Vol. LXIV, No. 39
Wednesday, September 29, 2010
Chairman of the Federal Reserve System and former Princeton University Professor Ben Bernanke lectured on the repercussions and implications that the financial crisis has for the field of economics at Richardson Auditorium on Friday, while emphasizing the need for thorough and innovative economic research and analysis going forward.
Suggesting that the economic collapse did not discredit the usefulness of economic research and analysis by any means, Mr. Bernanke pointed out that current and historical research and theory was essential to diagnosing and dealing with the fissures created during the crisis.
However, the crisis has raised some important questions that are already occupying researchers and should continue to do so . More work is needed on the behavior of economic agents in times of profound uncertainty; on asset price bubbles and the determinants of market liquidity; and on the implications of financial factors, including financial instability, for macroeconomics, and monetary policy, he said.
Described by Princeton University President Shirley Tilghman as the right man for the job and the right man for the times, Mr. Bernanke was on the faculty in the Department of Economics from 1985 to 2002, when he took what we thought would be a short leave of absence.
A member of the Board of Governors of the Federal Reserve from 2002 to 2005, Mr. Bernanke served as Chairman of the Council of Economic Advisors for President George W. Bush before being appointed to a 14-year term on the Feds Board of Governors, as well as a four-year term as Chairman beginning in 2006. President Barack Obama also nominated him for a second term as Fed Chair.
In his lecture, Mr. Bernanke cautioned the capacity crowd that cries for a full re-working of the field of economics likely go too far. In particular, it seems to me that current critiques of economics sometimes conflate three overlapping yet separate enterprises, which he characterized as economic science, economic engineering, and economic management.
The recent financial crisis was more a failure of economic engineering and economic management than of what I have called economic science, which he defined as basic research and analysis, academic and otherwise, that is concerned with the behavior of individuals, institutions, markets, and national economies.
Weaknesses in risk measurement and management systems, overreliance on unstable short-term funding, gaps in public financial regulatory structures, the shadow banking system, and other structural problems were cited as central to the crisis, as opposed to shortcomings of what I have called economic science.
Calling for innovative economic research, Mr. Bernanke said that the crisis should motivate economists to think further about their modeling of human behavior.
I suspect that progress will require careful empirical research, with attention to psychological, as well as economic factors, he added.
The full text of Mr. Bernankes speech can be found at: www.federalreserve.gov/newsevents/speech/bernanke20100924a.htm.
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