Freakonomics Radio - 229. Ben Bernanke Gives Himself a Grade

Episode Date: December 3, 2015

He was handed the keys to the global economy just as it started heading off a cliff. Fortunately, he'd seen this movie before.

Raise your right hand and repeat after me. I, Ben S. Bernanke, do solemnly swear. On February 1st, 2006, the economist Ben Bernanke became the 14th chairman of the Board of Governors of the Federal Reserve System, a job better known as Fed Chairman. Until just four years earlier, he'd been a longtime creature of academia, primarily at Princeton. But in 2002, he took a job as one of seven Fed governors under Chairman Alan Greenspan. He later spent several months as the head of the Council of Economic Advisors in George Bush's White House. It was President Bush who first named Bernanke the Fed chairman. It's good to be with Anna, Ben's wife, Alyssa and Joel, his sister Sharon, and the other members of the Bernanke family. Welcome. Thanks for being here. You probably didn't think your brother was

going to amount to much. So I didn't come from Texas. I wasn't part of President Bush's original team. I wasn't involved in his elections. I mean, he basically, you know, got interested in me based on my professional qualifications, my academic reputation and the like. You write that your wife cried when you were offered the Fed chairmanship, but these were not tears of joy, at least purely not. Why? What did she foresee? Well, she understood that it was going to be a tough job and that the public scrutiny was going to be tough. But, you know, I was really interested in the economic part of the job and the policy part of the job. And the personal stresses that came along with it were, you know, it turned out to be much worse than I expected, frankly. So that was what she was concerned about.

So she was right in some large sense. Do you regret having taken the job? Well, at some level. I mean, obviously, I got a lot more than I anticipated, you know, but it was an important time and I feel like I made a contribution. And so I'm happy about that. Today on Freakonomics Radio, a conversation about the life story that Bernanke tells in his recent book, The Courage to Act. I was not somebody who had all their lives wanted to be a policymaker or certainly not Fed chairman. He explains what FDR got right and wrong during the Great Depression. And he assesses another political giant from that era. Ironically, and please take this the right

way, the person who sort of most understood fiscal policy in some sense was Adolf Hitler. Also, why an economist in the employ of the federal government isn't always as candid as the facts might demand? Well, it was partly the result of the fact that I was representing the administration. And you don't really want to go out and say, you know, run for the hills, right? From WNYC Studios, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner. Today's episode is brought to you by Popular Demand because four out of five podcast listeners surveyed said they cannot get enough of the Federal Reserve. My name is Ben Bernanke, and I am now at the Brookings Institution in Washington, and up till February of 2014,

I was the chairman of the Federal Reserve. You were indeed. And what shall we call you? Is it Mr. Chairman? Is that a lifetime honorific? What do you like to go by? I don't think it is. I don't honestly know. There's not enough examples of emeritus chairman. I guess Ben is okay with me. Ben? Really? You're going to let me call you Ben, Mr. Chairman? Absolutely. Can I call you Steve? I'd love it, but I feel like I don't deserve it, but I'm going to take advantage of it anyway.

Okay, Ben. All right, why not? Yes, sir. You write that, quote, toward the end of my tenure as chairman, I was asked what had surprised me the most about the financial crisis. The crisis, I said. Can you unpack that for a moment? Sure. I mean, it's not that we didn't see many of the elements of it. And I made a presentation to President Bush in 2005 in the White House explaining, you know, what we thought would happen if house prices reversed and came down, as they ultimately, in fact, did. And what I got right was that it would cause a recession. What I got wrong was I didn't appreciate

that the decline in house prices and the problems in the mortgage markets would generate this big panic that was in fact the reason why the recession was so, so deep. So, we understood about house prices. We understood about subprime mortgages. We understood that there were risks in the financial system. What we didn't appreciate was the vulnerability of the overall system to a panic. And that panic, once it became evident, then we had to address it very vigorously. Your personal background, I guess I would call it compelling, if not dramatic. Give us briefly a sense of growing up in Dillon, South Carolina, in a Jewish family with a kind of typically Jewish diaspora, you know, background before and then enrolling at Harvard in 1971 as a freshman? Well, I was, you know, I was part of the community and not part of it. Being Jewish,

small minority in a otherwise Christian community created a certain amount of distance in some respects, a certain amount of being an outsider. On the other hand, I was very much part of the town. My father and his brother were the town pharmacists and they knew everybody and everybody knew them. And I worked at the store and I later would work on the construction of the new hospital and I would wait on tables at the local tourist place. So I learned a lot about, you know, how hard it is to make a living and how hard it is to feed your family, especially when you don't have a lot of education. You write that in your academic career, you were, quote, a Great Depression buff in the way that other people are Civil War buffs, and that, quote, the holy grail of macroeconomics was essentially

to understand why the depression happened and why it was so long and deep. Okay. So, Ben, why was the depression so long and deep? Well, let me first emphasize what a puzzle that is. I mean, economists are used to thinking about market economies as working pretty well. You know, invisible hand leads to good outcomes. Most of the time, people can find work if they want to work. So here we had a situation where the world economy from 1929 until about 1941 was deeply

depressed with unemployment rates as high as 25% in the United States, was leading to huge political disruptions, including the rise of Hitler and other fascist leaders, challenges to capitalism in the United States. It was an enormous event. And so it was very puzzling how something like that could happen in a market economy. And I don't know if we fully understand it, but there were a couple of things that happened that I take lessons from. One of them was monetary policy, the control of the money supply and its effect on prices. We had in the United States a collapse in the money supply and that led to a deflation of prices of about 10% a year.

People didn't want to buy things because they knew the prices were going to fall further. Debtors couldn't pay their debts because the prices of what they sold were falling, like farmers, for example. Firms didn't want to invest because they knew they saw the prices of their products were plummeting. So the deflation of the 30s was one of the major factors. By the way, the fact that the world was on a gold standard meant that whatever happened in the US on monetary policy essentially happened elsewhere as well because the gold standard linked the money supplies of different countries together in a very tight way. So that was one very important factor, the monetary policy or the lack thereof in the 30s. The other thing which actually was something I worked on in my own research, was the collapse of the financial system. In the United States, we had at the time a remarkable number, something like 24,000 individual banks in the country.

About a third of those, something like 8,000 of them, failed during the 30s. And the result was a situation where very difficult to obtain credit, a lot of fear. And that, I think, also contributed not only here in the United States bank failures, just transport yourself for a moment back to this time. Pick the year. I don't know what the proper year would be to forestall this, but let's say we install you as Fed chairman then. What could you have done? Well, it might have taken more than just the Fed chairman, but together, I think two things would have been very important, particularly from the Fed's perspective.

One would have been to prevent the collapse in the money supply. And doing that, more could have been done even in the context of the gold standard that existed in the early 30s. But getting rid of the gold standard or abrogating the gold standard, which is what the UK did in 1931, for example, would have been very helpful. There's a lot of evidence that countries that stepped away from the gold standard and allowed their money supplies to grow to avoid deflation did much better than countries that accepted deflation. And indeed, one of the most important things that Franklin Roosevelt did when he became president in 1933 was to take the United States off the gold standard. So that was a very important thing.

The other thing, the Fed could have done more. And why they didn't actually is a bit of a puzzle. They could have done more to prevent the collapse of so many banks. They could have done what we did, the Federal Reserve did in 2007, 2008, which was to make loans to banks that were suffering from runs by their depositors, taking as collateral their loans and other investments, and by providing more liquidity to the banking system, they could have likely slowed the panic, slowed the bank runs, and avoided so many failures. So FDR is the hero, really, in your telling of the Depression. I shall ask the Congress for the one remaining instrument to meet the crisis. Broad executive power to wage a war against the emergency. He tried several what you call experiments and that, quote, collectively, they work to you right now. How universally accepted is that argument among economists? To my understanding, it's not

universally accepted, correct? Well, I think there are a couple of things he did that were clearly helpful. The first one was going off the gold standard, allowing the money supply to grow. The second was putting in deposit insurance, which brought the bank runs, the banking panics to an end. And I think that those two things, I think almost any economist, particularly those who've studied the depression would agree that those are very important positive steps to stopping the collapse. Now, you could argue that more could have been done to help, you know, after 1934, when you saw a lot of recovery, the recovery from 1934 to 41 was actually somewhat halting and included a new recession in 1937-38.

And critics could argue, for example, just to make two points. One would be that he didn't do enough with fiscal policy, that he still had a balanced budget mentality. He campaigned on a balanced budget platform when he ran for president, that there wasn't enough done on the fiscal side. The other potential concern was that he took some actions that were probably counterproductive. And so one example would be the National Recovery Act, which actually put floors under prices, which was a kind of awkward way to try to stop the deflation. But I think most research today would suggest that that was actually pretty counterproductive. And what about taxation? What could he have done differently? I suppose he could have cut taxes, but taxes weren't as high then as they are now.

The general recollection people have or the vision they have of the 30s was that the government employment programs like the WPA and the building of the Hoover Dam and things like that were a big deal. And they were important, but relative to the size of the problem, they were actually quite small. As early as the 1950s, economists pointed out that the fiscal programs of the 30s were actually very modest compared to the size of the problem. Ironically, and please take this the right way, the person who sort of most understood fiscal policy in some sense was Adolf Hitler because the rearming of Germany in the 30s was so big and so extensive. Of course, he had other objectives in mind, but the side effect of that rearming together with a big highway building program was such that Germany actually came – which had a very deep depression actually came out of it

much quicker than other countries and suggested that a more aggressive fiscal program would have helped the United States as well. And of course, ultimately, what brought the United States out of the Great Depression was World War II, which was, you know, unintentionally a huge fiscal program. Now, let's get into the crisis, which I'm sure is a lot of fun for you to relive. When you came in, what did you know and what did you not know? And what was your kind of assessment of the economy at the moment that you assumed the chairmanship? This was February of 2006 is when I first became chairman. At that time, some of the things were looking okay.

You know, 2005, 2006 were pretty solid years. The housing sector, which had been very hot, of course, was showing signs of cooling. We also saw some problems in the mortgage markets that would grow over the year, obviously in the so-called subprime mortgage market, which was the mortgages to people with lower credit scores. I had some concern about broader financial stability issues when I first came on. In fact, even before I was sworn in, I met with staff and I tried to go through what our contingency plans were and what kinds of systems we had for monitoring the financial markets and the like. So I knew,

again, from history that one of the things that central banks have to do is pay attention to financial stability concerns. So those were some of the elements that central banks have to do is pay attention to financial stability concerns. So those were some of the elements, but I certainly did not put a high probability at least in 2006 on a crisis of the severity that we would later see in beginning really in the summer of 2007. That only occurred over time. but you seem pretty measured, at least, highly educated and very much aware of the role that central banks have played throughout history. But I could also see how someone reading the same book might also think this is exactly the wrong kind of person to have in charge. He's been very removed from these kind of issues, a kind of ivory tower theoretical background. In fact, you posit that your predecessor, Alan Greenspan, perhaps saw you as, quote, too academic and consequently naive about the practical complexities of central banking. Then you write, interestingly, that opinion was not without merit.

So I was not somebody who had all their lives wanted to be a policymaker or certainly not Fed chairman. I did an academic my whole career. So I had the academic type of qualifications. I was knowledgeable about my subject, but I had a little bit of an ivory tower aspect, and I tended to work on my own, occasionally with co-authors, and so I wasn't somebody who was heavily engaged in political type activities. The only political background I had before I went to Washington was two terms as a member of the Board of Education in my town in New Jersey. If there was one central difference you could identify between academic economics,

where you spent the first few decades of your career, and then governmental economics, where you spent the last couple, what would that biggest difference be? Well, there are many differences. I think the biggest one is just the political context. In academia, you're thinking about economic policies, you know, in terms of what's the absolute best thing one could imagine doing. Whereas in Washington or any other political context, you have to think about how can you sell what you want to do to others who are involved in the process. Would you say that you adjusted to that difference organically and well, or was it always a difficulty? Well, I was surprised by how big a share of my time it took to talk to the administration and to Congress and in general to communicate more broadly to the markets and the public. But I quickly understood it was a big part of my job, and I think I adapted over time. Although you do write that you never enjoyed giving testimony.

Why was that? Well, first of all, it's a stressful situation. But also, testimony is typically not about, you know, learning, not about the legislators learning about the situation. I mean, I think a lot of it is an opportunity for them to express their concerns or their political views or their ideology. Mr. Bernanke, if you don't mind, would you tell me whether or not you do your own shopping at the grocery store?

Yes, I do. Okay, so you're aware of the prices. But, you know, this argument that the prices are going up about 2%, nobody believes it. You have to be a large, greedy, reckless financial institution to apply for these monies? There is no subsidy. There is no capital involved. There is no gift involved. And they were often very tense situations and sometimes downright unpleasant. But that being said, I, you know, while I didn't personally enjoy them, I understood they were essential. And, you know, I never avoided them. I did my best. I testified something like 80 times while I was chairman.

In early 2004, so a few years before the crisis, you were still a governor at the Fed. You weren't chairman yet. You gave a speech at the Eastern Economic Association in D.C., and your speech was titled The Great Moderation. And your speech began, one of the most striking features of the economic landscape over the past 20 years or so has been a substantial decline in macroeconomic volatility. And you continued, three types of explanations have been suggested for this dramatic change. You said they were structural change, that is in the economy itself, improved macroeconomic policies, and good luck. And then you generally discounted good luck and also structural change generally and came down firmly on the side of monetary policy. Now, maybe we shouldn't be surprised that a person whose professional activity is monetary policy would vote for monetary policy. But if that was, in your view, then in 2004, a central cause of the great moderation that we were all enjoying, and then the great moderation suddenly ended and we entered instead a great recession, well, wouldn't the average person be inclined to think that monetary policy was to a large degree to blame for the crisis after all?

No, that doesn't follow at all. I think that monetary policy was a lot better in the 90s and 2000s. I mean, remember, the great moderation so-called started in the mid-1980s. And when was that? That was after the 70s when inflation got out of control and the early 80s when Paul Volcker, the chairman of the Fed at the time, came in and fought inflation and conquered it. And after he did that in the 80s, in the 90s and early 2000s, Alan Greenspan basically continued that fight and low and stable inflation and stable monetary conditions made the economy more stable. Now, one could argue that a more stable economy was one of the factors contributing to more risk-taking, which then built up in the financial system. I don't think you would want to conclude from that the monetary policy ought to intentionally destabilize the economy to prevent more risk-taking.

No, of course not. But like you just said, the incentives become present for more risk-taking. No, of course not. But like you just said, the incentives become present for more risk-taking. And at the end of the day, everything you've described in the conversation today makes it sound as though the crisis kind of snuck up on everybody because there were systemic opportunities for people to take on that risk, to absorb the risk, or really to pass on the risk. So wasn't that in some ways a product of the great moderation in the monetary policy that helped induce the great moderation? In other words, so easy for anyone to borrow anything for any purpose and so on that really

isn't that what snowballed to some degree? Again, I don't think that's the right way to think about it. The way I think about this, you got two tools. You got monetary policy and you got bank regulation. Monetary policy, the job of monetary policy is to try to help keep the economy stable. The job of regulation and supervision is at least be the first line of defense against excessive risk-taking and those kinds of problems building up in the financial system. So you got – you used the right tool for the job. You used monetary policy for economic stabilization and supervision regulation and other related policies, more targeted policies to address financial stability concerns. So what I would argue is – well, it may have been the case that one of the factors

that supported more risk-taking was the stability of the economy overall, which in some sense ironically was in fact the result of successful monetary policy. That the true policy failing leading up to the great crisis was the regulatory and supervisory side. That we didn't – we – and I say – now I'm talking about the regulatory community in general didn't fully appreciate the risks that were building up nor did the banks themselves and they weren't tough enough about preventing them. And so I think that today, for example, I think monetary policy is still good and is working to help keep our economy growing and keep inflation low. But what we've done is we've greatly strengthened the regulatory system. That's the right tool. So if you ask the question, you know, what should have been done different, I don't think you should have had, you know, bad monetary policy to keep the situation unstable so that people wouldn't take risks. I think that's crazy.

I think the right thing to have done would have been to have much stronger regulatory policy, and that's the right tool to focus on that particular problem. Anyone who spends time on YouTube and on particularly libertarian or right-wing quadrants of YouTube will find statements, videos of you, compilations of conversations you had, whether in the media or elsewhere, that as modulated as they may have been in retrospect appear kind of monstrously wrong. I'll read a quick excerpt from November 2006. You said, consumer spending, supported by rising incomes and the recent decline in energy prices, will continue to grow near its trend rate. In February 2007, you said that, quote, there's a reasonable possibility that we'll see some strengthening in the economy sometime during the middle of this year, which did not happen.

And then this one goes back to 2005. This was, I believe, from CNBC. This was about the lack of a housing of a coming housing bubble. Well, let me play you this little piece of tape. You can see some types of some types of speculation, investors turning over condos quickly. So those sorts of things you see in some local areas. I'm hopeful that, and I'm confident, in fact, that the bank regulators will pay close attention to the kinds of loans that are being made, making sure that underwriting is done right.

But I do think that this is mostly a localized problem and not something that's going to affect the national economy. What do you think, what do you say when you hear that statement of yours from 2005? Well, it was partly the result of the fact that I was representing the administration, and you don't really want to go out and say, you know, run for the hills, right? We were paying attention to the housing situation. But no, I absolutely, you know, the first thing she said, by the way, when saying in 2005, 2006, the economy was going to continue to do well, it did do well. 2007 was not a bad year until the end. So what we, you know, the economy was doing okay in a broad sense.

What we missed, what we didn't anticipate was that the decline in house prices and the problems in mortgages would generate this huge panic. So that, you know, I can't deny that. I think that I wouldn't give us a particularly good grade before the fall of 2007. After that, when we began to see what was going on there, we were much more aggressive in responding. All right. So if you're going to give yourself a letter grade for before and after, what are your letter grades? C minus and A minus, something like that. But I don't, it's really not up to me. I think that, you know, others have to make those judgments. You know, in the end, we did stabilize the system and the economy has recovered. And the U.S. recovery, while not everything we would like, has been pretty good compared to other industrial countries.

Coming up on Freakonomics Radio, did Bernanke and the Fed really need to intervene as aggressively as they did? I mean, how big a probability of a second depression do you need in order to act? Today, we're talking with a man who was essentially handed the keys to the global economy just as it started heading off a cliff. It began really in the summer of 2007. See, I need to say first that the crisis wasn't fundamentally about subprime mortgages and the like. It was really about the fact that those problems in the subprime mortgage market triggered a much broader financial panic, a financial crisis throughout the whole system. It's like you got a nail stuck into you and you got tetanus that spread through the whole system, if you will. And so, we were quite aware, again,

of the problems in subprime mortgages and the like. But it was only when we began to see that this disease was spreading much more broadly that we began to get really worried. I remember in August of 2007 having breakfast with Secretary Paulson, the Treasury Secretary, Hank Paulson. I would usually have a meal together, breakfast or lunch once a week. And we would often meet either at the Fed or the Treasury and have our oatmeal together. We're both big oatmeal fans and talk about what was going on. And that particular morning, we were looking at the market developments and we saw that in Europe, there had been a lot of volatility going on in the markets and the stock markets had dropped and there seemed to be a lot of fear.

And as we learned, that particular day, a big French bank called BNP Paribas had basically said that there had been no demand for its subprime mortgages. It couldn't determine what they were worth and they were going to stop even valuing their assets because nobody wanted to buy. And that was spreading fear through the system. And I went – Paulson and I talked about it. I went to the Fed and it became clear that things were starting to get a bit hairy. And so we took some actions that day to try to put cash into the system to make sure that interest rates didn't spike too much and that, you know, try to calm down the markets a little bit. But that was one of the first days. And by the way, that particular day, I had been planning

the next week to go on a vacation, a beach vacation with our family. And that vacation got canceled. And I really haven't had a vacation. I didn't and that vacation got canceled, and I really haven't had a vacation. I didn't have a vacation over the eight years I was chairman, basically. Things were getting hairier and hairier. First came Bear Stearns. Bear Stearns was an investment bank that was facing a run. It was losing its funding, as people who lent to it short-term were pulling their money out. It was losing its funding as people who lent to it short term were pulling their money out. It was very exposed because it had invested a lot in housing and subprime mortgages. With Bayer on the verge of collapse, Bernanke helped broker a deal for JPMorgan Chase to buy

it, with the Fed providing a $30 billion line of credit. Bear came unraveled faster than most people would have suspected. The rescue of Bear Stern. They couldn't prevent a run on the bank. Eliminating the entire trading day on Wall Street. Investors pulling their money. Big hedge funds not doing business with them. In fact, we haven't seen the Fed do something on a weekend in more than 20 years. It might even be longer than that.

We were very concerned about it because it was very interconnected with many other firms. And we were afraid that if it failed in a conspicuous collapse, that it would trigger fears about other financial institutions. Were you, I couldn't really tell from reading your book,

the degree to which you personally were, I guess, surprised or caught off balance by just how overexposed and overleveraged the banks were. If you were very much surprised by that or taken by surprise, was that a function of your just not having come from that world? Or was it just the magnitude of the leverage that was really hard to comprehend? Well, financial panic is a self reinforcing thing and people get afraid. If they get afraid, they won't lend. If they won't lend, then in order to get cash, banks have to sell their assets.

That pushes down the prices of their assets. That makes people even more afraid. So a financial panic can get its own dynamic going. Now, that having been said, I think that it is true that it wasn't just me. I think it was true that the banks themselves did not really appreciate fully how exposed they were both directly and indirectly to housing mortgages and related assets. If you had asked – and this is a failing of both the banks and the regulators including the Fed. If you had asked a big bank in 2006, hypothetically, suppose that house prices were to drop 30%, what would happen to your balance sheet? How much would you lose? They would have had a lot of trouble giving you a plausible answer because they were exposed

not just through the mortgages they held, but also through various kinds of derivative contracts, through off-balance sheet investments that they had made, through their investments in other companies. Very complicated, lots of different businesses. And they just didn't have enough of a grip. And it was still getting worse. Several months after the Bear Stearns rescue, Lehman Brothers, a huge and historic financial services firm, went bankrupt. This time, there was no Fed rescue. Then came another foundering firm, the massive insurance company AIG. New developments surrounding AIG. Standard & Poor's downgrading its rating on AIG. An unprecedented move to save the financial world from meltdown. They insure everything from cars to corporations to you name it.

How do you stem the fear tonight? It's going around the globe. AIG is a blow. From your book, it sounds like selling the AIG decision. So this is an $85 billion. I don't know if bailout is technically the word you use or not. Sounds like that one, the environment was so intense that the White House and others and Congress kind of – that was a hurried one, but they bought it. You sold it, and then you pulled it off. Can you just talk about that transaction for a moment? Sure. Yeah, I'd call it a bailout because the company would have failed if we hadn't act.

On the other hand, I think it's important to understand that we didn't give them $85 billion. We lent them a short term. We made them a loan of $85 billion and we got all the money back with interest. I talk in the beginning of the book about how Secretary Paulson and I went to Congress to explain to an ad hoc group of legislators what we were doing, why we had to stop AIG from failing, you know, how we were going to approach that. And they took, you know, listened to us and gave us, we took their questions for a while. At the end of this process, Senator Harry Reid, who was the majority leader of the Senate, basically told us that, well, appreciate your coming and explaining all this to us, but just so you understand, you don't have Congress's

approval and this is all on you, basically. It's your call, your decision, your responsibility. And the next day, there was a wire story which said, you know, Republicans and Democrats bury the hatchet right into Ben Bernanke, you know. So, and then, of course, later on, there was the big blow up over the bonuses that AIG paid to some of their traders. So they were politically just a huge problem for us. And for many people that that company symbolized, you know, everything that went wrong in the in the crisis. But in retrospect, even in retrospect, you sound as though you still believe you had to do what you did, correct? Oh, absolutely. I think in retrospect, you know, when we were going into these situations with Bear Stearns and Lehman and AIG and so on, there was a lot of debate before the fact about whether or not it was safe to let these companies just fail. And we were, if anything, were, when I say we, I mean, again,

Geithner and Paulson and I were very much on the side of, no, it's not safe to let them fail. It's just going to make the panic much worse and really have a bad effect on the whole economy. And so, in retrospect, it's evidently clear that we had to do something to prevent these companies from failing. Now, unfortunately, we didn't have a really good set of tools to do something to prevent these companies from failing. Now, unfortunately, we didn't have a really good set of tools to do that. And I'm happy to say that the regulatory reforms that took place after the crisis have put some tools in place so we won't ever have to do this kind of weekend ad hoc intervention again.

And so I think that substantiallyively, it was clearly right, but politically, it was poison. I can see why you'd say it's evidently clear that letting them fail would have fueled the panic. And I totally understand that you have kind of interventionist bona fides from way back and beliefs from way back. But the fact is, we don't have the counterfactual. We can't know the counterfactual. So just persuade me why it is so evidently clear. In other words, let's say that Lehman, Bayer, and AIG had all been allowed to absolutely disintegrate. As an economist, I mean, what economists are always telling us is, well, these failures are

really necessary to make the market fair, make it work, and that by bailing out and so on, you create moral hazard by telling these institutions that, you know work, and that by bailing out and so on, you create moral hazard by telling these institutions that, you know what, no matter how deep you get, there may be a rescue. So persuade me that you're right and that we should believe people like you when you say things like this. Right. Well, as I say, I was there. We had an experiment. The experiment was the collapse of Lehman, which we tried desperately to prevent but were unable to prevent, when it collapsed, the panic by all kinds of objective indicators in terms of the volatility in markets and the collapse of credit and so on, jumped to a whole new level. And immediately after that, the global economy began to fall off a cliff. I mean, almost immediately. The fourth quarter

of 2008, which followed Lehman, was the worst quarter really since the early 1930s. It was a terrible collapse. Millions and millions of jobs got lost. And then the first quarter of 2009 was also very, very bad. We intervened, took various actions including the passage of the TARP bill, which allowed the government to put capital into banks to try to stabilize them. But, you know, and after we intervened and the system began to stabilize in the spring of 2009, then the recession stopped and we began to grow again in the second half of 2009. So the timing is almost perfect. And we've seen, you know, recently the Council of Economic Advisors put out a paper

which compared the declines of 2008 where the crisis was at its worst to what happened in the United States in 1929 after the stock market crash and found 2008 was actually more severe. So every indication was that not just the U.S. economy but the global economy was freezing up, activity was falling off a cliff, jobs were collapsing, and all of that was directly traceable in time and in terms of everybody's perception to the acceleration of the panic. And the panic, in turn, was directly connected to the collapse of those firms. So, look, from a policy point of view, I mean, how big a probability of a second depression do you need in order to act? I mean, I think 25% would be enough, but in my view, it was probably about 90% that if the panic had not been arrested, that the depression we had would have been much,

much worse. It might be churlish to say this, but I had to wonder, when a scholar's devoted his entire career to studying the Great Depression, might every bad recession look like the next Great Depression? Bernanke's interventionist argument is certainly compelling, and who am I to challenge him? Ben Bernanke has forgotten more about depression economics than most of us will ever know. But was Lehman, for instance, really the experiment that proved the need for such a historic Fed response? Would the death of AIG really have been the death of the American economy? And what about Bernanke's decision to use quantitative easing? That's the policy whereby the central bank starts buying up securities by the trillions of dollars in order to stimulate the economy. Quantitative easing was such a

strange concept to so many people that it provided the basis for a YouTube sensation called Quantitative Easing Explained. Did you hear about the Fed? No, what about the Fed? They announced another round of the quantitative easing. What does that mean? It means they are going to make large asset purchases via POMO. What does that mean?

It means they are going to expand their balance sheet and buy treasuries. What does that mean? It means they are going to print a ton of money. So why do they call it the quantitative easing? Why don't they just call it the printing money? Because the printing money is the last refuge of failed economic empires and banana republics, and the Fed doesn't want to admit this is their only idea. Who runs the Fed? The Fed is run by the Ben Bernanke.

Does the Ben Bernanke have a lot of business experience? No, the Ben Bernanke has no business experience. Does the Ben Bernanke have a lot of policy experience? No, the Ben Bernanke has no policy experience. So what qualifies him to run the Fed? I don't know. Maybe the fact that he has a nice beard. But my plumber also has a nice beard. Talk about quantitative easing in a way that all of us can understand and appreciate and how you feel about the degree to which you embraced it

and the method that you used, you and others used to roll it out and how you think it's worked? Well, the problem was that, you know, the Fed usually operates by reducing to ease the monetary policy. It reduces short-term interest rates. And the trouble was that short-term interest rates fell almost to zero. And so you couldn't really cut them much anymore. So what we did was what's called quantitative easing, which was that the Fed basically bought on the open market, it bought treasury securities and some government guaranteed mortgage backed securities. And in doing so, by buying those securities, by increasing the demand for those securities, it pushed down

longer term interest rates. And that led more people to buy houses and help the economy recover. By the way, this is not government spending because we own the securities which pay interest and ultimately can be resold or allowed to run off. So the Fed actually made huge profits for the taxpayer on this activity. But anyway, it did seem to help. Most of the academic studies and central bank studies of quantitative easing suggested it was one of the reasons why our economy came back, why we avoided deflation of prices. And I think the best evidence for that is that, you know, other countries, without exception pretty much, have copied what the Fed did. Most recently, in January of this year, the European Central Bank, six years after the Fed, actually began doing the same thing for Europe. And Europe has been doing better, you know, since that activity was undertaken. You've said you wished there had been more punishment, I guess, prison time, really,

for some people who helped create the financial crisis. It sounds as though you can really identify with a kind of general view that people who did things that shouldn't be rewarded either got rewarded or didn't get punishment the way they might have. You now, having served in office for a bunch of years, now are a private citizen. You can go on the lecture market, which I know you've done. I've read that your first talk in Abu Dhabi, you received about $250,000 for that talk. Correct me if any of this is incorrect. And there are those, especially economists, who received about $250,000 for that talk. Correct me if any of this is incorrect. And there are those, especially economists, who would say, well, of course, it's a free market. There's a demand for Chairman Bernanke's services, and he should be free to go out and earn a living

and so on. On the other hand, there are those people who say, you know, he may have done a good job after the crisis hit, but gosh, I sure wish he'd done a better job of forestalling it or foreseeing it. And I don't like the idea that someone like him and then a bunch of other people who actually were more contributory to the crisis itself, I don't like to see them rewarded or at least not suffer. What do you say to that general sentiment? Well, what I said, and you didn't quote me right, what I said was that I objected to the way that the Department of Justice went about their investigation. I think if people break the law and whether they're bankers or, you know, pickpockets, whatever they are, I think they should face the consequences. I think what the Department of Justice did for reasons which I don't fully understand was at least least in some cases, it chose to pursue institutional

remedies. That is, it would say, well, this bank, you know, there were a lot of bad loans made and a lot of shady practices. And so, we're going to find the bank, which means the shareholders, you know, billions of dollars, instead of investigating individual culpability. So, you know, I don't know whether more people would have gone to jail. Some people did go to jail, some people who rigged markets and the like or insider traders and so on. But I think that we missed out an opportunity to find out more about what, you know, individuals did and what individuals had responsibilities. I don't – you can have bad things happen. You know, if a plane crashes, it doesn't mean that somebody necessarily, you know, sabotaged the plane. It could have been a series of mistakes and errors.

And I'm sure that mistakes and errors were very important in the crisis, including on the regulatory side. But to the extent that there was fraudulent behavior or market rigging or whatever, that should be investigated. I'm totally in favor of that. So you're at Brookings now. I read you're an advisor to a couple of investment firms, Pimco and Citadel. You do public speaking. I'm curious, will you teach again? Will you perhaps start a podcast? What's in your future? Well, I've been doing a little blogging, as you may know. I do enjoy your blog very much, too. Thank you. Good. Besides that, you know, I just, obviously, I just finished this book,

The Courage to Act, a book about my experiences and my time in Washington. So, I think I'm going to take a little bit of time to relax and breathe and think about what's next. I thank you so much. I'll call you Mr. Chairman, even though you've given me permission to call you Ben just because it seems more appropriate. But Mr. Chairman, thank you so much for your time. I appreciate it. Thanks, Steve. Maybe I'm reading between the lines,

but my largest impression from speaking with Ben Bernanke is that he feels that his work during the financial crisis and the work of many people around him, surely, is wildly underappreciated. That he happened to be on call when a ferocious storm slammed into the global economy. And even though it got very, very ugly for a while and remains ugly in some places, that it could have easily gone beyond ugly had it not been for some very smart and cool under pressure responses. Indeed, some courageous responses by his reckoning. Again, his book is called The Courage to Act. We'll never know what would have happened if the Fed and Treasury didn't do what they did, but I will say this. It's always easier to shout about the things that have gone wrong

than to appreciate what hasn't gone wrong. I've been thinking about this a lot lately after the terrorist attacks in Paris and elsewhere. Every attack produces the predictable cycle of shock and then the recrimination and finger pointing, sometimes as much at law enforcement and intelligence and military officials as at the perpetrators. But what about when those same officials prevent a terrorist attack? Our appreciation is generally muted and short-lived. We forget about the catastrophe that was a hair's breadth from happening and we move on. that was a hair's breadth from happening, and we move on, kind of like we've moved on from the financial crisis that Ben Bernanke helped steer us through.

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