Ben Bernanke, who during the depths of the financial crisis worked seven-day weeks, sometimes availing himself of an office couch to catch some sleep, is now in memoir mode, collecting his thoughts for an upcoming book and for an audience of thousands at Schwab Impact in November.
Speaking to a nearly packed 5,000-seat theater at the Denver gathering, the former Fed chairman quipped: “Now I read the newspaper and say, ‘Gee, that’s a serious problem. I hope somebody does something about it.’”
The economist and avid baseball fan also appreciates no longer receiving urgent phone calls from former Treasury Secretary Hank Paulson that always seemed to come in the fourth inning of Washington Nationals games, leaving the Fed chairman with the challenging task of finding a place in a crowded stadium where he could carry out an important policy discussion.
Those calls came during the times he managed to get away, even if only taking a walk or reading a book, which Bernanke made a point of doing from time to time as a means of maintaining calm and gaining perspective.
And the man who presided over crisis-era monetary policy actually enjoys Washington, where he continues to reside, saying the nation’s capital city is “a nice place if you don’t have to give Congressional testimony,” though he rues the invention of the selfie, now that he has become a recognizable figure.
That wasn’t the case when he first assumed the chairmanship in 2006, the same year his daughter first went away to college. Her roommate asked Benanke’s daughter what her father did for a living, and when she replied he was the chairman of the Federal Reserve, the young woman gasped: “You mean your father is Alan Greenspan!”
The data-loving economist added that 12% of the public still thinks Greenspan’s running the Fed, eight years after his departure from the job.
Reflecting on his eight-year chairmanship, Bernanke likely surprised few in calling the “Lehman Brothers-weekend” the critical turning point in the financial crisis.
“My view was that it was essentially a panic,” said Bernanke, an economic historian by training. But instead of having depositors run on banks, it was an institutional-level wholesale market that panicked about its money, for which reason “the cost of bank funding shot through the roof in December 2008.”
But that frightening month was also a turning point for a positive reason, he said, noting that it was then that Congress undertook measures, like its Troubled Asset Relief Program (TARP), that helped stabilize the financial system.
The measure was deeply unpopular with the public, and Bernanke said there are still those who charge that the Fed was busying itself helping its buddies on Wall Street rather than trying to prevent an economic collapse.
Indeed, during that time he called one senator to urge his approval of TARP, asking him how his constituents felt about the measure. The senator replied that voter sentiment was running about 50-50: “50% said ‘no’ and the other 50% said ‘hell no.’”
Bernanke said that the Fed had no recourse other than to allow Lehman to fail since the 12 CEOs he invited to inspect the firm’s books eschewed taking over the firm. His two main hopes were Bank of America and Barclays. BofA eventually acquired Merrill Lynch after turning down Lehman, while Barclays was “prevented by its regulator” from acquiring the troubled firm.
But post-Lehman, TARP provided the Fed with tools to stave off future crises. Those tools included asset purchases, which were needed to inject liquidity into markets after interest rates were already reduced to zero immediately after the Lehman fiasco.
The failure of that single institution, with all the spillover effects, nevertheless came short of Bernanke’s “worst-case scenario,” which entailed a dozen or more failed financial institutions, the collapse of financial markets and a Great Depression.
The asset purchases that kicked off in March 2009 and came to be known as QE1 worked in practice if not in theory, Bernanke once quipped.
The theories remain debated. Bernanke proposed two: one, that acting as a buyer of last resort pushed down longer-term yields and helped revive the housing market; or two, that the move simply sent a “whatever it takes” signal that kept rates low.
But the former Fed chair defended the controversial policy based on outcomes, noting that the U.S. and U.K., which both implemented QE, are far more economically secure than Europe, which faced political roadblocks to implementing the policy and is today bordering on a dangerous deflation.
By the time QE2 came around in November 2010, anti-QE sentiment among politicians and a segment of the economics profession had intensified, leading many to charge it would crash the economy and trigger massive inflation.
But to Bernanke, that “made no sense; there was slack in the economy,” he recalls thinking. “We were never concerned about [inflation]; that was just bad economics. Inflation was never a risk and is not a risk now,” he said, adding that today “inflation is non-existent, and we’re adding 200,000 jobs a month to the economy.”
Nevertheless, the former Fed chairman, speaking to Schwab’s chief market strategist, Liz Ann Sonders, and taking questions from the packed and appreciative audience, did acknowledge a diminishing returns phenomenon with successive QE rounds.
“The first round in 2009 was probably the most powerful; but you come to a point where it’s harder to bring yields down. It’s harder on the signaling side to show you’re going to keep rates low,” he said.
Going forward, Bernanke expressed optimism about the U.S. economy.
“Looking ahead to the medium term, the U.S. is still a good place to invest in and to live in,” he said, citing a population that is younger on a relative basis than other industrialized nations, has a higher birth and immigration rate, contains the best universities overall and, saluting the investment advisors in the audience, capital markets that can efficiently bring new ideas to market.
Asked by Sonders to consider his legacy, the former Fed chair expressed pride in measures he took to increase Fed transparency, such as advancing the availability of minutes of Fed meetings, introducing press conferences following FOMC meetings by the Fed chair and his efforts to educate the public through his television appearances on “60 Minutes” and PBS.
He expressed particular satisfaction that the Fed is now “structured to address financial stability issues; financial stability is now an equal partner with monetary policy,” he said.