I spoke to former Federal Reserve Chairman Ben S. Bernanke late in the debt-ceiling impasse. It was not completely finished yet but will be soon. This time, at least, the financial system averted another full-blown crisis.
But when really serious events happen and Congress and the White House are focused on the political battle, the Fed often ends up as “the only game in town,” Mr. Bernanke said, “the only policymaker who can manage an economy in crisis.” might help.”
It is no longer Mr. Bernanke’s responsibility to fix the world’s pressing problems. In 2014, he stepped down as Fed chair after leading it through the global financial crisis. Now, at age 69, he’s a scholar Brookings Institution in Washington, devoting himself mainly to research and writing.
His research, showing “that bank crises can have devastating consequences” and highlighting the “importance of well-functioning bank regulation”, earned him a Nobel Prize in Economics in 2022. That academic work, and the changes the Fed has made, have changed the way we understand financial news, even if it’s itself making fewer headlines.
Nevertheless, Mr. Bernanke said he still “watches the Fed very carefully,” and in a wide-ranging interview, he discussed a range of tangled issues, including bank runs, inflation and threats to financial stability.
At the moment, the banking system appears to be stable, he said, but you never know. For example, in the summer of 2007, when the global financial crisis began, Mr. Bernanke said that he did not immediately recognize how “catastrophic” it was going to be. Now, he said, he regrets it took “a few months” to “appreciate the magnitude of the crisis.”
Conditions in the financial system appear much calmer today, he said, but added, “I have learned from painful experience that one never says never; It’s always possible.
In agreeing to an open conversation, he insisted on a ground rule: He “wouldn’t second-guess the Fed.”
“I’ll tell you what I think the Federal Reserve is doing and why,” he said, “but I won’t tell you what I think they should do at the next meeting.”
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Once Mr. Bernanke started rolling, highlights from his remarks included:
Further bank runs can be mitigated by raising the ceiling on deposit insurance. That insurance “should cover more than $250,000 per account,” perhaps requiring large bank depositors to “pay some sort of premium” to benefit. his research, and he and his two colleagues 2022 Nobel Prize WinnerDouglas W. Diamond and Philip H. Dybvig show that the fear of losing money in a weak bank can close or worsen a bank run, like the one earlier this year, and lead to deeper economic stress.
If the Fed had the legal authority over other central banks, it would not need to invoke emergency powers and set up temporary rescue “facilities” every time a crisis demanded that it stop “shadow banks”, Including hedge funds, investment banks. , private equity funds, money market funds and so on. These giant institutions perform many of the functions of traditional banks. The Fed is “hampered by a structural flaw that was never corrected by Congress, which is that the Fed is restricted to lending on a general basis only to banks and not to other types of financial institutions,” he said.
Never assume that all is well in the financial system. this can not be happening. There is a need for continuous monitoring and strengthening of systemic regulatory oversight to address major issues. Mr. Bernanke’s research showed that “the financial crisis of the 1930s was a major factor in the Great Depression,” an insight he recalls that people “laughed at” when he first wrote about it. “I think it’s become pretty conventional wisdom at this point that a big financial crisis is really bad for the economy.”
The Fed may need time to reduce inflation to the 2 percent target it helped institute, but unlike some writers — including this columnist — he says the target should stand. Two percent is not an “ideal” number, he said, and during his early academic career, he advocated a higher goal. 3 or 4 percent, for Japan. But now, US politics and practical reality mean that the 2 percent target must be upheld, he said. “I think if the Fed announces tomorrow that it is raising its inflation target, it will destroy its credibility,” he said. And any attempt to raise the target could stall Congressional action, which could have the opposite effect.
Are we in an AI bubble? Mr. Bernanke said it was difficult to identify bubbles when they were forming and to know what to do when one existed. “AI stocks are rallying despite the worrisome overall economic environment,” he added. “Is that a bubble? It depends on whether AI becomes the transformative technology some people think it will be. Maybe it is, maybe it isn’t. The problem is that when some bubbles collapse, So they can crash, as the housing bubble did 2008, Such a collapse “could bring down important financial institutions and lead to a tremendous financial crisis.” “If you have a strong and well-regulated financial system, then even if you have a bubble that pops, the system should be able to weather it without major impact on the economy,” he said.
He said that the regular news conference by the Fed chair, which Mr. Bernanke started and which was followed by his successor, Janet L. Yellen and Jerome H. Powell, are essential. They need not only to convey the Fed’s message to market experts, but also to explain what is happening to the general public. At the start of the 2007-8 crisis, he said, the Fed took a lot of heat for rescuing the big Wall Street firms, while supposedly neglecting the little guy. “It was probably impossible, but at least I should have tried to explain why it was important to maintain the stability of the financial system,” he said. “And why it would benefit everyone and not just Wall Street CEOs. It feels like the Fed is cornered by Wall Street, which is not true. But if you’re asking for remorse, I think that’s one thing I should have done more actively.
fiscal and monetary policy
The Fed, he said, had to innovate in those years because the economy was in a severe recession and needed more help, even though the Fed had already lowered short-term interest rates to near zero.
By 2011, he said, “In terms of the fed funds rate, we were facing a very nasty situation with more ammunition.”
More fiscal stimulus – more spending – could do the trick, he said. But, he recalled, “Congress was already trying to go into an austerity program, trying to cut fiscal policy.”
“And so essentially, the Federal Reserve was left as the only policymaker in Washington that could do anything about this desperately deep recession and all the job losses and all the costs it would impose on workers and their families.” Was,” he said. “So we needed a new set of tools,
In his academic work up to that point, Mr. Bernanke had developed the principles of quantitative easing (buying bonds and other securities to lower long-term interest rates) and forward guidance (using messaging to shift expectations). was prepared. These become permanent parts of the fed tool kit.
Massive fiscal stimulus certainly worked in the recent pandemic downturn, but with inflationary consequences, so the Fed is not only raising interest rates, but also using its new tools. In contrast to quantitative easing, it has been reducing asset purchases over the years, and has sent a lot of belt-tightening messages. At its next week’s policy meeting, the Fed will assess whether all these measures are slowing the economy.
He said the Fed’s job would be easier if fiscal policy were “more cooperative,” but it is most likely that the central bank will often find itself “the only game in town.”
a lazy investor
Mr. Bernanke is churning out a stream of books and articles on topics both brief and topical, including a paper in his December issue of the American Economic Review. Nobel lecture Summary of his life’s work. Paperback edition of his book, “Monetary Policy of the 21st Century” was released in May with fresh analysis of recent events.
Like many of us, Mr. Bernanke is putting away money for retirement. A cottage industry of Fed watchers basing their investment strategies on what they believe the Fed is doing. Mr Bernanke may be the most sophisticated of Fed watchers, but he said he was “a very boring investor”. “I basically have a well-diversified portfolio,” he said. “I don’t try to pick individual stocks. I don’t base my investments on what I think the Fed is going to do.
In fact, Mr. Bernanke told me that he essentially practiced the straight approach that “you advocate in your column.” “I’m certainly not going to advise people to buy meme stocks or do anything unusual,” he added.
He summarized his approach this way: “Something you said the other day was, you know, your portfolio is in line with your risk aversion and your liquidity needs.”
I would say, make sure you can pay the bills first. Never invest money in the stock market that you cannot afford to lose. And invest for the long haul.
Based on Mr. Bernanke’s own example, I would add: Think, study, innovate and do whatever you can to save the world. But keep it simple for your personal investments.