What should economists and policymakers learn from the financial crisis? Dr. Ben S Bernanke, LSE

Following the events of the 2008 Great Recession, it is clear that this financial crisis could have been prevented. Therefore, we should prepare for the future and learn how to prevent such a catastrophe if it happens again. Dr. Bernanke argued how policymakers, including the Bank of England, should act if another financial crisis occurs again.

Dr. Bernanke revealed that the Bank of England took very classical approaches to dealing with the recession when it struck, similar to the approach taken for the Great Depression of the 1930s. He commended the mutual agreements that policymakers from across the world made after the 2008 Great Recession. Dr. Bernanke then continued to talk about the currency depreciation that occurred during the 1930s and 1940s and the removal of the gold standard.

Dr. Bernanke began to talk about the present and what economists can learn from the past.  Firstly, he emphasised the problem that many economies are still emerging from the impacts of the Great Recession, with central banks providing monetary policy to help support growth. However, it was made clear that this would impact the competitiveness of these economies and countries. Dr. Bernanke then began to divulge how capital inflows could benefit economies by stating that they are a challenge to policymakers due to their possible volatile nature, but could be a useful tool. Dr. Bernanke ended the lecture, by claiming that literature on the Great Depression hints at the fact that expansionary policy that supports recovery and price stability is generally more of a benefit to these economies, even with the risk of competitive devaluations.

The lecture was interesting and revealing into the mind-set of Dr. Bernanke, the Chairman of the Board of Governors of the Federal Reserve System. However, I feel the issue of inevitability of these financial crises and role of banks was not mentioned in enough detail. This is most apparent with the theory that financial crises could be inevitable after a period of economic prosperity, where an economy grows so large it eventually collapses, if that economy has not been supported enough. This is mostly referred to as the bubble analogy, however, the business cycle also agrees with this theory by stating that after an upturn and peak, a recession will follow. Therefore, economists and policymakers need to ensure the economy is properly supported whilst growing.

In addition, Dr. Bernanke constantly related the Great Recession to the great Depression, however these two significant economic catastrophes occurred as a result of similar and very different reasons. For example, one reason why the Great Recession occurred was due to the failure to properly check the credit rating of people who took out mortgages and loans in the 2000s and surprisingly, many could not pay the banks, so, vast amounts of ‘bad debt’ had accumulated. Another reason for the cause of this financial crisis was the lack of credit reserves the banks had, this meant that the bank had very little ‘real’ money, money which could be taken out in paper form.

Whereas one reason for why the Great Depression occurred was due to the Wall Street Crash of 1929, where America had to quickly retrieve the large loans it lent out to many countries globally, including Germany. This caused catastrophe worldwide and can be argued to be one reason for why the Nazi Party rose to power in Germany during the 1930s. Therefore, one cannot use the example of the Great Depression to prevent another catastrophe such as the one that occurred a mere five years ago, as they occurred due to different causes.

Notice

The next blog post will be published on the 21st June, due to AS exams in May/June.

Does Eastern Europe Still Exist? By Professor Anne Applebaum

Eastern Europe is mostly used as a political term to define those countries who were under Soviet control, such as being a satellite state, prior to the collapse of the Soviet Union in 1991. However, when this collapse occurred all these countries were no longer under control and they took very different approaches at reforms. This lecture by Professor Applebaum, provided a sound argument on whether eastern Europe still exists, both economically and metaphorically.

Firstly, when one thinks of eastern Europe with counties like Poland and Hungary, they imagine poor and unstable economies with low living standards and in desperate need of western Europe’s help. However, it is clearly apparent that this view held for the last twenty years is now completely false, as was demonstrated with the Great Recession of 2008. Professor Applebaum accurately revealed that in fact it was Iceland that was first hit by the recession, possibly the furthest western country of Europe. Furthermore, eastern European countries were mildly affected by the recession and some not at all, for example Poland which has had staggering figures of continuous growth since the 1990s. 

The common belief, prior to the Great Recession, was that eastern European countries would be the first to collapse and that the western countries would have to help, to prevent a Eurozone Crisis. However, the exact opposite has occurred with most of the western European countries on the brink of collapse, with eastern European countries helping. It is now obvious that the people who a few years ago greatly criticised EU enlargement, were incorrect, as if the enlargement never occurred, then the Eurozone crisis would have taken place much sooner, with drastic consequences, as Professor Applebaum revealed.

The reasons behind the success of these eastern European countries and the failure of most of the western European countries is difficult to decipher. However, one argument that Professor Applebaum pointed out was that they paid little into bonds, whereas other western European countries did not, instead countries like Greece and Spain paid up to 8-10% in forms of bonds, whereas their eastern European counterparts where doing about half. However, this is just one reason behind why eastern European countries are becoming prosperous. 

The graph below shows the growth rates of most, if not all, European countries. It was produced by the Ministry of Treasury of Poland. It clearly demonstrates the true extent to which eastern Europe was overtaking western Europe. However, upon close analysis, it is evident that not all of eastern Europe is experiencing this prosperity that their neighbours have been, such as Slovenia.

To conclude, this lecture presented by Professor Anne Applebaum was interesting and offered another opinion on these rising economies. Perhaps it is time for us, as Professor Applebaum suggested, to stop having these stereotypes and old cliches about eastern Europe, because in fact western Europe should learn from the failures and successes of eastern Europe.