Noah Smith tweets a Q&A at the LSE in 20013:

LSE: What should economists and policymakers learn from the financial crisis?

Ben Bernanke: Well I was thinking about Olivier [Blanchard’s] comments. Certainly I agree that bringing financial markets into macroeconomics is obviously critical. I think back at the work I did–that I was involved with academically–and in some ways we had taken steps in that direction. I did work thirty years ago on the role of credit in the Great Depression. We had done work on the financial accelerator, and how financial factors could play a role in exacerbating a downturn, and so on.

But the point that Olivier made was very important: the details really matter. Here is a fundamental question: the decline in wealth associated with the tech bubble bursting [in 2001] and the decline in wealth associated with the decline in house prices as of, say, late 2008 was about the same–maybe even more on the [2001] stock [market] bubble. From a standard macro model or even one elaborated with financial factors, you would not have really thought that the housing bubble would have been more damaging than the stock bubble. Now the reason it was more damaging, of course, as we know now, is that the credit intermediation system, the financial system, the institutions, the markets, were far more vulnerable to declines in house prices and the related effects on mortgages and so on than they were to the decline in stock prices. It was essentially the destruction of the ability of the financial system to intermediate that was the reason the recession was so much deeper in the second than in the first. To understand that, you really have to know the details of how banks and individual institutions are exposed to housing and to mortgages, in ways that the institutions themselves did not fully understand at the time.

Apparently Bernanke missed out the fact of utmost importance in the 1930s – the very deep drop in nominal spending (NGDP) – and let it do a “moderated replay” in 2008-9! Moderated because he knew (from his research) that he couldn´t let the financial system implode. In 1987-88, nothing of the sort happened!

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