Former Federal Reserve Chairman Ben Bernanke knows Americans have not forgiven him for the Wall Street bailout that saw greed in financial company executive suites go unpunished while regular people lost their homes, jobs and nest eggs in the financial crisis of 2008.
“I can understand why they are angry,” he said.
He says he is frustrated that he hasn’t been able to convince more Americans that his actions were necessary to avoid a deep depression.
In an attempt to do just that and, he says, to do his part to avert a future crisis, he wrote “The Courage to Act: A Memoir of a Crisis and Its Aftermath,” which he is touring to promote. I chatted with him after a speech in Chicago and asked him the questions you’ve wanted him to answer all these years. Here are his answers, edited for length and clarity.
You and former Treasury Secretaries Hank Paulson and Tim Geithner have repeatedly said you had to bail out Wall Street banks because the results otherwise would have been “catastrophic.” But people remain furious. They have asked if there was any real evidence of catastrophe. Or were you just saving Wall Street with tax money?
There is a lot of evidence that in a financial crisis, people lose confidence, stocks drop, everyone hunkers down and hoards cash. That was a major factor in the Great Depression in the 1930s. And after the Lehman (Bros.) collapse, (everyone) went into a panic, everything froze up, credit was not available. We were dropping 600,000 to 700,000 jobs.
The financial system is critical to our market economy, and if it’s not working everything comes to a grinding halt.
Did you actually see that?
Betsy Duke (then a Fed governor) went to San Francisco and was talking with businesspeople. She sent me an email that radiates horror and said, “For God’s sake, think about the financial system.” It was really graphic. She wrote: “Across the board, every business (is) canceling every capital project and discretionary program possible. Credit is increasingly unavailable. Small businesses and nonprofits are missing payrolls and shutting down. I would plead to do anything possible to restore confidence in the entire financial system.”
People complain that they lost homes, jobs, their future, and yet no one from Wall Street went to jail.
I have been uncomfortable with the Department of Justice’s prosecution strategy. They penalized large banks (with fines) rather than trying to track down individual responsibility. It would have made more sense to consider the individuals in management and employees who make the decisions. We would have learned more and been more fair if the people whose actions led to problems were held accountable.
It’s not against the law to take a dumb risk. It is against the law to misrepresent what you are selling.
You write that the Fed had to take on more responsibility than it would have if Congress had done more. You write that you were surprised it was controversial to help homeowners in trouble and argue for infrastructure spending.
An infrastructure building program would have been helpful. It would have added to jobs immediately. In 2009, Congress approved a big fiscal package, but fiscal policy after the initial program kind of went AWOL. So everything got laid on the Fed and the Fed was struggling to support the recovery through monetary policy, which is why interest rates have been so low. Fiscal policy (government spending) would have given us a better recovery. And it would have helped if Congress approved the debt ceiling and not shut down the government.
If Congress had built infrastructure, would interest rates be higher now?
I don’t know. But if there had been a more balanced approach, the Fed wouldn’t have had to be as aggressive as it was because part of the burden would have been carried by fiscal policy.
Economists such as former Treasury Secretary Larry Summers say the global economy could be weak for a decade. Will it be that long?
Among the major industrial economies, only the UK has had a recovery like the U.S. Europe is still quite far from full employment. Japan is still trying to break deflation. There is a big slowdown in China.
A slowdown was anticipated, but emerging markets as a group are growing very slowly, worse than anticipated. Fifty percent of global GDP comes from them. If they are slowing it will subtract from our economy — especially the manufacturing sector, and manufacturing is already slowing down.
Could that cause a U.S. recession?
The Fed is trying to compare the strength of our economy. Households are in pretty good shape, but the international economy is sluggish — so it’s really a balancing act. Most likely, the U.S. will keep growing but it’s a head wind to our recovery.
You write about regulators not getting on top of risky housing lending and financial risks before the crisis. It seems like we could reach crisis again based on the same human nature: Regulators not wanting to rock the boat when things seem good.
The good news is we hadn’t had a financial crisis for 76 years — 1931 to 2007.
But I agree with you.
It’s important for regulators to be vigilant and keep monitoring. In the past there were many gaps in regulation. No one was looking out for the system as a whole. That’s changed radically. We have the Financial Stability Oversight Council and the Fed looking at the whole system. That doesn’t mean problems won’t get by. I’m sure they will.
If you were going into retirement, would you be worried that a new crisis would leave you without the resources you need?
One lesson that really struck me was that in the crisis and when the stock market crashed in 1987, people sold their stocks and said, “I’m getting out of this.” And that was dumb because there’s a really good chance that the stock market will come back. If nothing catastrophic happens you should be OK.
The origins of the financial crisis were in mortgage practices that were harmful to consumers and ultimately the system. You note in the book that consumer protection was an afterthought, a place for Fed members with the lowest seniority. Do you see a change?
A big change. The Fed lost those authorities. The Dodd-Frank Act created the Consumer Financial Protection Bureau. Their entire mission is consumer protection. It represents an upgrade of regular resources directed to this issue. I do think it’s important to have strong consumer protection.
Twitter @gailmarksjarvis
