Analysis: Calling in the crash team to bring the economy back to life

We chart the Jewish role in responding to the global financial crisis

By Alex Brummer, May 11, 2011

The best book on the Great Crash of 1929 is John Kenneth Galbraith's succinct account, written in 1956, some 27 years after the events that brought the world economy to a shuddering halt. It had the advantage of perspective, something that was lacking from the many accounts of the financial panic of 2007 to 2009. This includes my own effort, The Crunch.

When the authoritative account is finally stitched together, some time in the future, I suspect that one of the features of interest will be positive role played by Jewish economists in the events leading up to the crisis, in the debate about how best to respond to it and in clearing up the mess.

Many of the key players, including Ben Bernanke, the Federal Reserve chairman and Dominique Strauss-Kahn, the managing director of the International Monetary Fund, can claim Jewish backgrounds. Indeed, this has been fertile territory for some of the conspiracy theorists on the fringes of the internet.

It is, however, a fact of life in the United States, that many of the most prominent economic gurus happen to be Jewish. This can partly be accounted for by Paul Samuelson, the Nobel Prize winning doyen of US economics, who found Harvard an uncongenial environment for someone of his ethnic background and instead set up shop at the nearby Massachusetts Institute of Technology (MIT).

It is from this powerhouse of economic wisdom that many of the great names in modern economics emerged, including Samuelson's nephew Lawrence Summers, until recently serving in the Obama White House.

Alumni of MIT include Paul Krugman, the Nobel-winning professor at Princeton and New York Times columnist, who has been a fierce critic of the West's approach to the great panic and the economic contraction which followed.

Another MIT product is Joseph Stiglitz, a Nobel prize winner, who has been critical of the Osborne- Cameron approach to fiscal deficits.

But the most important of all is Ben Bernanke, the Federal Reserve chairman, who has been at the forefront of all the major decisions surrounding the crisis. All three of these men received their PhDs from MIT. Bernanke's has been most valuable, since his area of expertise was the Great Depression, a knowledge bank that made him invaluable during a crisis which Bank of England governor Mervyn King (a colleague of Bernanke at MIT) regards as the most serious for a century.

The policymaker whose reputation has suffered most from the crisis is Bernanke's predecessor Alan Greenspan. A free market economist, Greenspan earned his PhD from New York University. But his reputation, as the most powerful man in finance rests on his period as Federal Reserve chairman, having been appointed to the post of central bank chief by Ronald Reagan in 1987, holding on to the job until his retirement in 2006 when George W Bush was in the White House.

For much of this time Greenspan, a master of reading the economic runes, was credited as the genius who steered America and the world clear of the great inflation of the 1970s and 1980s and set it on a path to sharp growth. But in the wake of the great panic he has been widely criticised. Firstly, he is accused of having left interest rates too low for too long following the 9/11 destruction of the World Trade Centre in New York, setting in motion the conditions of the credit boom which followed.

Secondly, as chair of the Fed he is seen as having not done enough to restrain the greedy behaviour of the banks. The search for scapegoats is, of course, understandable. But Greenspan is much less responsible than the critics would have you believed.

In the wake of 9/11, he had little choice but to supply credit to the US economy. If not, Osama Bin Laden would have been rewarded for his symbolic attack on the heart of American capitalism.

Greenspan's mistake was to allow the credit free-for-all to run for too long. In fairness Greenspan was among the first to warn of an unsustainable housing market boom when speaking to other central bankers and economists at Jackson Hole symposium in 2005. But no one was seriously listening.

When the crisis reached its peak in September 2008 - after the collapse of the US broker-dealer Lehman Brothers - Bernanke found himself at the vortex of events. Learning the lessons of 1929, Bernanke opened the Federal Reserve's lending window to ailing banks and finance companies, like the financial arm of General Electric, and engaged in "quantitative easing" - printing new money.

When the economy failed to respond in 2010 and US unemployment remained unacceptably high, he organised the purchase of a further $600 billion of government debt designed to keep the financial system solvent.

Other key figures in dealing with the global financial crisis include IMF managing director (and now French presidential hopeful) Dominique Strauss-Kahn and his senior deputy John Lipsky. At the outbreak of the crisis the IMF seemed to be an institution seeking a role, but that role was quickly discovered, as countries ranging from Iceland to Mexico came a-calling. Strauss-Kahn reformed the Fund to give more voting power to emerging market countries and made it easier for nations to borrow than had been the case in the past.

But when it came to the euro crisis of last year, with Greece and Ireland needed rescues, it was old-fashioned IMF discipline on budgetary policy and cleaning up the banking systems that was required. The speed with which Strauss Kahn, a former French finance minister, acted is regarded as impressive.

In the financial crises of 2007 to 2010, the wisdom of people like Bernanke and Strauss-Kahn may have saved the world from a 1930s style catastrophe.

Alex Brummer is City Editor of the Daily Mail and author of the The Crunch (Random House Business)

Last updated: 10:54am, May 18 2011