But when Lehman Brothers also faced a liquidity squeeze in September , the Fed did not come to the rescue. Lehman filed the biggest bankruptcy in U. Could Bernanke have avoided that outcome? No, he says — Lehman Brothers was beyond saving, because its balance sheet was in such dire straits that it could not post sufficient collateral to qualify for Federal Reserve aid.
This proved an important point — if a default cascade starts due to a bank failure, the Fed can stop it by bailing out the failed bank's counterparties. This hadn't really been tested before. And even if he wanted to directly bail out Lehman as opposed to arranging a shotgun marriage with a healthier bank , the existing legal framework he inherited forbade him from doing so. The system was cracked with frailties. Second, the Fed moved to shore up the broader economy.
With unemployment rising so quickly, the Fed quickly dropped short-term lending rates to zero , to discourage investors from idly sitting on cash and savings. Although Bernanke promised to keep rates low , unemployment was still rising, and deflation was setting in. Deflation is problematic for two reasons — first, it makes past debts more difficult to repay, thus increasing the risk of default; second, it discourages economic activity by depressing wages, leading consumers and businesses to just sit on bonds, cash, or bank deposits.
With its main tool — lowering the benchmark interest rate target — tapped out, the Federal Reserve needed a new set of tools to conduct monetary policy. Congress was little help: After it passed a large stimulus package in , it quickly became clear that no more stimulus money was forthcoming from the gridlocked legislature. Japan had experimented with asset purchases to conduct monetary policy at the zero bound. But these methods were controversial, since Japan at the time had suffered 15 years of false starts, weak growth, and deflationary slumps.
Bernanke's theory was that if you can't cut interest rates in the traditional way, you can still effectively cut rates by taking yielding assets out of the financial system and replacing them with cash. By taking safe yield out of the system, investors seeking a return on their investments would have to diversify their portfolios with productive assets like equities. More productive activities should produce more growth and jobs, bringing down unemployment and growing the economy.
By late , unemployment finally began to stabilize just below 10 percent, and the threat of a deflationary cycle receded. Unemployment fell, gradually. What was his grand career plan for rising to the top of the economic world? As Bernanke tells it, it was all quite simple. Bernanke intended to be a career academic.
He changed paths only when George W. Bush asked him to serve and Bernanke realized he had something to contribute. Always give back. Tags: fed , great recession , ben bernanke , fed chairman , lehman brothers , tarp.
Be Transparent For much of its history, the Fed was about as opaque as institutions come. The Depression was the longest and deepest downturn in the history of the United States and the modern industrial economy.
The Great Depression began in August , when the economic expansion of the Roaring Twenties came to an end. A series of financial crises punctuated the contraction. These crises included a stock market crash in , a series of regional banking panics in and , and a series of national and international financial crises from through The downturn hit bottom in March , when the commercial banking system collapsed and President Roosevelt declared a national banking holiday.
Return to full output and employment occurred during the Second World War. Each district had a governor who set policies for his district, although some decisions required approval of the Federal Reserve Board in Washington, DC. The Board lacked the authority and tools to act on its own and struggled to coordinate policies across districts.
The governors and the Board understood the need for coordination; frequently corresponded concerning important issues; and established procedures and programs, such as the Open Market Investment Committee, to institutionalize cooperation.
When these efforts yielded consensus, monetary policy could be swift and effective. But when the governors disagreed, districts could and sometimes did pursue independent and occasionally contradictory courses of action.
The governors disagreed on many issues, because at the time and for decades thereafter, experts disagreed about the best course of action and even about the correct conceptual framework for determining optimal policy. Information about the economy became available with long and variable lags. Experts within the Federal Reserve, in the business community, and among policymakers in Washington, DC, had different perceptions of events and advocated different solutions to problems.
Researchers debated these issues for decades. Consensus emerged gradually. The views in this essay reflect conclusions expressed in the writings of three recent chairmen, Paul Volcke r, Alan Greenspan , and Ben Bernanke.
Unintentionally, some of their decisions hurt the economy. Other policies that would have helped were not adopted. The Fed did this in an attempt to limit speculation in securities markets.
This action slowed economic activity in the United States. The Fed repeated this mistake when responding to the international financial crisis in the fall of This website explores these issues in greater depth in our entries on the stock market crash of and the financial crises of through We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year.
We'll see recovery beginning next year. And it will pick up steam over time. Asked if he thinks the recession is going to end this year, Bernanke said, "In the sense that this decline will begin to moderate and we'll begin to see leveling off.
We won't be back to full employment. But we will see, I hope, the end of these declines that have been so strong in a last couple of quarters. Unemployment is rising. Job losses are still very severe. And no doubt, the unemployment rate's gonna go higher than it is. But I think, again, that if we do succeed in stabilizing the financial system, that we'll begin to see a slower pace of decline, and eventually, a stabilization that will set the basis for a recovery," Bernanke said.
I think we've gotten past that and now the problem is to get the thing working properly again," the chairman said. For this interview, he opened up the Fed headquarters, rarely seen by the public.
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