Towards the end of the debate over the debt ceiling, I called former Federal Reserve Chairman Ben S. Bernanke. No conclusions have been reached yet, but they will come soon. At least this time, the financial system has again avoided a full-blown crisis.
But when truly disastrous events occur and Congress and the White House focus on political battles, the Fed becomes the “only game” – the only policymaker who can help a troubled economy. A lot, Bernanke said.
It is no longer Mr. Bernanke’s responsibility to solve the world’s most pressing problems. He stepped down as Fed chairman in 2014 after leading the Fed through the global financial crisis. Now 69, he is a university scholar. the brookings institute Stayed in Washington, mainly concentrating on research and writing.
His research showed “the potentially devastating consequences of banking crises” and showed “the importance of well-functioning banking regulation”, giving him the award. Nobel Prize Even if he made fewer headlines, his academic work and the changes he made at the Fed changed the way we understand financial news.
Still, Bernanke said he was still “monitoring the Fed very closely” and discussed a number of thorny issues including runs, inflation and threats to financial stability in wide-ranging interviews.
The banking system appears to be stable at the moment, but he said he doesn’t know. For example, when the global financial crisis began in the summer of 2007, Bernanke said he did not immediately realize how “devastating” it would be. He said he now regrets that it took him “months” to “understand the magnitude of the crisis.”
He said the financial system looks pretty calm today, but added, “What I’ve learned from painful experience is that you can never say never.” It is always possible. “
In agreeing to free dialogue, he insisted on one basic principle: don’t “guess the Fed after the fact.”
“I’ll tell you what I think the Federal Reserve is doing and why it’s doing it, but I won’t tell you what I think it should do at its next meeting,” he said. said.
Findings and Recommendations
As Bernanke got to work, his comments included the following highlights:
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Raising deposit insurance caps could discourage further runs. The insurance “should cover more than $250,000 per account” and would likely require large bank depositors to “pay a premium of some sort” to benefit from it.his research and that of his two colleagues 2022 Nobel Prize WinnersDouglas W. Diamond and Philip H. Divig, find that fear of losing money in weakened banks can trigger or exacerbate runs like those earlier this year, leading to severe economic stress. showed that it is possible.
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If the Fed had the legal powers other central banks have, it could invoke emergency powers whenever a crisis required a backstop for “shadow banks,” including hedge funds and investment banks, There would be no need to set up temporary relief “facilities”. , private equity funds, money market funds, etc. These giant institutions perform many of the functions of traditional banks. What’s holding the Fed back, he said, is “a structural flaw that was never rectified by Congress. That is, the Fed, on normal grounds, limits lending to banks only, not to other types of financial institutions.” It means that we are not lending to .
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Never assume that everything is fine with the financial system. Maybe not. Continuous monitoring and increased systematic regulatory oversight are necessary to avoid serious problems. Bernanke’s research shows that “the financial crisis of the 1930s was a major factor in the Great Depression,” an insight people “laughed at” when Bernanke first wrote about it. recalls. “I think it’s pretty common knowledge at this point that a major financial crisis is really bad for the economy.”
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It may take time for the Fed to get inflation down to the 2% target he helped formulate, but unlike some writers, including this columnist, he said the target should stick. . 2 percent is not an “ideal” figure, he said, and early in his college career advocated a higher target of 2 percent. 3 or 4 percent, for Japan. But now, considering US politics and practical realities, the 2% target should be maintained, he said. “I think tomorrow the Fed will lose credibility when it announces that it will raise its inflation target,” he said. And attempts to raise the target could backfire by triggering Congressional action.
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Are we in an AI bubble? Bernanke identified that a bubble was forming and said it was difficult to know what to do if one existed. “AI stocks have surged despite concerns about the overall economic environment,” he said. “Is it a bubble? It depends on whether AI becomes the game-changing technology that some people expect it to be. The thing is that when some bubbles burst, they can wreak havoc, just like the housing bubble did. 2008. Such a failure could “cripple a significant financial institution and cause a significant financial crisis.” “With a strong and well-regulated financial system, even if the bubble bursts, the system should be able to weather it without much impact on the economy,” he added.
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He said regular press conferences by the Fed chair, initiated by Bernanke and expanded by his successors Janet L. Yellen and Jerome H. Powell, are essential. These are necessary not only to convey the Fed’s message to market experts, but also to explain to the public what is happening. At the start of the 2007-2008 financial crisis, he said, the Fed had considerable zeal to bail out the big Wall Street companies, but perhaps ignored the smaller ones. “Probably couldn’t, but at least they should have tried to explain why it’s important to keep the financial system stable,” he said. “And why it benefits everyone, not just the CEO of Wall Street. He has a sense that the Fed is in the grip of Wall Street, which is not entirely true. But if you ask for regret, it is I think we should have been more proactive.”
fiscal and monetary policy
He said the economy was in deep recession at the time and needed more help, so the Fed had to innovate, but it had already cut short-term rates to near zero.
By 2011, he said, “we were running out of ammunition and facing a very, very bad situation with the Federal Funds rate.”
More fiscal stimulus, or more spending, might have helped, he said. But he recalled, “Congress was already trying to move to austerity and cut fiscal policy.”
“Essentially, the Federal Reserve remains the only policymaker in Washington who can do something about this hopelessly deep recession and job losses, and all the costs it is inflicting on workers and their families. It was done,” he said. “So what we needed was new toolset“
By that point, 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 change expectations) in his academic research. was They will become a permanent part of the Fed Toolkit.
While the recent pandemic-induced economic downturn has certainly brought in massive fiscal stimulus, inflation has also had an impact, so the Fed isn’t just raising interest rates, it’s also using new tools. In a reversal of quantitative easing, the country has sent out a ton of messages to cut back on years of asset purchases and tighten belts. The Fed plans to assess whether all these measures are slowing the economy at its policy meeting next week.
He said the Fed’s job would be easier if fiscal policy were “more cooperative,” but perhaps the Fed would often find itself “the only game.”
dull investor
Mr. Bernanke has published a voluminous series of books and articles on both esoteric and topical subjects, including an American Economic Review paper based on his December remarks. included. Nobel Prize Lecture Summarize his life’s work. paperback edition of his book, “Monetary Policy in the 21st Century” A new analysis of recent events was released in May.
Like many of us, Bernanke is saving for retirement. The cottage industry of Fed watchers base their investment strategies on what they believe the Fed is doing. Bernanke may be the most sophisticated Fed watcher, but he called himself a “very boring investor.” “I basically have a well-diversified portfolio,” he said. “I’m not picking individual stocks. I’m not investing based on what the Fed is trying to do.”
In fact, Mr. Bernanke told me that he basically follows the simple approach that “you claim in your column.” “I’m not going to advise people to buy memetic stocks or do anything weird,” he added.
He summarized his approach as follows: “The other day you said something like aligning portfolios with risk aversion and liquidity needs.”
First make sure you can pay the bill. Don’t invest more money in the stock market than you can’t afford to lose. And invest for the long term.
Based on Bernanke’s own example, I would add: Think, research, innovate, and do all you can to keep the world alive. But for personal investments, keep it simple.
