Look Who Bernanke Just Blamed for the Financial Crisis

The global financial crisis has been blamed on everybody from bankers to rating agencies to politicians. Federal Reserve Chairman Ben Bernanke on Wednesday cited the baleful influence of two people whose names rarely come up in the blame game: Nobel Prize-winning economists Franco Modigliani and Merton Miller.

In a speech in Boston marking the Fed’s centennial, Bernanke said central bankers didn’t pay enough attention to the workings of the financial system in the years leading up to the crisis in 2008, partly because they were under the influence of a theorem developed by Modigliani (who died in 2003) and Miller (who died in 2000). The Modigliani-Miller theorem, which is taught in business schools and economics PhD programs, says that under certain narrow conditions, it doesn’t matter how much debt a company takes on: what investors care about is the value of the company’s underlying assets, not how they’re financed. The company’s value is unaffected by the ratio of debt to stock that it issues.