At its core, the 2008 financial crisis was an “old-fashioned bank run,” former Federal Reserve chairman Ben Bernanke said Tuesday, requiring the Fed to take aggressive actions to support the banking system, keep credit flowing, and restore confidence in the financial system.
Speaking at a packed breakfast meeting of the Greater Boston Chamber of Commerce, Bernanke defended the Fed’s policies during the economic downturn, which has been called the worst since the Great Depression. In the 1930s, said Bernanke, a Great Depression scholar, people stood in line outside banks to withdraw their money. But during the recent Great Recession, he said, “it was happening electronically and quietly.”
Bernanke was in Boston to promote his recently released memoir, “The Courage to Act,” which documents his experiences leading the Federal Reserve during the financial crisis, recession, and early years of the recovery. Appointed by President George W. Bush, Bernanke was chairman from 2006 to January 2014.
The Fed has come under criticism for not recognizing the risks facing the economy early on, as well as for its extraordinary responses to the crisis, including slashing its benchmark interest rate to near zero, engineering bailouts of financial institutions, and pumping hundreds of billions of dollars into the US economy through unconventional bond- buying programs.
Bernanke defended actions that the Fed took starting in late 2007, when the recession began. He argued that the policies helped the United States recover more strongly than other countries did. But, he conceded, the central bank should have recognized the dangers of rampant subprime lending sooner and realized that banks weren’t sufficiently capitalized to protect themselves against such risky lending.
“Once the panic began, we were pretty aggressive,” Bernanke said. “I don’t know if there was much more we could have done.”
But he faulted Congress and political leaders for not doing enough. The government shutdowns and Congress’s refusal to approve additional stimulus measures for the economy slowed growth and impeded the recovery, Bernanke said.
It will take years to address some of the systemic problems that have surfaced since the crisis, such as income inequality, Bernanke said. But he worries that the polarized political system will make solving those problems harder.
Too much of the responsibility for the recovery was placed at the Fed’s doorstep, Bernanke said, instead of a more balanced approach that might have included Congress’s cutting taxes, increasing spending, or both to support faster growth.
Bernanke bristled when asked about efforts by lawmakers to audit the Fed’s monetary policy decisions. Senator Rand Paul, a Kentucky Republican seeking the GOP nomination for president, has proposed legislation that would allow the Government Accountability Office, a nonpartisan congressional watchdog, to review policy decisions made by the Fed.
The Fed’s finances are already audited, but this proposal would undercut the agency’s independence, Bernanke said. The real aim of the legislation is to allow Congress rather than the Fed to make decisions about setting interest rates, he said.
And considering Congress’s record of stalemates on key economic issues, Bernanke questioned the wisdom of such intervention.Deirdre Fernandes can be reached at firstname.lastname@example.org. Follow her on Twitter @fernandesglobe.