WASHINGTON, D.C. – Former Federal Reserve Chairman Dr. Ben Bernanke opened the 2014 AFP Annual Conference by stressing that he is positive about the U.S. economy in the long term.
“It was up to the Federal Reserve to do what we could [during the financial crisis], and we took extraordinary actions to help bring the 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 reasons to be optimistic about the U.S.
- Good demographics. The U.S. has a young population relative to other industrial countries, as well as healthy immigration and growth.
- Technological and education. Bernanke noted that a recent poll identified the top universities in the world, and of the top 20, the majority were located in the U.S.
- A culture of entrepreneurship. The U.S. 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.” He noted that there is a common misconception that everyone believed that Lehman should be saved, but the Fed and the Department of the Treasury believed it should 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, he said, there was simply no way to salvage it. The Fed and the Treasury made extraordinary efforts to prevent Lehman’s collapse, Bernanke said, but could not find any buyers. “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. “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.
Following the Fed’s decision to lend money to AIG, then-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 gotten the blame.
Shortly thereafter, the Troubled Asset Relief Program (TARP) program was proposed. This $700 billion allocation to help put capital into the U.S. banking system, was possibly the most successful and the least popular government program 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 FDIC’s 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 stabilize 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.”