- By Elizabeth DickinsonElizabeth Dickinson is author of the Kindle Single Who Shot Ahmed? A Mystery Unravels in Bahrain's Botched Arab Spring, from which this excerpt was adapted. She is a former FP assistant managing editor.
It was almost ominous. Writing in FP in 2000, Ben Bernanke imagined the next stock market crisis, and how true recession might be averted.
There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse."
So, how would Bernanke stack up to his own expectations? According to the now Fed chairman’s article, central banks must keep banks intact, credit flowing, and interest rates low. In Congress yesterday, Bernanke said this:
Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth."
Great. He passes. But could that be part of the problem?
I used Bernanke’s macroeconomics textbook in college, and learned that market ups and downs are natural. Did years of pushing those minor blips into the horizon — one liquidity injection or interest rate decrease at a time — cause today’s massive build up of bad? The housing bubble, for example, might have been encouraged to shrink before it got too big. Instead, all those bad loans have built up into the torrent of junk in need of a bailout today.
Weigh in on your thoughts in comments. In the meantime, I’m still hoping that the man who taught me macro was right in 2000:
If Wall Street crashes, does Main Street follow? Not necessarily."
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and a senior editor at The National Interest. Prior to Fletcher, he taught at the University of Chicago and the University of Colorado at Boulder. Drezner has received fellowships from the German Marshall Fund of the United States, the Council on Foreign Relations, and Harvard University. He has previously held positions with Civic Education Project, the RAND Corporation, and the Treasury Department.| Daniel W. Drezner |