Tags: Bernanke | Federal Reserve | crisis | money

Bernanke: Without Fed, Financial Crisis Would Have Been 'Much Worse'

By    |   Monday, 29 December 2014 02:55 PM

Ben S. Bernanke, former chairman of the Federal Reserve, said the 2008 financial crisis would have been “much worse” without the central bank’s actions to avert a global economic depression.

“There’s plenty of evidence that when the financial system collapses, the rest of the economy collapses as well,” Bernanke said in a BBC radio interview with Mervyn King, who was governor of the Bank of England during the crisis. “By stabilizing the financial system, we avoided much worse, persistently bad consequences.”

In the months after the September 2008 collapse of Lehman Brothers in the world’s largest bankruptcy, the S&P 500 lost about one-third of its value as investors dumped stocks and scrambled for safe havens. The U.S. unemployment rate climbed to a 26-year high of 10 percent in the ensuing recession.

Ben S. Bernanke, former chairman of the Federal Reserve, said the 2008 financial crisis would have been “much worse” without the central bank’s actions to avert a global economic depression.

“There’s plenty of evidence that when the financial system collapses, the rest of the economy collapses as well,” Bernanke said in a BBC radio interview with Mervyn King, who was governor of the Bank of England during the crisis. “By stabilizing the financial system, we avoided much worse, persistently bad consequences.”

In the months after the September 2008 collapse of Lehman Brothers in the world’s largest bankruptcy, the S&P 500 lost about one-third of its value as investors dumped stocks and scrambled for safe havens. The U.S. unemployment rate climbed to a 26-year high of 10 percent in the ensuing recession.

The Fed responded by cutting interest rates to record lows, followed by several bond-buying programs known as “quantitative easing” that pumped trillions of dollars into the global economy. Meanwhile, the U.S. government bailed out banks and automobile companies as part of the effort to avoid another depression.

Bernanke was the target of criticism from all ends of the political spectrum for not anticipating the crisis, and then for the Fed’s policy response. Liberal economist Paul Krugman said Bernanke hadn’t taken enough steps to reduce unemployment by boosting inflation, while Rick Perry, the Republican governor of Texas and presidential candidate, described quantitative easing as “treasonous.”

Bernanke said one of the major challenges of being Fed governor was explaining how its policies helped to avoid “counter-factual” outcomes, or hypothetical results based on a different set of conditions.

“It’s hard to explain to the electorate that ‘things are pretty bad, but gee, if we hadn’t done what we’d done, things would have been much worse,'” he said in the radio interview. “In fact, I think they would have been much, much worse.”

Bernanke joined the Brookings Institution in Washington after leaving the Fed in January. He first started working for the central bank in 2002 following an academic career that included research into the political and economic causes of the Great Depression. Critics called him “Helicopter Ben” after a 2002 speech that cited economist Milton Friedman’s idea of dropping free money from a helicopter to prevent deflation.

The Fed continues to face criticism over its policies, with Stephen Roach, a senior fellow at Yale University, saying the central bank is taking too much time to raise interest rates and reverse other elements of its easing program.

"America’s Federal Reserve is headed down a familiar, and highly dangerous, path," he said in an article for Project Syndicate.

"Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009," he said. "The consequences could be similarly catastrophic."

In its policy statement last week, the central bank said it would be "patient" in raising rates. Fed Chair Janet Yellen said a rate hike is unlikely before April. The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent for the past six years. "[Central bank] policy levers ... remain at their emergency settings, even though the emergency ended long ago. While this approach has succeeded in boosting financial markets, it has failed to cure bruised and battered developed economies," Roach said.

The Fed responded by cutting interest rates to record lows, followed by several bond-buying programs known as “quantitative easing” that pumped trillions of dollars into the global economy. Meanwhile, the U.S. government bailed out banks and automobile companies as part of the effort to avoid another depression.

Bernanke was the target of criticism from all ends of the political spectrum for not anticipating the crisis, and then for the Fed’s policy response. Liberal economist Paul Krugman said Bernanke hadn’t taken enough steps to reduce unemployment by boosting inflation, while Rick Perry, the Republican governor of Texas and presidential candidate, described quantitative easing as “treasonous.”

Bernanke said one of the major challenges of being Fed governor was explaining how its policies helped to avoid “counter-factual” outcomes, or hypothetical results based on a different set of conditions.

“It’s hard to explain to the electorate that ‘things are pretty bad, but gee, if we hadn’t done what we’d done, things would have been much worse,'” he said in the radio interview. “In fact, I think they would have been much, much worse.”

Bernanke joined the Brookings Institution in Washington after leaving the Fed in January. He first started working for the central bank in 2002 following an academic career that included research into the political and economic causes of the Great Depression. Critics called him “Helicopter Ben” after a 2002 speech that cited economist Milton Friedman’s idea of dropping free money from a helicopter to prevent deflation.

The Fed continues to face criticism over its policies, with Stephen Roach, a senior fellow at Yale University, saying the central bank is taking too much time to raise interest rates and reverse other elements of its easing program.

"America’s Federal Reserve is headed down a familiar, and highly dangerous, path," he said in an article for Project Syndicate.

"Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009," he said. "The consequences could be similarly catastrophic."

In its policy statement last week, the central bank said it would be "patient" in raising rates. Fed Chair Janet Yellen said a rate hike is unlikely before April. The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent for the past six years. "[Central bank] policy levers ... remain at their emergency settings, even though the emergency ended long ago. While this approach has succeeded in boosting financial markets, it has failed to cure bruised and battered developed economies," Roach said.

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Ben S. Bernanke, former chairman of the Federal Reserve, said the 2008 financial crisis would have been "much worse" without the central bank's actions to avert a global economic depression.
Bernanke, Federal Reserve, crisis, money
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2014-55-29
Monday, 29 December 2014 02:55 PM
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