Q&A with Ben Bernanke: the former Federal Reserve Board chairman talks about quantitative easing, the rise of non-bank lenders and why Bear Stearns could be saved during the crisis but not Thornburg Mortgage.

Author:England, Robert Stowe

It has long been a point of debate. Do the times make the man? Or does the man make the times? In the case of Ben S. Bernanke and the Fed's battle to tame financial panic during the financial crisis of 2007-2009, historians in the future may conclude it was perhaps a little of both. [paragraph] The eyes of the world were on Bernanke, chairman of the Board of Governors of the Federal Reserve System, at the height of the financial crisis as he and Treasury Secretary Hank Paulson led a series of innovative initiatives to stop a financial panic and prevent solvent institutions from failing. [paragraph] The first tremors struck in August 2007 and the crisis slowly burned away, consuming a string of smaller mortgage companies until it flared up in March 2008 with the rescue of Bear Stearns and its sale to JPMorgan Chase in a Fed-led bailout that Bernanke justified because Bear Steam's failure posed systemic risk. [paragraph] The panic roared to its fiery peak in September 2008 with the conservatorship of Fannie Mae and Freddie Mac, which ultimately required $187 billion in injections from Treasury, paid for by taxpayers. It was quickly followed by the bankruptcy of Lehman Brothers and an initial $85 billion rescue of American International Group (AIG) (a bailout that would eventually require the government to advance $182 billion in loans). [paragraph] A series of innovative emergency lending facilities and guarantee programs and capital injections from Troubled Asset Relief Program (TARP) funds into the largest banks finally stabilized the system in late 2008.

In spring of 2009, stress tests of the nation's 19 largest financial institutions--an initiative led by new Treasury Secretary Timothy Geithner--showed that 10 of the institutions would need an additional $75 billion in capital to survive, should the economy deteriorate further. Markets were reassured, as the shortfall was less than expected. As a result, a degree of confidence was restored to the banking system and the atmosphere of crisis subsided.

Bernanke, who served two four-year terms as chairman from 2006 to 2014, was a player in all these events. Under his leadership, the Fed adopted an interest-rate target range of zero to 0.25 percent for the short-term Federal Funds Rate. That near-zero target still remains in effect nearly two years after his departure. At Bernanke's behest, the Fed also embraced inflation targeting, a goal he had long cherished, setting the target at 2 percent in 2012.

Beginning in 2009, the Fed under Bernanke launched the first of three rounds of quantitative easing (QE)--monthly purchases of Treasuries and mortgage-backed securities (MBS) to bring down longer-term interest rates to boost the economy and housing sector.

The third round of QE, launched in late 2012, was the largest, at $80 billion monthly in purchases or $1 trillion a year. The QE purchases increased assets on the balance sheet of the Fed from $800 billion to $4.5 trillion by the end of 2014, and assets have remained at that level since then.

The first reduction or tapering of asset purchases began in January 2014. The task of gradually reducing and ending the monthly purchases of securities fell to Bernanke's successor, Chairman Janet Yellen, who took the reins of the Fed in February 2014.

In one of those unexpected coincidences of history, Bernanke arrived at the Fed well prepared to fight financial panic because he had devoted much of his time as an economics professor at Stanford University and then later at Princeton University to studying monetary policy in the Great Depression.

He graduated from Harvard University in 1975 and earned a doctorate at the Massachusetts Institute of Technology (MIT) in 1979. His mentor at MIT was professor Stanley Fischer, who is now vice chairman of the Fed.

Fischer encouraged a young Bernanke, who was a student in Fischer's first-year class in macroeconomics and monetary policy, to read the 860-page tome, A Monetary History of the United States, 1867-1960, by Milton Friedman and Anna Schwartz.

Fischer told Bernanke that reading the book would either excite him or put him to sleep and, based on his reaction to the book, Bernanke would be better able to decide on the intellectual path he would pursue in his academic career. "I found the book fascinating," Bernanke writes in his new book, The Courage to Act: A Memoir of a Crisis and Its Aftermath, published in October by W. W. Norton.

The Friedman-Schwartz book documented how three episodes of money-supply contraction by the Fed--one just before the 1929 stock market crash and two more in the early years of the Great Depression--led to many bank failures and deepened and prolonged the Great Depression.

"After reading Friedman and Schwartz, I knew what I wanted to do. Throughout my career I would focus on macroeconomic and monetary issues," Bernanke wrote in his book.

While at Princeton, in addition to teaching classes, Bernanke became an adviser to the Fed. In 2002, President George Bush nominated him to a post as governor in the Federal Reserve System and he subsequently left academia.

Which brings us back to the question of the times versus the man. "It is kind of amazing Bernanke got the job at the time he did," because he brought important insights from his study of the role of monetary policy in the Great Depression, says David Wessel, director of the Hutchins Center on Fiscal...

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