“It was up to the Federal Reserve to do what we could, and we took extraordinary actions to help bring the [US] economy back,” Bernanke said. “We have seen a slow process, but one that now seems to be showing an economy that has been turning to more normal conditions, creating jobs, and frankly, it’s the envy of other industrial countries at this point.”
According to Bernanke, there are three key things that make the US economy a promising place to invest:
- Good demographics. The US has a young population relative to other industrial countries, as well as healthy immigration and related growth.
- Tremendous technologies. Bernanke noted that a recent poll identified the top universities in the world, and 17 of the top 20 were located in the US.
- A culture of entrepreneurship. The US has a healthy influx of startups and new companies that are creating growth and new opportunities.
Bernanke weighed in on the inciting moment when the financial crisis, aka the “Lehman/AIG weekend” really hit in September 2008. He noted that there is a common misconception that while general sentiment was that Lehman should be saved, both the Fed and the Department of the Treasury believed it should be allowed to fail. “That is exactly the opposite of the truth,” he said.
Not only were economists, the media and other experts adamant that Lehman should be allowed to fail, there was simply no way to salvage the investment bank. The Fed and the Treasury made extraordinary efforts to prevent Lehman’s collapse, Bernanke said, but could not find any buyers after Potential deals with Bank of America and Barclays proved unsuccessful. “Without a buyer – without the ability to put capital to the firm – we really had no opportunity to prevent the firm from collapsing,” he said.
Bernanke contrasted the outcome of Lehman with that of Bear Stearns earlier in 2008. “Bear Stearns was acquired by a strong set of hands, JPMorgan, which guaranteed its liabilities and absorbed Bear Stearns into a bigger, stronger, more stable firm,” he said. “So its customers said, ‘Okay, Bear Stearns is now safe,’ and stayed with the company.”
Lehman’s case was quite the opposite; everyone was pulling away. “The thing about an investment bank is, what makes a company viable is its customers, its relationships, its counterparties, its employees,” said Bernanke. “There was nobody to assure Lehman’s customers or counterparties that the firm would be there in a week.”
In the case of AIG, the Fed was dealing with essentially a hedge fund on top of an insurance company. “The hedge fund was losing billions of dollars and the insurance company had real assets that could be used as collateral for the Fed to make a loan to allow AIG to survive,” Bernanke said.
An Unpopular Policy
Following the Fed’s decision to lend money to AIG, then-US treasury secretary Henry Paulson and Bernanke explained to both the president and Congress that they did not see an alternative solution to this action. While both branches of government gave their support, they also made it clear that this was Paulson’s and Bernanke’s decision and responsibility – so if it didn’t work, they were the ones who would have incurred the blame.
Shortly thereafter, the Troubled Asset Relief Program (TARP) program was proposed. This US$700bn allocation to help put capital into the US banking system, was possibly the most successful and the least popular government programme in recent memory, Bernanke noted. “But it was passed, and ultimately, with the capital that was there; with the ability of the Treasury to guarantee the money markets; with the Federal Deposit Insurance Corporation’s (FDIC) guarantees that protected banks; with the Fed’s continued lending serving as the lender of last resort to put more liquidity into the system; with our stress tests that back in 2009 helped restore confidence in our banking system; eventually we were able to stabilise the financial system,” he said.
Bernanke acknowledged the difficulties of explaining to “the guy on Main Street” that preventing the collapse of the financial system helps him out. “The financial system is like the nervous system of the economy and if it shuts down, the effects are going to be felt broadly and globally,” he said. “But we did what we had to do and over time, we’ll try to explain it and hope that people will understand. But the way I think about it is, Congress created the Fed to do the stuff it didn’t want to do. So the Fed did what it had to do.”
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