Transcript of Bernanke's answer to Terry Easton on the Austrian school.
X: Yes, one right at the back, red tie, just underneath the cabinet
rack.
Terry Easton: Thank you, that's an Adam Smith tie, eh, at the Adam Smith
Foundation.
Thank you Dr. Bernanke. I really appreciate as we all do your
challenge in dealing with the systemic financial systems crisis.
I'm Terry Easton with Human Events newspaper in Washington D.C.
The concern that we have is that right now we're dealing with this
problem looking at the forest at the tree level, in fact probably
down on the ground looking at the blades of grass growing, and you
seem to be dealing with it as all people are in all similar
institutions worldwide, as a classic Keynesian approach to solving
the problem.
And of course here in the London School of Economics,
there is some knowledge of another alternative approach to the
problem, known of course as the Austrian school. von Mises,
Hayek, Rothbard, et cetera, have suggested an alternative to this
90-year edifice that we've built, which now is coming back to roost, and
I wonder if it's possible, realizing that your position is the head
of the Fed, can you talk a little bit about the underlying system
that has now existed for 90 years? Are we going the right way?
Can we fix it? Should we look at these alternatives to the problem? I would be interested in your philosophical comments.
Bernanke: Well, the question is related to the former one. It has to do
with the value and the benefits of markets. I think economists
are often accused of being market fundamentalists, I think in fact
economists have done a better job than anybody of figuring out what
markets can do well, and what they don't do so well, when there are
problems with information or other things.
And economists have also pointed out that government interventions
are not benign, perfectly executed interventions, but are also
executed by individuals with interests, and so on -- this is the
public policy, er, ah, school. And so, the balance
between markets and the government is a delicate one.
In particular, those of us who are economists, and I think that
accounts for almost everybody in the room, are always amazed by the
lack of understanding in the general public about the power of
markets, and in particular the Austrian school emphasized the ability
of markets to aggregate information and incentives to provide
outcomes which a top-down government approach can't provide.
So, as an economist I have a lot of faith in markets. I don't
think, for example, I completely disagree with the view that what's
happened in the last year and a half is a 'crisis of capitalism',
per se. I mean, after all, capitalism has done an awful lot for
growth and living standards for a long time. But rather it's a
crisis that arises in a particular set of situations and conditions
that we've faced in the last couple of years.
In particular, as
I've indicated before, because of the tendency of financial systems
to the boom and bust -- which is a very long-standing problem, one
that was recognized by virtually every economist who's studied these
issues -- and because of the effects of that on the economy, there
has been a long-standing tendency to try to find a regulatory balance
that reduces the costs of those booms and busts without costing us
the benefits of the market forces and the innovation and the
information aggregation and so on. It's a very difficult balance.
I think, what we've learned, in this case, is not necessarily that
we need to have a lot more regulation, but that we need to think
through what went wrong with -- what I described: when I say the
financial sector what I mean is the private sector plus the
regulatory overlay; that whole complex didn't perform well in
this case, and we need to think hard about how to fix it.
Now, as I try to say in my speech, we have short-term and long-term
considerations. I think it's very important for us to try to put
out the fire. I think it's good advice in general, that if there's
a fire burning, you try to put it out first, and then you think
about the fire code.
So you don't try to do it all at once necessarily. We need to
figure out how to solve this problem, how to stop the costs that
are being borne all over the world, but going foward we have to
look at the fire code: we have to think about what is the right
balance of regulation, markets, that will give us a powerful,
innovative financial system, but one that would be safer to use in
some sense.