As RBI governor I had bet on Bernanke winning Nobel prize

When I was in RBI (2008-13), I used to take wagers with my colleagues on the possibility of Ben Bernanke winning the economics Nobel sometime down the line. Most thought it was unlikely that any central bank governor associated with the Global Financial Crisis (GFC) of 2008-09, least of all the chairman of the US Federal Reserve, would pass the bar. They had a point. US policymakers of that time were blindsided by the financial instability brewing in the underbelly of the system. Bernanke himself was remarkably sanguine when he deposed before the Congress in early 2007: “Our assessment is that there’s not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy.” How monumentally wrong he was! Within just a few months of that statement, the US subprime sector exploded spectacularly, plunging the global economy into the deepest and most ferocious downturn since the Great Depression of the 1930s. But where Bernanke stood out was in managing the crisis, once it was upon us, and for doing so with extraordinary calm, confidence and candour. Rarely do policymakers find themselves in a situation where their entire breadth of learning and expertise is called upon to solve a real-world problem. Bernanke had that unique privilege. A scholar of the Great Depression, it was as if the crisis was tailor-made for him.In a downturn, central banks cut interest rates swiftly to restore stability in the financial system.But what happens after the interest rate hits zero?What do you do next?Do central banks just give up the fight, having exhausted their arsenal?It is here that Bernanke showed his ingenuity by pioneering Quantitative Easing (QE) – running the printing press overtime and using the money to aggressively buy securities in the market.He topped it up with credible reassurance that the easy money policy will continue over an extended period of time. It is to Bernanke’s credit that QE and communication are now standard fare in central bank playbooks. Central bank governors of large economies meet every two months at the Bank for International Settlements (BIS) in Basel, Switzerland, to exchange notes in a friendly and informal setting. These meetings proved particularly crucial during the GFC, and we used to look forward anxiously to Bernanke’s briefing on how he saw the US and global economies. medium94792252Handling the crisis was a double whammy for us in emerging markets like India since our domestic situation became completely hostage to global conditions shaped by advanced economies, particularly the US. We argued that the Fed had an obligation to keep us in the loop on their strategies so that we were not caught off guard. To Bernanke’s credit, I must say that the Fed instituted a practice of regular advance briefings for emerging economies that continued till the crisis subsided. From an India perspective, I most associate Bernanke with the taper tantrums of 2013 when the rupee crashed 20% from peak to trough in a matter of just four months after Bernanke’s statement that they were considering ‘tapering’ the QE programme. India became part of ‘the fragile five’ and we came close to another balance of payments crisis. He was widely condemned for causing so much turmoil by his ill-timed statement.I am sure Bernanke must have been quite baffled by the market reaction.After all it was known right from the beginning that the QE had to end some time, and there was wide speculation in the market then that that time had come.From Bernanke’s perspective, he was just stating the obvious! Communication gaffes are of course part of every central bank governor’s repertoire. Markets hang on every word the governor says, treating every syllable, nuance and twitch of the face as a market cue. That is enormously ego boosting, but it is also frustratingly stressful. In his memoir, The Courage to Act, Bernanke talks about how he got wrongfooted several times in his communication and how he learnt the hard way. For all the heft of being the governor of the most important central bank in the world, Bernanke is remarkably soft-spoken and quiet, given largely to keeping to himself. During coffee breaks in conferences and meetings, when others would be chatting away, it was quite typical of him to pick up his coffee and return quietly to his seat to browse his papers. He has wry humour. He was named Time magazine’s Person of the Year in 2009. I asked him what it meant in practical terms – whether there was any event to formally confer the honour. “No. I got a complimentary copy,” he deadpanned. medium94792269It’s common, at any rate in democracies, for central bank governors to be criticised by opposition politicians. It happens here in India too but our discourse comes across as very civilised compared to the sharp attacks in the US. A group of senators accused Bernanke of throwing ‘seniors under the bus’ by keeping interest rates very low. Rick Perry, who campaigned for the Republican Party ticket to run for president in 2012, said that if elected he would try Bernanke for treason for playing politics by printing money. When we once shared a lunch table, I asked him how it felt to be under such virulent attack. An occupational hazard, he surmised. Bernanke straddled the world of academics and the world of policy with aplomb and advanced the theory and practice of central banking in a profoundly significant way. It’s very fitting that this erudite, scholarly and quiet person was honoured with the 2022 economics Nobel. The writer is former RBI governor. He was in office as the global financial crisis hit