tag:theconversation.com,2011:/au/topics/ben-bernanke-253/articlesBen Bernanke – The Conversation2022-10-10T15:01:56Ztag:theconversation.com,2011:article/1922082022-10-10T15:01:56Z2022-10-10T15:01:56ZNobel economics prize: insights into financial contagion changed how central banks react during a crisis<figure><img src="https://images.theconversation.com/files/488978/original/file-20221010-23-ejiz6q.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Left to right: Ben Bernanke, Douglas Diamond and Philip Dybvig. </span> <span class="attribution"><a class="source" href="https://www.nobelprize.org/prizes/economic-sciences/2022/press-release/">The Nobel Foundation</a></span></figcaption></figure><p><em>This year’s <a href="https://www.nobelprize.org/prizes/economic-sciences/2022/prize-announcement/">Nobel prize in economics</a>, known as the Sveriges Riksbank Prize in Economic Sciences, has gone to Douglas Diamond, Philip Dybvig and former Federal Reserve Chair Ben Bernanke for their work on banks and how they relate to financial crises.</em> </p>
<p><em>To explain the work and why it matters, we talked to Elena Carletti, a Professor of Finance at Bocconi University in Milan.</em></p>
<p><strong>Why have Diamond, Bernanke and Dybvig been awarded the prize?</strong></p>
<p>The works by <a href="https://www.nobelprize.org/uploads/2022/10/popular-economicsciencesprize2022.pdf">Diamond and Dybvig</a> essentially explained why banks exist and the role they play in the economy by channelling savings from individuals into productive investments. Essentially, banks play two roles. On the one hand, they monitor borrowers within the economy. On the other, they provide liquidity to individuals, who don’t know what they will need to buy in future, and this can make them averse to depositing money in case it’s not available when they need it. Banks smooth out this aversion by providing us with the assurance that we will be able to take out our money when it’s required.</p>
<p>The problem is that by providing this assurance, banks are also vulnerable to crises even at times when their finances are healthy. This occurs when individual depositors worry that many other depositors are removing their money from the bank. This then gives them an incentive to remove money themselves, which can lead to a panic that causes a bank run. </p>
<p>Ben Bernanke fed into this by looking at bank behaviour during the great depression of the 1930s, and showed that bank runs during the depression was the decisive factor in making the crisis longer and deeper than it otherwise would have been. </p>
<p><strong>The observations behind the Nobel win seem fairly straightforward compared to previous years. Why are they so important?</strong></p>
<p>It’s the idea that banks that are otherwise financially sound can nevertheless be vulnerable because of panicking depositors. Or, in cases such as during the global financial crisis of 2007-09, it can be a combination of the two, where there is a problem with a bank’s fundamentals but it is exacerbated by panic. </p>
<p>Having recognised the intrinsic vulnerability of healthy banks, it was then possible to start thinking about policies to alleviate that risk, such as depositor insurance and reassuring everyone that the central bank will step in as the lender of last resort. </p>
<p>In a bank run caused by liquidity (panic) rather than insolvency, an announcement from the government or central bank is likely to be enough to solve the problem on its own – often without the need for any deposit insurance even being paid out. On the other hand, in a banking crisis caused by insolvency, that’s when you need to pump in money to rescue the institution. </p>
<p><strong>What was the consensus about bank runs before Diamond and Dybvig began publishing their work?</strong></p>
<p>There had been a lot of bank runs in the past and it was understood that financial crises were linked to them – particularly before the US Federal Reserve was founded in 1913. It was understood that bank runs made financial crises longer by exacerbating them. But the mechanism causing the bank runs wasn’t well understood. </p>
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<a href="https://images.theconversation.com/files/489027/original/file-20221010-11-on0vn4.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Police controlling an angry crowd during a Paris bank in 1904" src="https://images.theconversation.com/files/489027/original/file-20221010-11-on0vn4.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/489027/original/file-20221010-11-on0vn4.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/489027/original/file-20221010-11-on0vn4.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/489027/original/file-20221010-11-on0vn4.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/489027/original/file-20221010-11-on0vn4.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/489027/original/file-20221010-11-on0vn4.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/489027/original/file-20221010-11-on0vn4.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A bank run in Paris in 1904.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/paris-police-hold-back-crowd-making-242294071">Everett Collection</a></span>
</figcaption>
</figure>
<p><strong>How easy is it to tell what kind of bank run you are dealing with?</strong></p>
<p>It’s not always easy. For example, in 2008 in Ireland it was thought to be a classic example of bank runs caused by liquidity fears. The state stepped up to give a blanket guarantee to creditors, but it then became apparent that the banks were really insolvent and the government had to inject enormous amounts of money into them, which led to a sovereign debt crisis. </p>
<p>Speaking of sovereign debt crises, the work by Diamond and Dybvig also underpins the literature on financial contagion, which is based on a <a href="https://www.jstor.org/stable/10.1086/262109">2000 paper</a> by Franklin Allen and Douglas Gale. I worked with Allen and Gale for many years, and all our papers have been based on the work of Diamond, and Diamond and Dybvig. </p>
<p>In a similar way to how state reassurances can defuse a bank run caused by liquidity problems, we saw how the then European Central Bank President Mario Draghi was able to defuse the run on government bonds in the eurozone crisis in 2011 by saying that the bank would do “<a href="https://qz.com/1038954/whatever-it-takes-five-years-ago-today-mario-draghi-saved-the-euro-with-a-momentous-speech/">whatever it takes</a>” to preserve the euro. </p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/tB2CM2ngpQg?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
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<p><strong>The prize announcement has attracted plenty of people on social media saying we shouldn’t be celebrating Bernanke when he was so involved in the quantitative easing (QE) that has helped to cause today’s global financial problems – what’s your view?</strong></p>
<p>I would say that without QE our problems would today be much worse, but also that the prize recognises his achievements as an academic and not as chair of the Fed. Also, Bernanke was only one of the numerous central bankers who resorted to QE after 2008. </p>
<p>And it is not only the central bank actions that make banks stable. It’s also worth pointing out that the changes to the rules around the amount of capital that banks have to hold after 2008 have made the financial system much better protected against bank runs than it was beforehand. </p>
<p><strong>Should such rules have been introduced when the academics first explained the risks around bank runs and contagion?</strong></p>
<p>The literature had certainly hinted at these risks, but regulation-wise, we had to wait until after the global financial crisis to see <a href="https://www.ecb.europa.eu/pub/pdf/fsr/art/ecb.fsrart201405_03.en.pdf">reforms such as</a> macro-prudential regulation and more stringent micro-prudential regulation. This shows that regulators were underestimating the risk of financial crises, perhaps also pushed by the banking lobbies that had been traditionally very powerful and managed to convince regulators that risks were well managed. </p>
<p><strong>If retail banks become less important in future because of blockchain technology or central bank digital currencies, do you think the threat of financial panic will reduce?</strong></p>
<p>If we are heading for a situation where depositors put their money into central banks rather than retail banks, that would diminish the role of retail banking, but I think we are far from that. Central bank digital currencies can be designed in such a way that retail banks are still necessary. But either way, the insights from Diamond and Dybvig about liquidity panics are still relevant because they apply to any context where coordination failures among investors are important, such as sovereign debt crises, currency attacks and so on.</p><img src="https://counter.theconversation.com/content/192208/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elena Carletti does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Until Diamond and Dybvig published key papers in the early 1980s, it wasn’t well understood that perfectly healthy banks could be brought down by panicking depositors.Elena Carletti, Professor of Finance, Bocconi UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/222402014-01-28T03:07:07Z2014-01-28T03:07:07ZMarkets watch as Bernanke hands over to Yellen<figure><img src="https://images.theconversation.com/files/39755/original/rfm87dj7-1390455805.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4096%2C2732&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Incoming US Federal Reserve chair Janet Yellen must choose whether to further taper the quantitative easing program.</span> <span class="attribution"><span class="source">EPA/Jim Lo Scalzo</span></span></figcaption></figure><p>Ben Bernanke prepares to vacate his seat as Chairman of the US Federal Reserve on Friday, making way for for Janet Yellen, <a href="http://www.smh.com.au/business/world-business/imf-sees-higher-global-growth-warns-on-deflation-20140122-317j4.html">just as the developed economies finally seem to be coming right</a>. </p>
<p>Yellen’s impact on the global economy will come from decisions about monetary policy – specifically the Fed’s quantitative easing program – which will be felt around the world. Markets are <a href="http://www.smh.com.au/business/markets/turmoil-explained-why-emerging-markets-are-melting-down-20140128-31jpp.html">already jittery</a>.</p>
<p>The Fed holds more than US$3.2 trillion in mortgage-backed securities and US treasuries, mostly purchased under its quantitative easing program introduced to stimulate the economy by massaging medium and long-term interest rates lower.</p>
<p>Already, the reaction of financial markets to this initial cut to the quantitative easing program has been to push yields on long-term treasuries higher. Share markets initially increased in a surprise following this announcement. </p>
<p>But financial markets turned last Friday, falling in anticipation of Bernanke’s final Federal Open Market Committee this week, where a decision to taper further could be taken. </p>
<p>This will be the first regularly scheduled meeting of the year, in which the membership of the committee and potential positions are decided. Economists expect a further decrease of US$10 billion in asset purchases.</p>
<h2>Strong growth forcasts</h2>
<p>The International Monetary Fund and the World Bank have <a href="http://www.imf.org/external/pubs/ft/weo/2014/update/01/index.htm">forecast global growth at a healthy 3.2% to 3.7% for 2014</a>. It is the first time in two years that the IMF has raised its global growth forecast. </p>
<p>In particular, those countries that experienced the most severe economic impact during and after the global financial crisis – the US, the UK and nations in southern Europe – now have better outlooks.</p>
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<a href="https://images.theconversation.com/files/39845/original/c4p3dn4w-1390538559.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/39845/original/c4p3dn4w-1390538559.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/39845/original/c4p3dn4w-1390538559.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=356&fit=crop&dpr=1 600w, https://images.theconversation.com/files/39845/original/c4p3dn4w-1390538559.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=356&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/39845/original/c4p3dn4w-1390538559.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=356&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/39845/original/c4p3dn4w-1390538559.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=447&fit=crop&dpr=1 754w, https://images.theconversation.com/files/39845/original/c4p3dn4w-1390538559.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=447&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/39845/original/c4p3dn4w-1390538559.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=447&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Annual economic growth (%) for selected countries (2014 and 2015 figures are projections).</span>
<span class="attribution"><span class="source">International Monetary Fund</span></span>
</figcaption>
</figure>
<p>But that positive scenario isn’t without risks. The IMF also cautioned central banks in the improving economies against lifting interest rates – or decreasing money supply – too soon as their economies return to stronger growth, for fear modest inflation could turn into deflation. </p>
<p>The stark increase in money supply, in response to the global financial crisis, in key economies hasn’t resulted in the <a href="http://business.time.com/2013/09/18/taper-tantrums-3-myths-about-quantitative-easing/">asset value increases that economic theory might predict</a>. </p>
<p>So, lifting interest rates and decreasing money supply could result in falling asset values – which would be a problem for borrowers and could result in another peak of credit defaults, triggering an economic downturn.</p>
<p>Country-specific issues, like a moderation of growth in China, could exacerbate these problems. The IMF concludes that countries shouldn’t increase interest rates and slow down quantitative easing programs for now.</p>
<h2>Time to taper?</h2>
<p>That puts Yellen in the spotlight in coming months. Bernanke has <a href="http://www.marketwatch.com/story/fed-tapered-as-it-saw-qe-benefits-slip-over-time-2014-01-08">already taken the first step</a> in slowing down the Federal Reserve’s asset purchase program, reducing its monthly security purchases by US$10 billion to a still large US$75 billion.</p>
<p>Yellen is expected to re-balance the Fed’s position given new economic information and continue to increase the transparency of its monetary decisions. Certainly, the current policies of the Federal Reserve Bank have the <a href="https://theconversation.com/explainer-what-us-fed-tapering-means-for-markets-21639">potential to destabilise the US economy and result in either deflation or inflation</a>. Will Yellen act and take the tough decisions? </p>
<p>Yellen could continue to decrease asset purchases, which will lead to higher US treasury yields, with follow-on effects in other countries. The mere expectation of a reduction this week has <a href="http://www.bloomberg.com/news/2014-01-23/brics-nations-warn-of-volatility-as-u-s-fed-begins-tapering.html">already led to declines of currency values and net investment outflows in emerging markets</a>. Tapering may exacerbate other challenges these countries face, like political and economic uncertainty in Argentina, Ukraine, Turkey and Thailand.</p>
<p>However, Yellen has expressed concerns about US unemployment, <a href="https://www.google.com.au/publicdata/explore?ds=z1ebjpgk2654c1_&met_y=unemployment_rate&hl=en&dl=en&idim=country:US&fdim_y=seasonality:S#!ctype=l&strail=false&bcs=d&nselm=h&met_y=unemployment_rate&fdim_y=seasonality:S&scale_y=lin&ind_y=false&rdim=country&idim=country:US&ifdim=country&tstart=1022162400000&tend=1382533200000&hl=en_US&dl=en&ind=false">which remains relatively high</a>. The IMF warnings support this concern, which means it is possible that Yellen may continue the quantitative easing program for longer than was expected. In this scenario, the US monetary policy may change little and continue to support global growth.</p>
<h2>Where will Australia head?</h2>
<p>What may matter most for Australia is economic growth in Asia, in particular the growth of its key trading partner China. China has recently announced an economy growth of 7.7% in 2013, relatively low compared to the past. Economists expect the growth in China and some of its neighbours to <a href="http://www.bloomberg.com/news/2014-01-25/asian-stocks-drop-fourth-week-amid-china-growth-slowdown-concern.html">decelerate further</a>.</p>
<p>China has now reached a higher level of wealth and the question is whether it will be able to maintain the sort of economic growth seen in recent years. This may require an increase in domestic consumption, and the development of innovative products.</p>
<p>Unlike other developed countries, Australia has avoided the recent financial crisis, public debt levels are low, other trade partners are geographically diversified, and the Reserve Bank of Australia has a variety of options to conduct monetary policy and support the economy. Whether this proves to be sufficient to deal with the potential challenges from the Asia region that may arise, remains to be seen.</p><img src="https://counter.theconversation.com/content/22240/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harry Scheule does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ben Bernanke prepares to vacate his seat as Chairman of the US Federal Reserve on Friday, making way for for Janet Yellen, just as the developed economies finally seem to be coming right. Yellen’s impact…Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/171532013-08-27T20:27:35Z2013-08-27T20:27:35ZWalking the line on GFC times<figure><img src="https://images.theconversation.com/files/29411/original/py4khqqf-1376632952.jpg?ixlib=rb-1.1.0&rect=17%2C0%2C3981%2C2616&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Fabrice Tourre, a former trader for Goldman Sachs, walks out of the United States Federal Court after being found liable for defrauding investors.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Echoes of the Global Financial Crisis resonate while debate continues on the best way of dealing with its consequences, including the actions taken by the Europeans and Americans to counter its effects. Last week’s <em>The Economist</em> contained two articles, adjacent to each other, that reflect this: one was on the conviction of Fabrice “Fabulous Fab” Tourre, an executive at Goldman Sachs, found guilty of six counts of securities fraud, including one of “aiding and abetting” his former employer. The other is sparked by <a href="https://theconversation.com/who-will-be-next-to-head-the-fed-16397">debate over the best person to replace Ben Bernanke</a> as chair of the US Federal Reserve: Larry Summers or Janet Yellen.</p>
<p>These events, their connection with the GFC past and their implications for the future evolution of international economic conditions, can be better understood by reference to a timeline I have <a href="http://royalsoc.org.au/generator/assets/journal/J_Proc_RSNSW_Vol_146_1_Nos_447_448_Marks.pdf">recently published</a>. This stretches from the South Sea Bubble of 1720 to the present (or, at any rate, to March 2013 when the Cypriot euro lost its convertibility with euros from any other “eurozone” country). I began compiling this timeline at the height of the Global Financial Crisis, in October 2008, when I realised that events were occurring too fast for me to remember accurately, and that the crisis was the biggest disruption to world credit markets and the economies of the advanced nations since the Great Depression of the 1930s.</p>
<h2>Creating a timeline</h2>
<p>For over four years, I recorded those “breaking” events I deemed significant to understanding the scope of the crisis and its antecedents. I also scoured the news media and academic journals for earlier events and decisions that might now be seen as significant forerunners of the crisis, such as calls for the US to repeal the laws that had kept US merchant banks and retail banks separate since the 1930s. I read the investigative reports in <em>The New York Times</em>, <em>The Economist</em>, and <em>The Wall Street Journal</em>, as well as minutes of the deliberations of the US Federal Reserve, when they became public.</p>
<p>Is it possible to distinguish those events that were sufficient for the GFC to occur (that is, those events that occurred before the GFC, which were correlated with the GFC, and which perhaps influenced it) and those events that were necessary for the GFC to have occurred (that is, those events without which the GFC would not have occurred)? This is one of the purposes of the timeline, which makes such analysis possible.</p>
<p>In the timeline paper, I conclude that three conditions were necessary for the financial crisis in the US, which, in turn, resulted in the GFC: </p>
<ul>
<li>First, the repeal on November 12, 1999, of the Glass-Steagall Act (which led to a vast increase in the market dominance of the major banks) </li>
<li>Second, the Congressional decision of 2000 that explicitly exempted derivatives from government regulation</li>
<li>Third, the US Security and Exchange Commission 2004 decision to relax the capital adequacy of Wall Street banks (which allowed them to expand their leverage threefold or more).</li>
</ul>
<hr>
<p><strong>Read Robert’s timeline of the global financial crisis <a href="http://www.agsm.edu.au/bobm/papers/marksfinal.pdf">here</a></strong>.</p>
<hr>
<h2>Milestone moments</h2>
<p>But what of the past week’s news items? Tourre appears in the timeline four times: twice in early 2007, once in late 2007, and once in July 2010 (when Goldman Sachs paid $550 million as a penalty). The US Securities and Exchange Commission charged Tourre in April 2010 and found him guilty on six of seven counts of securities fraud in August 2013. He is the first, and perhaps only, Wall Street banker to be found guilty of any charges having to do with the GFC. But he is small fry: others survive and prosper. (On September 15 it will be five years since the collapse of Lehman Brothers, an event that triggered the GFC; for many potential offences the statute of limitations will then apply.)</p>
<p>While Tourre is obscure, Summers is a high-profile academic and government official: the nephew of two economics Nobel Laureates, he has worked for presidents Reagan, Clinton and Obama; he was chief economist at the World Bank and later president of Harvard. He argued strongly for repeal of parts of the Glass-Steagall Act and against the regulation of the trade in derivatives. </p>
<p>He was one of a group who dismissed the prescient 2005 warning of ex-IMF chief economist Raghuram Rajan (who has just been appointed head of the Reserve Bank of India) that financial innovation had made the world riskier. Summers appears in July 1998, in February and November 1999 (when his lobbying to repeal the Glass-Steagall Act succeeded), in 2008 and in 2009.</p>
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<img alt="" src="https://images.theconversation.com/files/29735/original/dtrnz3wj-1377145807.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/29735/original/dtrnz3wj-1377145807.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/29735/original/dtrnz3wj-1377145807.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/29735/original/dtrnz3wj-1377145807.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/29735/original/dtrnz3wj-1377145807.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/29735/original/dtrnz3wj-1377145807.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/29735/original/dtrnz3wj-1377145807.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The debate over who will replace US Federal Reserve chairman Ben Bernanke echoes the global financial crisis.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>Yellen is married to an economics Nobel Laureate. She is Vice Chairwoman of the US Federal Reserve, was previously the president and CEO of the San Francisco Fed, and worked for president Clinton. She appears three times in 2006 (as the San Francisco Fed president in the Fed’s Open Market Committee meetings), discussing the adverse consequence of a downturn in the US housing market, which she underestimated. She would be the first female head of the Fed and appears eminently qualified for the job.</p>
<p>Yellen has been the subject of a strong campaign in <em>The Wall Street Journal</em> and elsewhere, some of it quite sexist, against the possibility of President Obama appointing her as Bernanke’s replacement. (Any appointment would still need to be ratified by the Senate.) Summers is apparently high on President Obama’s list as a replacement, but he has been the subject of criticism in left-wing publications (<em>The Huffington Post</em>, <em>The Guardian</em>) as well as a petition by 20 Democrat Senators who prefer another Fed chair. Even Bette Midler has tweeted against his appointment, although whether this will help or hinder his chances remains to be seen.</p>
<p>President Obama might nominate Summers, Yellen, or perhaps a third person to replace Bernanke. If the eventual replacement was influential in the GFC, the reader can learn more about him or her from the timeline, as amended. The timeline is also following the evolution of institutions and banks in Europe: will <a href="https://theconversation.com/good-news-from-the-eurozone-or-is-it-17200">the Eurozone</a> survive intact, or is Cyprus the first splinter? Again, time will tell - and the timeline might foretell.</p>
<h2>The value of a good timeline</h2>
<p>The value of a good timeline is that it can identify and list events that did not appear significant at the time, but with the wisdom of hindsight are judged by the timeline’s compiler as very important, even crucial. In doing this, the timeline can help the reader look for other minor events that in time might be seen as important in understanding future occurrences: the reader learns to be more sensitive to the possibility of events helping to forecast future outcomes.</p>
<p>While the media often focus on personalities, small changes in laws, regulations or routines can be equally or more significant. As I have compiled this timeline, I have tried to include such events, both current and past. Since other events might exist that are not yet public, or not yet obviously significant, I continue to <a href="http://www.agsm.edu.au/bobm/papers/marksfinal.pdf">update the timeline</a>. Suggestions are welcome.</p><img src="https://counter.theconversation.com/content/17153/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Marks does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Echoes of the Global Financial Crisis resonate while debate continues on the best way of dealing with its consequences, including the actions taken by the Europeans and Americans to counter its effects…Robert Marks, Professorial Fellow, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/153862013-06-21T04:21:36Z2013-06-21T04:21:36ZReasons why we should expect a lower Australian dollar<figure><img src="https://images.theconversation.com/files/25951/original/hfj83rjb-1371771862.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Global markets have experienced sharp sell-down off fears of a wind-down in US quantitative easing.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The response to US Federal Reserve Ben Bernanke’s comments about the possibility of ending its policy of <a href="http://www.abc.net.au/news/2012-09-14/what-do-you-want-to-know-about-quantitative-easing/4260828">quantitatitive easing</a> has helped evoke a <a href="http://www.guardian.co.uk/business/2013/jun/20/stock-markets-violent-sell-off">global sell-off</a> as markets question his upbeat assessment of the US economy and express concern about a withdrawal of cheap money. </p>
<p>Weaker manufacturing figures from China have also helped send the Australian dollar below 92 US cents, its lowest level in nearly three years. </p>
<p>Professor Geoffrey Garrett, Dean of the Australian School of Business at the University of New South Wales, outlines four reasons why we might expect a lower Australian dollar in the future. </p>
<hr>
<h2>Reason 1: Money will get more more expensive in the US the better the economy does</h2>
<p>Bernanke’s announcement indicates that the US is going to try to return over the next 12 months to more “normal” monetary policy. “Quantitative easing”, the Fed’s large bond buying program, has made money even cheaper than the near zero interest rates the Fed has set for several years. The fact that the market has reacted so negatively to an ending of QE tells you that there are lots of investors in the US who believe that the big run-up on the Dow Jones is a function of very cheap money, not improved fundamentals in the US economy. Any signal that the near free money’s going away will have a negative impact on Wall Street.</p>
<p>The headline unemployment rate in the US has been coming down, slowly but steadily, for a long time and will probably continue to do so. But I think the important thing to remember is that the standard unemployment rate is not as useful as it used to be because a lot of people are still counted as “employed” – that is, not showing up on the “unemployed” statistics – even if they’ve been moved from full-time work to part-time work involuntarily. </p>
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<figcaption>
<span class="caption">Ben Bernanke is upbeat.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>But even at 6.5% - which Bernanke has used as the trigger for a return to normal monetary policy - two things would be true. First, that’s a much higher equilibrium unemployment rate than the US has had in the past. The old figure used to be about 4.5%, so the US is going to be living with structurally higher unemployment now. Second, as I said, even at 6.5%, the number would conceal the fact that a lot of people want to be working full-time but only have part-time work. </p>
<p>What that tells us is that since the GFC American firms have figured out that they can make money employing fewer Americans than they used to. They’re outsourcing more to Asia and using technology more to reduce labour costs. So higher unemployment is going to be a big social challenge in the US, even when the conventional macroeconomic statistics look good.</p>
<p>So when Bernanke says “the economy’s doing well so we can think about returning to normal monetary policy”, the markets say, “Oh my god, free money’s going away. We’d better pull back”.</p>
<h2>Reason 2: A slowing Australian economy means lower interest rates here</h2>
<p>If and when US monetary policy returns to more normal, the interest rate differential between Australia and the US will go down.</p>
<p>In the past few years foreign investors have moved money into the Australian dollar because they can get a higher interest rate on lending than they can in the US. So if the interest rate differential goes down because money becomes a bit more expensive in the US, people who are lending money in the US will get higher rates of return, and money will flow out of the Australian dollar, lowering the exchange rate. </p>
<p>The less incentive people have to park their money in Australian dollars, the lower the dollar will go.</p>
<p>On the other side of the interest rate equation, the Australian economy is slowing down. That is why the Reserve Bank has lowered interest rates here. This also reduces the difference between US and Australian interest rates, again putting downward pressure on the Aussie dollar.</p>
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<figcaption>
<span class="caption">Natural gas prices are expected to drop.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>So there are two financial drivers pushing down the A-dollar: cheaper money in Australia and more expensive money in the US. </p>
<h2>Reason 3: America’s shale gas booms means a lower Australian dollar</h2>
<p>But there are also two structural reasons for a lower Australian dollar. The first structural one is lower commodity prices. We know about iron-ore and coal, but the biggest story going forward is natural gas.</p>
<p>All of that investment in Australian natural gas in Queensland and Western Australia was predicated on a pretty high global price for natural gas, which Australia is now going to export in huge quantities over the next decade.</p>
<p>The problem for Australia is that natural gas prices are going down globally because the recent US shale gas revolution has just put a lot more gas on the world market. Demand for natural gas is high around the world. But there is now much more supply than when the Australian natural gas investment boom started. Just like lower iron ore prices, lower gas prices also reduce the value of the Australian dollar.</p>
<h2>Reason 4: China is slowing down and the Chinese government may not respond with more infrastructure stimulus</h2>
<p>And the last reason is China. We know that in an important respect, the global market has viewed the Australian dollar as a proxy for Chinese demand for raw materials. If China is slowing down in general, that is bad for the flobal economy. But if the Chinese government isn’t going to respond with another massive infrastructure spend, that is particuarly bad for Australia, and the Australian dollar.</p>
<p>China was hit harder than other countries by the GFC because its growth was so dependent on exports. The Chinese government responded with a massive program of lending and fiscal stimulus, focused on big infrastructure projects–new cities, new airports, new high speed rail networks. This all required steel, made from Australian iron ore and coking coal. Australia escaped the GFC and the dollar boomed - both because of what the Chinese government did.</p>
<p>Now China is slowing again, but it is just not clear that the government has the appetite for another massive infrastructure stimulus. That will slow Australian commodity exports and economic growth. It will also put downward pressure on the dollar.</p>
<p>So all four factors point to a lower Australian dollar. In fact a lot of people in the market have been thinking that there’s a new rate for the dollar. It’s not 105 cents to the greenback as it has been for the past few years. It will probably be closer to 85 cents. </p>
<p>Is that good or bad for Australia? I think the answer depends on whether the dollars decline is orderly and gradual or chaotic and rapid.</p>
<p>Say it’s orderly, and the Australian dollar gradually reaches an equilibrium of 85 cents – everyone’s happy because the problems associated with a high dollar will have been reduced. Australian exporters like Holden win, although people taking holidays or buying BMWs would not be. </p>
<p>The bad scenario is if the dollar plummets global financial markets might lose so much confidence in the dollar that they will stop lending Australia money, or at least charge much higher interest rates to do so. A disorderly, chaotic, uncertain decline of the dollar where you don’t know where the new floor would be, that’s a very bad news story. </p>
<p>But we don’t see evidence of that at the moment. Yes, the decline’s been appreciable in the last six weeks or so. But there is no reason to think we are facing anything like the dire conditions associated with the Asian financial crisis 15 years ago.</p><img src="https://counter.theconversation.com/content/15386/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Geoffrey Garrett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The response to US Federal Reserve Ben Bernanke’s comments about the possibility of ending its policy of quantitatitive easing has helped evoke a global sell-off as markets question his upbeat assessment…Geoffrey Garrett, Dean of the Australian School of Business, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/10082011-05-15T20:37:37Z2011-05-15T20:37:37ZIs Ben Bernanke giving Glenn Stevens a run for his money?<figure><img src="https://images.theconversation.com/files/1068/original/glennstevens.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There is economic reasoning behind Glenn Stevens's low public profile.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Late last month, Ben Bernanke held the <a href="http://www.nytimes.com/2011/04/28/business/economy/28fed.html?_r=1&scp=1&sq=a%20bernanke%20conference,%20a%20fed%20first&st=Search">first ever press conference</a> by a chairman of the US Federal Reserve Bank. </p>
<p>For more than an hour, he took questions about the Federal Open Market Committee’s decision to leave interest rates unchanged and commented on the economy in general. </p>
<p>In contrast, after this month’s Reserve Bank of Australia (RBA) board meeting, Governor Glenn Stevens released a <a href="http://www.rba.gov.au/media-releases/2011/mr-11-07.html">press statement</a> detailing the reasons behind the decision to leave interest rates on hold. </p>
<p>There was no media conference or any opportunity to ask questions in response to the statement. </p>
<p>This raises an obvious question: is the RBA sufficiently transparent? </p>
<p>The answer to this question is, of course, rather complicated.</p>
<h2>Measuring accountability </h2>
<p>The level of transparency at the RBA can be measured according to how well it communicates its goals, operations, and strategies to the public. </p>
<p>For example, we know that the RBA board meets on the first Tuesday of every month (except January) to decide if interest rates need to be changed. </p>
<p>The RBA informs the public of its decision with a media release at 2.30pm, and two weeks later the minutes of that meeting are released to the public. </p>
<p>Both these events are covered extensively by the media. </p>
<p>These are all hallmarks of being open and transparent, and the RBA has increased the level of transparency substantially since it took the first step by announcing changes in interest rates for the first time back in January 1990.</p>
<p>Today, the RBA is among the top 10 most transparent central banks in the world. </p>
<p>A recently published survey gave the RBA a score of nine out of 15 for transparency, based on 2006 data, ranking it at 14th in the world. </p>
<p>However, the RBA’s December 2007 move to publish the board’s minutes and announce the monetary policy decision on the meeting day should increase the RBA’s score to 11 out of 15 and put it the top 10, in line with the US Federal Reserve, European Central Bank and Bank of Canada. </p>
<p>In comparison, the Swedish and New Zealand central banks are the most transparent, with scores of 14.5 and 14, respectively, whereas the central banks of Yemen, Libya, Saudi Arabia, Bermuda and Aruba barely rate a score. </p>
<p>Among our neighbours the central banks of Indonesia rates an 8.5/15, Singapore 6.5/15 and China 4.5/15. </p>
<p>So in world terms, the Fed and the RBA are relatively similar and among the most open, with Bernanke and Stevens both being responsible for increasing the levels of transparency of their respective central banks.</p>
<h2>Opening the vaults</h2>
<p>Bernanke’s chairmanship has been characterised by increasing the access and opportunity the public has had to ask questions relating to the Fed’s policy directions.</p>
<p>Bernanke has appeared at plenty of congressional hearings, some town hall-style meetings, had a few television interviews, and given numerous public speeches where he takes questions from the audience. </p>
<p>However, taking questions directly from reporters directly after a policy meeting is certainly a new direction. </p>
<p>Likewise, Stevens’s governorship has also been characterised by a similar increase in access and transparency levels. His interview on Channel 7’s <em>Sunrise</em> is last year is a good example.</p>
<p>However, transparency is more than just the communication of information. </p>
<p>The RBA’s capacity to affect the economy depends on its ability to influence public expectations of future interest rates. </p>
<p>The public’s understanding and learning of current and future policies is critical for the effectiveness of monetary policy. Hence, any words spoken by the governor must be taken in this light.</p>
<p>Stevens’ _Sunrise _interview is better seen as the governor taking the opportunity to increase the public’s understanding of the RBA and how monetary policy will be implemented. </p>
<p>Stevens explained in the interview that the property market was what people should be worried about the most. The RBA then raised rates by 25 basis points in April and May, 2010. This left the public in no doubt that further increases in interest rates could be on the cards if house prices kept rising.</p>
<h2>Contrasting contexts</h2>
<p>How much transparency is required to communicate a credible signal on interest rates to the public also depends heavily on the characteristics and state of the economy. </p>
<p>About 70% of housing loans in Australia are variable rate loans. So the majority of the public are aware of the implications of a change in monetary policy as it affects their disposable income relatively quickly.</p>
<p>However if, as in the rest of the world, the majority of housing loans are fixed rate then public sensitivity to monetary policy changes is much lower, as disposable income is not as rapidly affected. </p>
<p>This is one reason why the Reserve Bank of New Zealand is one of the most transparent in the world. Over 70% of housing loans are fixed and the RBNZ has to move interest rates much further than the RBA to achieve a similar result.</p>
<p>The stage of an economic cycle a country is in also has an effect on transparency. </p>
<p>With US unemployment at 8.8%, interest rates effectively zero, huge debt levels, little economic growth, and a large majority of long term fixed rate housing loans, Ben Bernanke is left with very few options to influence public expectations of future interest rates.</p>
<p>So a media conference after a FOMC meeting makes perfect sense to further enhance transparency.</p>
<p>Australia, on the other hand, is in the enviable position of having low unemployment, historically average interest rates, low debt levels, average economic growth and a large majority of variable rate housing loans. </p>
<p>So Glenn Stevens does not need to or have to resort to having a press conference after a RBA board meeting. The level of transparency is currently sufficient to have the desired effect on the public’s future expectations. </p>
<p>Mind you, I and the rest of the media would love to have the opportunity to question Glenn, like Ben.</p><img src="https://counter.theconversation.com/content/1008/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nigel Morkel-Kingsbury does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations. </span></em></p>Late last month, Ben Bernanke held the first ever press conference by a chairman of the US Federal Reserve Bank. For more than an hour, he took questions about the Federal Open Market Committee’s decision…Nigel Morkel-Kingsbury, Assistant lecturer, Department of Accounting and Finance, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.