(本文翻譯自 陳冲 諾貝爾獎能否解答女王的疑惑 2022-10-24)
Queen Elizabeth II died on Sep. 8th 2022. A month later, Nobel Economics Prize is announced. What’s the relationship between these two events?
I think of the time when financial tsunami still swept the world in 2008, Queen Elizabeth II made a visit to LSE on Nov. 4th. Facing economists, the Queen, feeling sad for the withering financial center, asked a brief question “Why did nobody notice it?” All kept quiet. The director of the research center had no choice but to reply, saying something the same as not saying it, “At every stage someone was relying on somebody else and everyone thought they were doing the right thing.” Simply put, no one clearly identify core problems and all shrink responsibility. On Dec. 13th 2012 when the Queen visited the BOE, one volunteered to answer the question raised four years ago, but the result was still disappointing, “People thought markets were efficient, people thought regulation wasn't necessary. Because the economy was stable there was this growing complacency (people slack off too much).” Ten years has passed. The Queen departed from us and still no one could give her a satisfactory answer. Until a month later, the Royal Swedish Academy of Sciences put this financial issue again onto the world stage.
On Oct. 10th 2022, the Nobel Economics Prize was announced. Three American scholars won the prestigious award. Among them, Bernanke, who was Fed chair, of course attracted most attention. The three scholars examined the interaction between bank runs and financial crises in the 1980s and successfully explain the social function of banks that prevent economic crisis caused by financial events. Bernanke even examined the Great Depression of the 1930s and showed when bank runs happen, it would be hard to deal with financial crisis as rebuilding crucial information that banks acquire on borrowers becomes difficult, which impairs society’s ability to direct savings to production.
The creative ideas of these three economists might not be surprising based on current view but just as the Swedish Academy said, “The actions taken by central banks and financial regulators around the world in confronting two recent major crises – the Great Recession and the economic downturn that was generated by the COVID-19 pandemic – were in large part motivated by the laureates' research.” In other words, the measures taken by various countries since 2008, such as QE, blanket guarantee, or buying illiquid assets of banks, etc., are all results of bankruptcy-avoiding thinking pattern. The US, to avoid larger crisis, even granted banks licenses initiatively. It’s without question natural that Bernanke carried out these measures that solved problems then, especially when in the early stage of financial crisis that doing so could prevent banks from imposing credit freeze on peers and customers. But how do you get rid of drugs after being addicted? The so-called QE2, QE3 even QE4 and the enlarged Fed’s balance sheet which has grown from $2 trillion in 2008 to $9 trillion in 2022 might all be the sequelae.
Scholars of course can reply the Queen by saying that it’s Wall Street’s overconfidence and competent authorities’ lack of risk awareness that led to the crisis. However, from the perspective of market practice, the greed for continuous growth is also the main reason. Seeing the high salaries on Wall Street, people in the financial industry should understand that huge profits are not necessarily converted to high salaries, dividends or bonus but instead a large part should be used as what Bernanke and others called “cost of credit intermediation,” the necessary expenses incurred when transferring funds from depositors to good borrowers, including screening, supervision, accounting, various reserves, allowance for bad debts and compensation reserve. If these costs deducted, the high salaries on Wall Street might just be fantasied image. The recent COVID-19 policies event among local insurance companies already gave us a vivid example.
Well, can LSE alumni answer the question the Queen raised at LSE?
(Released on Appacus Foundation website, Oct. 24th, 2022)