competition pretty much in every field.

Being the best in India (or for that matter any other country) and being the best globally are different ball games.

1. Why would a person as talented as Paulson work in the Indian financial industry?

Which financial firm pays $40-$50 million? None.

There is a big difference between heading Goldman in India and heading it globally.

Arguably, Vikram Pandit is a person of comparable stature and he heads up Citi globally.

Such talent in India would go into other areas where the reward is commensurate - may be setting up a world class business and profiting in the process.

2. Similarly, being a full prof. at the University of Chicago is being in a different league. There is no comparison at all.

Raghuram Rajan is an Indian, but he is not a prof. at DSE/JNU etc.

3. The power, stature and responsibility of the Fed Chairman far exceeds that of the RBI gov.

6. Anonymous,

There are good reasons why you don't find a finance CEO like Hank Paulson in India, and why you don't find academic economists like Ben Bernanke in India.

My limited point is: it's dangerous to be a trillion dollar fast-growing fast-globalising economy, and leave such problems festering. We have to diagnose these problems and solve them.

7. My limited point is that there is no problem. This comparison is misplaced. What you are seeing is economics 101.

What a $13 trillion economy offers in form of rewards, a$1 trillion economy cannot.

And in a market economy, resources chase the highest reward.

If you see this as a problem, I would say that there is no solution in a market economy framework.

8. a nobel winner is lamenting at the state of Macroeconomics and the state of best of economics and Finance professors here
http://krugman.blogs.nytimes.com/2009/01/27/a-dark-age-of-macroeconomics-wonkish/

and Prof. Ajay shah is giving credit to macroeconomics and finance "Knowledge" For Bernanke's solutions.

Whom should we believe

9. We are way away but not quite astray yet requiring a hundred small steps, as they say...

I think, this was one line which gave me a flicker of hope, that we might be there.

@Anonymous:
I dont think you get the point, about Krugman. Even with the excellent idea ecosystem on macronomics, US is having, Krugman is lamenting. He will surely have a heartattack, when he sees the socialist curriculum of economics taught in our colleges.

10. Dr Shah,

What is the use of just giving a lipservice to Mr. Rajan, when the government is still weighing political ramifications(wait, didnt our Comrades leave the party?) of implementing Raghuram Rajan Report in its entirety??

I pity with him, he must be damn frustrated with the lacuna of our bureaucracy.

Capital Account Convertibility, Bank Reforms, etc etc etc. None of them are implemented or even give a lip service.

11. Dear Ajay,

Inflation targeting in James Galbraith's words is at best a case of innocent fraud. The interest rate elasticity of investment is low for the range of interest rates seen in the United States for the last so many years.

Inflation is low in countries like the US, purely because of competetion. Oil prices do not respond to rate hikes and neither do food prices. Real estate in the US is an exception though.

As far as Paulson is concerned, the TARP plan seems to have been decided on lottery - pick a number between $100B and$1T. In the end, the Wall Street got richer and the unemployment rate has zoomed.

Ben Bernanke may be given credit for the help in the Commercial Paper market but I guess nowhere else. The crisis at Wall Street could simply have been avoided with the help of FDIC. Quantitative Easing seems to be just a waste of time. Banks are not lending because consumers do not want them. Banks are never really constrained in lending. Look at Japan - the monetary operation was a waste of time. The people in BoJ knew that! Automatic Stabilizers through the fiscal channel however came to the rescue for Japan. As Krugman says (FF to the present)- deficits saved the world!

12. Friedman, Ben lay the blame on bad monetary policy for the depression.

There are other economists towing the Fisher/Minsky debt accumulation line and pointing to the fact that the US currently has more debt/GDP than 1929. They further argue that monetary policy with all the innovations is not effective in this condition.

The question I have is whether Greenspan and Ben's failure of recognizing debt increase and risks of deregulation in earlier years going to prove fatal (as per Minsky) or whether it can be fixed by monetary efforts as per Ben.

Isn't the jury still out on this and isn't it too early to grade Bernanke?

13. For all ye skeptics :-)

* Look back at the Great Depression. The guys running the shop were wise and well motivated. They made mistake upon mistake. You can either say they were fools or that their knowledge was inadequate.

* Now look at business cycles in the Western world pre-great-moderation (i.e. pre-1979). Lots of new Keynesian ideas, very bad outcomes.

* Now look at the great moderation. New macroeconomics surely mattered in this.

* And look at the responses to the Great Recession. Why did we handle this so much better than the mess that things were pre-1979?

14. Ajay,

In your article, you cite Bernanke and Gertler (1982). However, I don't see such a publication at repec for Gertler:

http://ideas.repec.org/e/pge11.html

Can you post the full citation?

15. I was wrong about the 1982 date. Here is a good broad reference in the field.

But my question is not on the response to the great recession but the policies that led to it.

Between the great moderation and great recession private debt/GDP in the US went from 100% of GDP to 300% of GDP (from 1980 to 2007). In particular it went from 175% to 300% from 2000 onwards.

What should policy have prescribed on that issue pre-crisis? Also, shadow banking and regulation were areas that were ignored even though Minsky (post-Keynesian) had clearly outlined the issues in the 1980s. I'm just not sure that Ben's (and Greenspan's) pre-crisis, post-2000 policies were good.

Look, GDP growth will float all levered boats. I still think it is early to judge Ben given the odds and his potential role pre-crisis.

How about Stephen Roach's arguments in the FT:
The case against Ben Bernanke

To quote him:
"It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor"

17. A lot of discussion is generated on the topic. A few observations:
1. Are academic contributions barometer of a policy maker's effectiveness? Prof. Shah's example seems to suggest that. I seriously doubt if we can draw such a conclusion. Mervyn King of Bank of England does not figure prominently in such lists and his predecessor Eddie George is a career central banker. Does this mean that they are have lesser capabilities than Bernanke and Summers? Further, going by the same yardstick can you say Greenspan is not as capable policy maker as Bernanke or Paulson? My intention is not to start a debate but to ask for a rethink on Mr. Ajay Shah's conclusion.
2. Mr Manu Bhat seconds Mr. Shah and quotes IDEAS / RePEC. The top slot on that list goes to Prof. Stiglitz who opined that if America had a central bank chief like YV Reddy, the US economy would not have been in such a mess.[ http://profit.ndtv.com/2008/12/22201518/US-lacked-Reddys-guidance-No.html ] The intention here is again not to start a debate but only bring in to perspective the usage of the list and correlating it with policy maker's effectiveness.
3. With regard to Prof. Raghuram Rajan, is there any assessment of effectiveness of his policy making and implementation skills as IMF Chief Economist? Does the present financial position and global influence of IMF indicate great policy making abilities of its staff?
My submission is only on two counts:
a. Even in India economists from academics are holding policy making positions. ( We cannot compare Manmohan Singh / Rangarajan with Bernanke / Summers and rate on above other as these policy makers are operating in different environments)
b. It is too early to conclusively judge Bernanke's effectiveness as Fed Chief. we are not really able to judge Greenspan till date so any assessment of Bernanke must wait.
Therefore, Prof. Shah's concluding comments in his column in Financial Express "From ivory tower to ground zero" could have been more thoughtful and factual.

18. thats very cute, comparing pre 1979 with post 1979 business cycles. very conveniently 1979 happens to be the time the chinese started entering the capitalist fold. india followed in 1991. the so called great moderation was solely because of the benefits of global trade expanding. it is a stretch to credit the moral hazard creating greenspan and bernanke -btw,he wasnt plucked from an ivory tower and put on the hot seat.he has been an understudy of g'span for a long time.plus his 'helicopter' comment is from 2002.not exactly wet behind the ears. he saw the housing bubble emerging -he either was in denial or refused to take blame for it,blaming it on the oh-so-efficient US system which needed to 'recycle' the savings 'glut' of those silly asians.

not only does this post reveal the hubris of the wonks/experts who claim to stand for free markets,it displays ignorance of the fact the only the austrians and postkeynsians had any clue amongst economists in foreseeing this crisis.
i would devise a 'did you see this coming' test to evaluate any wonk or ivorytowermerchant who wants to peddle snake oil .

re. paulson. err. do we really want a paulson in india?. the shameful daylight robbery in favor of goldman is known to everyone.why are you even trying to portray the role paulson played as positive.

and can we stop the bull about the fed's independence.the fed chman is appointed by the president -and i have never seen any other fed boss hiring a lobbysit(one that workd for enron!) to do his PR work.

19. Rajendra,

I am not saying that a sorted ranking by journal citations should be used to recruit people into the world of policy. It is indeed a different world. My limited point is that the solid grounding in the macroeconomics of the last 30 years was of essence in figuring out what to do in this crisis.

E.g. the top quality policy makers of Chile or South Korea or Brazil are not the topper by journal cites. But they're clearly people who have these kinds of skills. In India, that is not the case.

20. Dyslexic,

The date 1979 is August 1979, when Volcker became the chairman of the US Fed. In his Taylor rule, for the first time, the inflation coefficient became bigger than 1. This satisfied the requirement of the Taylor Principle that a properly structured central bank must have an inflation coefficient on its Taylor rule which is bigger than 1, for monetary policy to be stabilising.

See Clarida,Gali,Gertler who first found this. Note that their paper was in 2000. This knowledge is quite recent. This is why I keep emphasising _modern_ monetary economics as the toolbox worth learning. John Taylor's original paper was as recent as 1993, well after everyone running India had left grad school.

21. Well Geithner thinks the Chinese fund the US. Its exactly the opposite.

22. Ajay,

1. Bernanke's response to this crisis may have saved us from a great depression. One may consider this a triumph of modern macro and finance.

2. The fact that something like this happened in the first place, is indeed a failure of modern macro and finance.

So, yes, on the one hand, we are doing better than we did 70 years ago. On the other, there is still much that we don't understand.

That Indian policy makers do not include such talent, should such a situation develop in India is indeed worrisome.

23. Ajay:

You have talked about the Taylor Rule several times on your blog.

My question is how applicable is that concept to an economy such as India.

Blind application of frameworks without paying attention to the underlying assumptions can be more damaging than useful.

1. How do you define the equilibrium real rate for India?

2. How do you define output gap for India?

24. http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?ref=magazine&pagewanted=all

really gives an F to Macroeconomics instead of a B+

25. @Rajendra:

Rank # (fluctuates - see Stiglitz at #2 now) on ideas/repec lists apart, given the myriad issues and multiple analyses using hindsight rather than forsight, even amongst top 50 rankers; thinkers cannot singly and exclusively think exhaustively on these issues in all-inclusive manner with conclusive futureproof inferences.

But it shall remain of the most important barometer of academic measurement, which is undeniable and irrefutable !

A higher rank maintained can be sustained series of newer/builtup good points, or sheet of fleet-footed followers with citations. Of course, subject to sea changes in free falls and sudden rises as seen in recent times :-)

Dr. Reddy's policy can be now be called "eclectic pragmatism" or "passive conservatism", with hindsight analysis so nicely done by Dr. Stiglitz, who emphasised "would not have been in such a mess" and didn't say "could have avoided the mess" !

What is your take on the last sentence of your link article: "He is also of view that there was a need for a global regulatory authority." Is it politically feasible, strategically plausible, and financially viable ? What happens to IMF/BIS et al, then ?

Therein, I opine; lies the gray area of difference between sure foresight and comfortable hindsight, making allowances for lesser nos. and magnitude of the real crises; which Dr. Stiglitz meant in the deeper sense.

Conscience-keeper kind of economists like Stiglitz, Krugman chastise and cleanse their own profession. But Bernanke thought and did right both, on his hot seat during scorching times.

Off hot seat, armchair analyses by experts and amateurs are easier than the man in the moment at the helm of affairs; hence I side with Prof Ajay Shah, who is our very own conscience keeping Professor-at-large of market economics in India.

It is good to be skeptical, okay
to be critical but it is sad to be cynical about the healing of the global economic situation.

We know, this too shall pass away....

Cheers,
Manu Bhat

26. Dear Sir,

I remained very much worried after reading your article. Till date, my mind always used to remain disturbed that what will happen if India has a crisis like UK or USA and not having a King (Mervyn King) or a Jew (I am referring to Ben Bernanke and not Robert Rubin) to solve it. But reading the article "Europe’s bank needs nous as well as rigour" in the Financial Times, I live with no fear that we in India should have to worry a lot about it. After all, a person who has explored rough sea becomes an experienced sailor. Otherwise, MN Dastur, one of the most eminent metallurgical engineer of his own times would not have ran a consultancy company and LN Mittal, with no academic knowledge of engineering sciences would have build the world's largest steel company.

Thanks & Regards,
Sritanu

Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question.

LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.