The Nobel prize in economics this year went to Ben Bernanke, Douglas Diamond and Philip Dybvig for “work adding to understanding of the relationship between banking crises and the broader economy.” Like other Nobels, the prize has a mixed reputation, having been given to outright Marxists like Gunnar Myrdal in the past. Looked at that way, this year’s prize fills a gap that must be a matter of deep regret to the Nobel Committee: they never gave an Economics Prize to GOSPLAN.
The original GOSPLAN was well worth the Sveriges Riksbank’s Prize in Economic Science In Memory of Alfred Nobel, to give the prize its official name. The Prize has never at any time shown any sign of requiring that the economic theories it honors actually work. It has over the years given the prize to some appalling socialist and environmentalist twaddle.
GOSPLAN was established on a solid basis of economic theory: that a central planning agency armed with sufficiently intelligent bureaucrats and sufficiently fearsome secret police could make the economy work optimally. Maynard Keynes would have approved and in some respects did approve of its theory, raising only a few wimpy Bloomsbury Group quibbles about its practice. The theory was internally coherent and had not been tried in any other country before Joseph Stalin led GOSPLAN to adopt its full version in 1928. Hence, GOSPLAN’s work qualified eminently for consideration by the Nobel Committee as an original piece of economic research.
GOSPLAN in its operations acted in a very similar manner to the Bernanke Fed. Since the KGB lacked the manpower to force 200 million Soviet consumers to buy the products GOSPLAN had decreed should be produced, the system worked through shortages and prices. GOSPLAN set the prices of all products, according to its targets for the economy, and consumers then either bought the goods produced by the Plan at the price the Plan decreed or did not. Naturally, sometimes consumers found a particular product/price pairing especially attractive, in which case it was rationed by queueing. More often, slackness in the producing units ensured that little or none of the GOSPLAN-decreed output was especially attractive to consumers, however it was priced.
Western observers, seduced by GOSPLAN’s Keynesian beauty, maintained until the fall of the Soviet Union that its economy was a roaring success – my ‘Economist’ diary for 1990 claimed that the moribund economy of East Germany was in 1989 richer than flourishing Thatcherite Britain, an error that could be confirmed by anyone unlucky enough like this columnist to suffer a 24-hour visit to East Berlin in this period (the food in the allegedly 5-star hotel, whose restaurant was decorated with genuine Diego de Rivera murals, was truly revolting)!
Once the Berlin Wall came down, the statistics of economic output in places like Russia and Ukraine collapsed spectacularly from two sources: the collapse of a hopelessly inefficient economic system and the erection of trade barriers between places that had previously been part of the same country (the successor states of Austria-Hungary had the same problem in 1918-39). However, the true living standards of the populace fluctuated, but then began to improve quite rapidly. Far from being successful, the GOSPLAN system had condemned 200 million people to grinding and perpetual poverty. But that naturally would not have mattered to the Nobel Committee in considering GOSPLAN for its highest honor.
In honoring Bernanke, the Nobel Committee has made up for its previous omission, and for the ill luck of GOSPLAN having collapsed in 1991 before the Nobel Committee could get round to honoring it. As for the other two Nobel winners: Doug Diamond and Phil Dybvig, they won the award for their 1983 Journal of Political Economy paper “Bank Runs, Deposit Insurance, and Liquidity.” This paper proposed a model of banking instability in which banks had no capital and were therefore vulnerable to sunspot-driven bank runs that could be prevented by deposit insurance. However, their two-period model environment was one such that there was no feasible way for deposit insurance payments to be made – that would have required a third period to the model that wasn’t there. Consequently, the deposit insurance could not be credible and therefore didn’t solve the instability problem. Bank capital would have solved it, but that wasn’t in their model. This was all pointed out by my esteemed Alchemists of Loss co-author Kevin Dowd 25 years ago. Thus, in this case also the panel awarded the prize to a paper that had long since been debunked – this would indeed appear to be standard Nobel practice!
As for Bernanke, like GOSPLAN, he believed that by setting prices — in this case, the most important price in the economy, the short-term interest rate — at an arbitrary level, the economy could be directed in the way that the all-seeing bureaucracy – in this case, the Fed – wanted to direct it. By setting the interest rate at an arbitrarily low level, the economy could be “stimulated” to any extent required, without inflation or other adverse side-effects. If further “stimulus” was required, it could be obtained by unlimited Fed buying of government securities. In Japan, where Bernanke had inspired the original zero-interest rate policy in 1998, the Bank of Japan even extended to buying stocks in the market, to prop up Japanese equities, whose performance had been lackluster since the 1990 bubble burst.
The central problem, which Bernanke and his successors at the Fed and colleagues at the Bank of England, the European Central Bank and the Bank of Japan were trying manfully to correct, was that, if inflation failed to appear, there was a limit on how much “stimulus” they could apply, formed by the zero lower bound in interest rates. If they set interest rates more than marginally below zero, the disobedient public would withdraw all their money from the banks and hold it in cash. No doubt Bernanke and his colleagues regretted not having the KGB available to prevent this – a few well-publicized show trials of malefactors, followed by painful public executions, should have been sufficient.
It appeared in the last few years that technology was about to resolve the central bankers’ problem for them. If cash could be abolished and replaced by the “digital dollar,” interest rates could be set at negative 5%, negative 10% or at any level the wise all-knowing central banker determined – the populace would have no ability to withdraw cash from the system, but only to whizz it around digitally from one node to another.
Social media provided an additional layer of control; those thinking evil thoughts, whether attempting to disrupt the GOSPLAN central banking system or to remove their wealth from it could have their wealth cancelled simply by pressing a button. We have just learned that this is not a joke, in the attempt to impose fines of $2,500 for wrong thought by the loathsome PayPal. This did not work because PayPal is still in a competitive market, but if the central bank imposed such penalties in a closed monetary system the unfortunate kulak wrong-thinkers would have no redress.
The economic model Bernanke has dreamed up may be inexpressibly evil, making George Orwell’s Big Brother look like an inept amateur, but you cannot deny that it is both original and internally consistent – well worthy of a Nobel. Indeed, the early version of it, practiced since 2010, appeared to work for a decade. Consumer price inflation did not appear, because inflation was forced into asset prices, which spiraled to levels never dreamed of in the poor old free market days before 2000. However, that gave all the world’s most important people a sense of ineffable well-being, as their wealth also increased, in terms of dollars that still appeared to be worth something.
We are now about to find out, in excruciating detail, all the ways in which the Bernanke economic model was not only disgracefully inegalitarian but in the long-term destructive of all economic value, just as was the original GOSPLAN. It was already clear that, in a world where only asset prices rose in value, investment would be excessively diverted into fixed assets and into leveraged stock market games, destroying the miraculous productivity growth that had been brought by post-Industrial Revolution technology.
We have also just found out that pension funds promising annual benefits to their beneficiaries could not survive if interest rates were held below the inflation rate for a decade. Needless to say, the institutional pension funds attempted to disguise this fact from themselves by playing idiotic games with derivatives, which only caused the funds to lose value at an even more rapid rate once interest rates reverted towards a free-market level.
Of course, what is true for institutional pension funds is also true for ordinary people’s pension savings – by closing the “final salary” pension funds to new entrants the institutions simply unloaded the longevity risk onto the employees themselves, who were far less able to bear it. Some of these people have been merely foolish and will be able to redeem their error – those who bought the siren song of the FIRE (financial independence, retire early) movement will discover the hard way that what looked an adequate provision for retirement in a stock market that was rising by 10% per annum, year after year, will disappear very quickly once economic gravity resumes its hold. However, being relatively young, they will be able to return to the workforce.
For the older, who relied on an already inadequate level of savings to fund their retirement, they will face destitution in medium old age, say around 78-83, when their shrunken savings run out and they are too old and sick to return to the workforce. Given that the U.S. Social Security system will be going bankrupt by then, death will come as a blessed release from the cares of this world. No doubt, as in GOSPLAN’s Soviet Union, vodka sales will spiral to infinity as this reality sets in.
In the circumstances, we should perhaps expect that the liquor companies will fund the awards attached to Bernanke’s Nobel.
Image: “Ben Bernanke winning vodka prize, style of Diego Rivera –ar 5:1”, Midjourney AI
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)