Bernanke defends field of economics

The lecture, titled “Implications of the Financial Crisis for Economics,” was the culmination of a daylong conference and celebration marking the 10th anniversary of the Bendheim Center for Finance, which Bernanke founded. It was also the beginning of a conference celebrating the 20th anniversary of the Center for Economic Policy Studies.

Before a full crowd in Richardson Auditorium, Bernanke broke down the field of economics into three distinct subdivisions: economic science, engineering and management. Economic engineering and management deal with the design and implementation of models to achieve a specific goal, while economic science focuses on the role of academic research in economics. Bernanke argued that the financial crisis did not disprove economic sciences, but “was more a failure of economic engineering and economic management.”

Bernanke explained that “economic models are useful only in the context for which they are designed” and that “standard models were designed for these non-crisis periods, and they have proven quite useful in that context.”

In the wake of the recent recession, the field of economics has come under fire from critics, including some from the University such as Wilson School professor and Nobel Prize winner Paul Krugman, who has criticized economists for too narrow a focus and obsessing over mathematical models.

But, Bernanke explained, “economic principles and research were quite useful for understanding key aspects of the crisis and for designing appropriate policy.” While Bernanke asserted that economic research is hardly obsolete, he did acknowledge that continued research is needed in certain subfields of economics, such as asset price bubbles. Asset price bubbles, which played a key role in the current crisis, occur when high demand for a product drives up prices.

“Most fundamentally, and perhaps most challenging for researchers, the crisis should motivate economists to think further about their modeling of human behavior,” Bernanke said.

In the question-and-answer session that followed his lecture, Bernanke said that the Fed maintains a list of specific actions it can take and will enact these steps when the time is right. He later asserted that the Fed is not any more optimistic about the state of the economy than forecasters in the private sector.

The issue of moving forward after the recent economic crisis was also a focus of two of the three panels held earlier on Friday as part of the Bendheim Center’s anniversary conference.

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In a panel discussing the structure of the financial system, the speakers — including economics professor and former Fed vice chairman Alan Blinder ’67; former New Jersey governor Jon Corzine, who is a visiting professor at the Wilson School for the 2010-11 academic year; Hyun Song Shin, an adviser to the president of South Korea; economics professor Markus Brunnermeier; and Krugman — presented a reserved yet positive appraisal of the sweeping financial reform legislation that Congress passed in July.

Panelists also suggested moves to prevent some of the major problems in the current financial crisis, such as requiring open-market trading of financial instruments. During the panel, Krugman praised the current administration’s dedication to enacting financial reforms, joking, “It’s the sort of thing that won’t work if President Palin appoints Ron Paul as Treasury secretary.”

Students in attendance at Bernanke’s lecture commended his speech.

“I felt like the talk was pretty much what I would have expected,” Eddie Grove ’14 said. “It dealt with the broader, more layman’s approach to the current financial crisis. I thought [Bernanke] was a very clear speaker, and it was very exciting to have him speak, especially within the first couple of weeks of my freshman year.”

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Bernanke served as chairman of President George W. Bush’s Council of Economic Advisers in 2005 and was appointed as chairman of the Fed in 2006. He served on the University’s faculty from 1985 to 2005, chairing the economics department from 1996 to 2002.