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How Bernanke Handled ‘The Granddaddy of All Financial Panics’

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The worst moment of the 2008 financial crisis for former Federal Reserve Board Chair Ben Bernanke was what he calls “the Lehman weekend.”

“The worst moment – I don’t think will shock you – was the Lehman weekend, and the knowledge that it was going to fail and the fear and uncertainty that was associated with that,” Bernanke said during a wide-ranging interview on CNBC’s Squawk Box. “And, then, the next couple days as we had to deal with AIG and talk to Congress. Very tough.”

Bernanke admits he was “very worried.”

“My whole background as an academic was studying the Great Depression, studying financial panics or effects on the economy, and I saw that we were having the granddaddy of all financial panics about to explode on us and I thought the consequences would be tremendous,” he told CNBC.

Bernanke appeared on CNBC as part of a promotion tour for his just-released memoir, “The Courage to Act: A Memoir of a Crisis and Its Aftermath.”

In his book, Bernanke basically puts an end to the debate of whether Lehman Brothers could have been saved. He says there was no way to save it.

“We tried really hard [to save Lehman],” he told CNBC. “At the time, conventional wisdom and the media elsewhere was ‘Let it go. Let it go.’ We knew, we were afraid that it wasn’t just the company itself but the fact that the markets were already in panic and the failure of that company and all of its ramifications would raise the level of panic to a whole new level and it would be extraordinarily destructive. So we tried very, very hard to avoid it. Unfortunately the tools that we used in other cases were not available.”

Bernanke admittedly blames himself for some of the speculation that Lehman could have been saved.

“In the few days following the collapse … it was our decision, our agreement that we would be reticent about being completely clear that we had been unable to save Lehman,” he told CNBC. “Because we were afraid that that would create even more panic. That may not have been the right decision, I certainly admit that, but that’s what we did.”

Asked if there were any great moments in his career as Fed chairman, Bernanke was unspecific but positive.

“As an economist, what better job could you have?” he said. “You had all these people helping you think about what’s happening. And, you were providing leadership for the global economy. In many ways it was a great job.”

Switching gears, Bernanke also discussed the current economic environment both stateside and globally.

“We’re in a slow-growth, low real return economy. Not just in the U.S., but everywhere,” he told CNBC. “Compare the United States with Europe, compare us with Japan, other industrial countries. We’ve been making more progress. I’m not saying things are great, I don’t mean to say that at all. But monetary policy can only do basically two things: It can keep inflation low and stable, and it can help the economy come back from a recession. Both of those things are happening.”

According to Bernanke, more pressure needs to be placed on other policymakers, not just the Fed. “We’ve been relying too much on the Fed,” he said. “The Fed is the only game in town. It’s been doing much of the policy heavy lifting for the last few years. We need to see more action from other policymakers.”

Bernanke said the Fed has done what it can.

“Things are not great, but the Fed can’t be expected to solve all problems. It’s time for other policymakers to be joined in,” he told CNBC.

The low 2% growth that the U.S. economy continues to struggle with is not a result of the recession, Bernanke said.

“We’ve come back quite a bit [since the recession],” he told CNBC. “Unemployment’s down to 5%. We’ve come pretty close to full employment.”

Rather, he says, the slow growth is coming from slow productivity growth.

“Ooutput per worker has not been growing quickly, and why that’s happening is not totally understood,” he said. “I don’t think it has much to do with monetary policy. It has to do with the waves of innovation. We saw slowing in productivity growth, even before the crisis.”

In order to increase productivity, Bernanke says again that more needs to be done from other policymakers.

“More growth has got to come from productivity, it’s got to come from capital investment,” he said. “Those things need help from other policymakers.”

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