Ben Bernanke: ¡°The burden is on central banks to help the recovery¡±

The conversation takes place in the office of David Wessel, author of In FED We Trust: Ben Bernanke¡¯s War on the Great Panic, one of a series of bestsellers published about the global economic crisis since 2007. The book chronicles how, as Federal Reserve chairman between 2006 and 2014, Bernanke made history by easing monetary policy to avoid another 1930s style Depression. Several copies of the book lie around the room, as does Bernanke¡¯s own memoir about that period, The Courage to Act: A Memoir of a Crisis and Its Aftermath. A cartoon of the former Fed chairman as Superman hangs on the wall. Bernanke (Augusta, Georgia, 1953), whose office is next door to Wessel¡¯s at The Brookings Institution, the prestigious Washington think tank, is regarded by many as a hero for his handling of the financial crisis.

He has also been nicknamed ¡°Helicopter Ben¡± by some for recommending large purchases of securities from the markets during the worst of the crisis to keep interest rates low, a policy that fell in line with Milton Friedman¡¯s metaphor about encouraging consumer spending by dropping money from a helicopter.

Others, particularly in the Republican party, see Bernanke, a student of the Depression and a baseball history buff, as less of a hero. He eventually left the party to become an independent.

Question. Did you think interest rates would remain so low for so long?

Answer. We didn¡¯t know how long it would be, but growth has been relatively slow, productivity gains have been slow, and interest rates around the world have been quite low for a number of years now. It¡¯s not just a short-term issue: interest rates have been declining for 30 years. The problem is that slow productivity and population growth mean low rates of return, so you¡¯re starting from a low base when you ease policy further to address a recession.

Q. Last week, in New York, you said that central banks were bearing too much of the burden in dealing with the crisis.

A. That¡¯s right. One reason interest rates are so low is that so much of the burden has been put on central banks to do the work to help the economy recover. And low interest rates are the main tool the central banks have. We could probably have recovered more rapidly, and maybe interest rates could have risen, if there had been a more balanced policy approach involving fiscal and other authorities as well as the central banks.

Q. After the fall of Lehman Brothers and so much stimulus, the US economy still raises concerns. Do more measures need to be taken?

A. Sure. As said, the central banks can only do so much. And in terms of realizing the economy's potential and putting people back to work, the United States has actually been reasonably successful. The unemployment rate is now 5%. What has been more disappointing is the slow rate of growth, which is something the central banks can do almost nothing about.

Q. What would you ask the next president of the United States to do?

A. To come up with economic policies that will make the US economy more productive and that would involve better tax systems, better education, and more investment in research and development; a variety of things to help the economy grow more quickly, which again, is out of the scope of anything the central banks can manage.

In terms of realizing the economy¡¯s potential and putting people back to work, the United States has been reasonably successful. The unemployment rate is now 5%

Q. Your stimulus program was attacked by many Republicans. Are you afraid of what Trump or Cruz are saying on the campaign trail?

A. I worry that some of the candidates in the primaries, along with other politicians, are talking about compromising the independence of the Federal Reserve, something I think would be a big mistake. There is a lot of talk of the need for reform, much of it not very well thought through, so I would hope that whoever becomes president will think carefully about how to achieve their objectives without doing away with independent monetary policy. Even though the central bank isn¡¯t the only game in town, it can be a very important part of an overall policy response to a crisis and hamstringing that ability to respond would not be a good idea.

Q. But you were criticized by the Republican Party.

A. Well, in 2010, the Federal Reserve received a letter from Republican leaders in the House [of Representatives] requesting that the Fed not undertake quantitative easing [by purchasing securities] arguing that this would spike inflation, bring about the collapse of the dollar and create asset price bubbles...This was five-and-a-half years ago and to this point we haven¡¯t seen any of those problems. Expressing their concerns about monetary policy, they underestimated the benefits and overestimated the costs. That said, I would agree that we need to be less reliant on monetary policy alone and that a more balanced policy mix would be better for the economy.

Q. Do you think that what is happening in Europe shows that quantitative easing on its own is not enough?

A. Yes. First, it took a number of years before the European Central Bank could take similar policy actions to the Fed or the central Bank of England and that delay was very costly. In addition, fiscal policy in Europe has generally been quite austere. More recently, it¡¯s become more neutral, but for many years it was actually a headwind to recovery. And so yes, the burden has been put on the European Central Bank to an even greater extent than here in the United States. As in the United States, I think a more balanced approach that included both fiscal and structural elements would be more successful.

Q. What would you do if you were in Mario Draghi¡¯s place?

A. I think he¡¯s basically doing what his mandate tells him to do, which is that he¡¯s working aggressively to try to meet his inflation target, but, again, I think that while it¡¯s important for monetary policy to be as proactive as necessary, he should be allowed to take a more balanced approach, as he has requested.

Q. Do you think Berlin represents Draghi¡¯s Republicans?

A. In the sense that German politicians and the media there have been very resistant to aggressive monetary policy and at the same time they¡¯ve also been unwilling to engage in any kind of fiscal action, I would agree. I think it¡¯s a mistake to rely solely on structural reform when you are starting from a situation of high unemployment and an economy which is still far from having reached its potential.

Q. Because structural reforms only start to work in the medium-term, and when you have an emergency¡­

I understand that people perceived the bailout as very unfair because it was. It was unfair that some financial institutions were protected while many people who lost their homes were not

A. That¡¯s right. Structural reform is important and changes could be made to make the European economy more productive and more efficient. But when you are starting with high unemployment, you need a balance of monetary-fiscal action as well as structural. The German trade surplus is an example of the problem, because they are in fact taking demand away from other economies. Germany could build more infrastructure, and it could increase wages to give German workers more income to spend, thus reducing its export advantage. It could also introduce other reforms to encourage private investment, rather than just deficit spending. But they¡¯ve been reluctant to undertake both monetary and fiscal action. And not every country can afford to run a major trade surplus.

Q. But the situation is different for every country in the EU. For example, in Spain, fiscal policies  impact on the deficit. How do you solve that dilemma?

A. The euro means monetary policy in Spain is the same as monetary policy in Germany, in the same way that the dollar ties Alabama¡¯s monetary policy to that of New York. The difference is that in the United States there is a central government that decides on fiscal policy in terms of the interests of the entire country, whereas in Europe there is no central fiscal authority for the entire zone. Instead each country looks to its own needs. Now Germany is saying that it is doing fine, so even though it could do more more fiscally, it don¡¯t see any reason to do so. Speaking frankly, this is the weakness of the euro: you have a single monetary policy but you don¡¯t have the ability to make a single fiscal policy to go with it. There needs to be more coordination among countries in the euro zone. If not, it¡¯s just going to take longer to make progress.

Q. Some people are uneasy about monetary stimulus measures that last so many years. Do you understand their concerns?

A. You have to think about costs and benefits. In a world in which fiscal policy is not doing anything, you are starting off with a recession with 10% unemployment, aggressive policy seems to be appropriate and I do believe, if you look back, you will see that aggressive monetary policies in the United States and the United Kingdom are part of the reason the United States and the United Kingdom recovered more quickly than Europe did. In the United States, GDP is now almost 10 percent above the pre-crisis peak, whereas in Europe, basically you¡¯re just flat. That¡¯s a huge difference. Evidently aggressive monetary policy has had a big benefit. Many of the costs that people have talked about such as inflation, commodity price spikes, the collapse of the dollar, asset bubbles, massive inequality ¨C all of those things have just not happened. Given that nobody else was doing anything, the central banks did all they could, and for the most part those policies have produced clear benefits and many of the predicted costs have not been incurred.

Q. When you go over the events from those years, do you wish you had done anything differently?

A. Obviously the Federal Reserve and other institutions were slow to recognize the problem before the crisis began and, in particular, we did not appreciate that losses in the mortgage market could generate a broad financial panic through the entire system. Once we identified that, there was a banking panic, and  we took action to try to stop that. The other area would be communication. We were so busy trying to put out the fire that we didn¡¯t perhaps spend as much time as we should have explaining to the public why we were doing what we were doing. I did try, I went on 60 Minutes...I visited colleges... But I think that many people still don¡¯t really understand what happened and why the Fed did what it did. My book was obviously an effort to try to explain.

Q. Do you think that what happened led people to mistrust economists?

A. Sure, the whole crisis didn¡¯t do economists or economics much good. I think that economists understood the basic mechanisms of what happened. It¡¯s like if a bridge collapses, it¡¯s not that engineers and physicists don¡¯t understand what holds a bridge up, but they didn¡¯t forecast that that particular bridge was going to have that problem. I understood what a banking panic was, I had studied history, learned about banking panics in the 19th century and early 20th century, but this banking panic took place in the context of a modern, highly sophisticated global financial system. It looked very different to previous banking panics. It took some time to recognize what it was. Conceptually, once we saw what was happening we understood it, but we didn¡¯t predict it in advance.

Q. When you saw bumper stickers saying: ¡°Where¡¯s my bailout?¡± you said you you understood those people¡¯s anger. Do you think certain individuals responsible for this crisis should be punished?

A. I understand that people perceived the bailout as very unfair because it was. It was unfair that some financial institutions were protected while many people who lost their homes were not. But we attached strings to the bailouts: at AIG, we took ownership of 80% of the company. After the crisis, AIG sued the Federal Reserve claiming we¡¯d been too tough on them. We weren¡¯t doing what we did to protect them, but rather to protect the system, because we knew that if the financial system collapsed it would bring down the entire economy. But I understand people¡¯s anger. Regarding individual responsibility, I think in some cases people did things that were wrong. But the Department of Justice is responsible for carrying out any prosecutions and they have generally taken the approach of imposing large fines on companies and using that money for relief on mortgage losses or foreclosures. They decided that individual cases would be very difficult to win for various reasons, mainly that the law is not sufficiently clear, and there isn¡¯t enough evidence...

Q. There are also people who think the stimulus packages exacerbated inequality in the United States.

A. That¡¯s not true. Inequality is a serious problem but it has been growing for almost 40 years. It¡¯s been a very long-term trend, driven by powerful forces like globalization, structural change, and technological change. Monetary policy was to help create millions of jobs, and that¡¯s good for the average person. It raised stock prices, but partly because the economy recovered, partly because rates of return are low.

Q. Is it true that a few years ago you had trouble trying to refinance your mortgage?

A.  I wanted to refinance my mortgage and I just called up a bank on the phone saying I was interested... informally, on the phone. The person asked me if was I employed. At this point I had left the Fed so I said ¡®I¡¯m self-employed.¡¯ He said ¡®do you have two years of tax returns showing your income?¡¯ I said ¡®No, I¡¯ve only been self-employed for six months.¡¯ So he said ¡®I don¡¯t think we can help you.¡¯ I didn¡¯t tell him my name. I didn¡¯t tell him my income.  I said this in public because I do think that regulations have generally been very constructive but sometimes they go too far. It¡¯s an illustration of how the regulations could be costly because you could have a legitimate borrower like me or somebody like me who, because the rules prohibit lending without adequate verification of income, couldn¡¯t qualify. As soon as I said that in public, of course I got 30 offers.

Q. You once said that if you never miss a plane, you¡¯re spending too much time in airports. So you believe you have to accept that innovation comes with a certain level of risk?

A. A major financial crisis is obviously very destructive, so it¡¯s very important to minimize the risk and make sure that if one does happen it doesn¡¯t have as catastrophic an effect on the economy as this last one did. But, to eliminate all risk whatsoever would probably mean eliminating innovation and risk-taking, which are part of a growing economy. That¡¯s not possible or even desirable. But let¡¯s be clear: we need to reduce the frequency, risk and impact. Since the financial crisis, a lot of progress has been made toward making the system safer and more resilient. For example, the amount of capital in the US banking system is far greater than it was before. They are under more comprehensive regulations and have to perform stress tests.

Q. Will we see negative interest rates in the United States?

A. I don¡¯t think that¡¯s very likely. The US economy is growing and is pretty close to full employment. The Fed has actually raised interest rates. If there was a slowdown it could do a number of different things. Also, there is at least some debate about whether the Fed even has the legal authority to impose a negative interest rate. We¡¯re pretty far away from that.

Q. What are the other options at the Fed¡¯s disposal?

A. I hope we¡¯re not going to need it. The best thing would be a better balance of monetary and fiscal policies. But if it comes to it, the Fed has plenty of other options. They can cut rates a little bit from here, forward guidance, if necessary it can implement more quantitative easing, while negative interest rates would be something to discuss, as well as targetting or pegging longer term interest rates...There are other things, some of them are somewhat experimental. If we do get to that point, it would be better to have a balance of monetary and fiscal policy.

Q. Do you think the increase in interest rates in December was premature?

A. I don¡¯t want to second-guess Janet [Yellen, who succeeded Bernanke at the Fed]. She has a hard enough job without me second-guessing her.

English version by Dyane Jean-Fran?ois.