Bernanke defends economic models that missed crisis- More work needed on how financial sector impacts growth
24 September 2010, by Greg Robb (MarketWatch)
http://www.marketwatch.com/story/bernanke-defends-models-that-missed-credit-crunch-2010-09-24Excerpt:Standard economic models, such as the “workhorse” new Keynesian model, did not predict the crisis. Bernanke himself initially said the subprime crisis wouldn’t spread throughout the broader economy.
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Rather than throwing out the models, more work was needed to capture how the financial system impacts growth and stability, Bernanke said.
Bernanke said the financial crisis was an old-fashioned bank run
(No it was Not!*) with different actors. This time, the role of depositors lining up to withdraw funds from a bank was played by money-market funds, Bernanke said.
Regulators and market participants failed to recognize the risks of the potential for runs from institutions instead of citizens, he said.
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Bernanke said that more work is needed about instances when decision makers are so uncertain that they cannot fathom what might happen next. In the financial crisis, so many economic actors essentially threw up their hands and gave up. This led to panicky selling, sharp cuts in payrolls and hoarding of cash by households.
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But during the crisis, there were vicious circles created as firms were forced to sell assets quickly, and these fire sales simply drove down asset prices and reinforced investor concerns about solvency of the firms.
*To make a long story short: Bogus Triple-A Securitisation Fraud - Derivatives - Leverage - And loads of more Fraud
