I had the great fortune to spend time with former Fed Chairman Ben Bernanke this week. It was a fascinating inside look into history. Bernanke is currently sitting at Brookings institute in Washington. He said he’s spending most of his time thinking about the last 8 years.
Ben Bernanke was appointed the 14th Chairman of the Federal Reserve by George W. Bush in 2006. He replaced Alan Greenspan, who had an 18-year run. Bernanke served 2 terms, and was succeeded by current Fed Chair Janet Yellen in February. Bernanke presided over one of the most dangerous periods in US history. Academically, he studied the Great Depression. That served him well in preparation for the Great Recession.
The former Chairman is a controversial figure, and he knows it. Many blame him for not seeing the crisis develop and doing something about it. Others blame him for doing too much, for too long. On the flipside, there are many who view him as a courageous hero. It will be interesting to see how history looks back at him. My feeling is that history will shine brightly on this great American.
Bernanke discussed the September weekend Lehman failed, and how complex and problematic the situation was. The Consensus thinking then was to let Lehman fail. The Chairman framed it that “capitalism without bankruptcy is like religion without sin. You have to have it.” But according to Bernanke, nobody fully understood the depth of the problem. It was the turning point in 2008, which made a problem a crisis. That was the point where fear escalated rapidly and runs began on commercial paper and other short-term securities found in money market funds.
This was a highly emotional and scary time. There was pure panic. It took two tries for Congress to act, and pass the Troubled Asset Relief Program, otherwise known as TARP. Our political landscape made things much worse. He did what he thought was right and Congress made him and Treasury Secretary Hank Paulson effectively act alone. There was a meeting with Congressional leaders in Nancy Pelosi’s office. Bernanke said he scared them as well as himself with potential consequences of doing nothing. All of this took place 2 months before the Presidential election, so naturally it became political. AIG was the biggest problem. It faced default risk that likely would have taken down our financial system. Bernanke described AIG “like a hedge fund on top of an insurance company”. This wasn’t just a Wall Street issue. The financial system affects everything. If action had not been taken quickly, a complete meltdown would have occurred. The Congressional leaders agreed to pass TARP the second time, but made it clear it was on him. AIG was at the heart of the financial crisis. It insured all of these debt obligations with virtually no reserves. It was easy to be scared and angry. AIG angers him most.
Today, Mr. Bernanke sees a much healthier US economy. He believes sustainable growth of 2.5%+ is likely. Housing has strengthened, and creates a multiplying effect within the economy. Inflation remains quite low. He also sees the Fed going back to its original roots; Trying to identify issues early and address them. Central Banks are much more proactive and collaborative, both here and abroad. Interest rates are so low in his opinion because everyone has put the weight of the system on the Fed. It’s still the case. Bernanke believes that until political gridlock departs Washington, it will be tough to get important long-term policy changes in place. Part of the problem in 2008 was there were modern sophisticated financial and technological enhancements in the system with a 1930’s regulatory system.
Interestingly, the Chairman said that every night during the crisis, the parking lot attendant at the Federal Reserve would recite a quote from Abraham Lincoln, which helped him get through his darkest hours. I do the very best I know how-the very best I can; and mean to keep doing so until the end. If the end brings me out all right, what is said against me won’t amount to anything. If the end brings me out wrong, ten angels swearing I was right would make no difference.
When asked, with the benefit of hindsight, what would he have done differently. His stoic response; “Besides not taking the job….?” That got some laughs. What’s next for the former Fed Chairman? He said he’d entertain the pending vacancy of the Commissioner of Baseball.
If anyone would like a copy of my complete summary of Mr. Bernanke’s discussion, please email me.
Have a nice weekend. Happy Father’s Day! We’ll be back dark and early on Monday.
By: Mike Frazier