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.
