America's Fiscal Future with Ben Bernanke

good morning everybody thank you for coming out it's nice to have a good full house there's quite the line downstairs so I hope everybody moved through quickly I'm Ben white politico's chief economic correspondent author of the daily morning money newsletter I hope you read it if you don't see me afterwards will sign you up you know I can deliver it personally to your house if need be thrilled to be here again in New York City at the Nasdaq market site in Times Square thanks to all of you are here and everybody joining on the livestream this is politico's first New York City event series throughout the year our America's fiscal future programs we're examining how policy politics and national trends are influencing the current fiscal landscape and the future of the national economy today I'm honored to have former chairman of the US Federal Reserve dr. Ben Bernanke for a timely and important discussion here in New York City I hope all of you have gotten his book it's a tremendous read if you study the period of the financial crisis it's essential reading and the history of the Fed it really is quite captivating for those of us who live and breathe this stuff so I highly recommend you get a copy of it before jumping into the program I'd like to thank our sponsor Nasdaq for their support of America's fiscal future and hosting us here at market sites for these important conversations Before we jump into the program here to say a few words is Hans Orly akhom Sinise the president of Nasdaq oz so good morning and welcome to Nasdaq market sites our store front to the words very open and close to markets every day so we are here today for the third event in our life series we cook produced together with political on American fiscal future in a strike we of course also very grateful that our special guest today is now free from the constraints of the Federal Reserve Banks to comment freely and openly on economic and fiscal issues we can all surely benefit from pimping Angus wisdom and insight could it particular as America returns to a more historical normal economic and political situation and we are all curious about what's next you will soon be naval hands of Ben white political senior economic correspondent and our moderator for today's conversation with Chairman Bernanke but let me first say that the return to normalcy we are seeing is not a foregone conclusion the persistent uncertainty in the global economy the volatility we saw in August mean mr. Bernanke s former colleagues at the Fed along with the Congress and the Obama administration must walk a fine line to ensure American America's long climb back and if I may steal a phrase from the title of mr. Bernanke s new book it will take acts of courage from all of us to ensure the return so NASA is pleased and proud to be part of these important discussions on America's fiscal future and we are so happy that you have elected to spend our morning with us we know furniture let me introduce political chief economist correspondent Ben White who will now moderate the morning falls Ben please thanks and Zola thanks so much for those words and for your sponsorship of this series we look forward to more great events this year and I want to encourage folks who are following on the livestream are here you can tweet the events with a hashtag and fiscal future and let's get started I want to introduce the former chair of the Federal Reserve possible future baseball commissioner dr. Ben Bernanke thank you so much for joining us and taking the time I want to start a little bit with current politics in Washington DC and a potential fiscal crisis that faces us relatively soon once again Congress is having a difficult time with the debt limit it's not clear yet whether a clean debt limit increase can get through the House of Representatives we've got according to Treasury just until the first week of November so time is growing short I wonder if you could talk to us about the potential consequences if we get both close to or passed a debt limit deadline what could that do to markets into the economy right now if Congress is not able to with alacrity pass a debt limit increase sure so people need to understand what the debt limit is first of all it's not about constraining spending it's about paying the bills and if the debt limit isn't raised you know the government can't pay Social Security can't pay military can't meet its obligations and very importantly from a financial point of view beyond a certain point it would not be able to pay the interest on the national debt and of course since Treasury securities are the most liquid base financial security around that could have obviously very disruptive effects on the global economy the global financial system so what we've seen in the past we've come pretty close and a few times in the past and the markets generally tend to discount it until the last few days because this assumption is always that it'll get done but you know I think the risks have risen the political paralysis has been such that you really can't count on things getting done in a timely way and if we get close to the point will begin to see disruptions in markets like we saw the last couple times 2011 that happened and also potentially effects on the economy for example when the United States was downgraded the last time we saw impacts on consumer spending consumer confidence so it's a very negative thing for our financial system and for our economy that that's the describing what happens if we get close to it if we go over the line and if there really were to be a default in the national debt I would really be a unknown territory and very very dangerous situations you have any sympathy with the argument that Republicans sometimes make and they're gonna try to put forward a bill this week that would prioritize payments pay the interest on existing bonds military certain other payments while not making others do you think it's conceivable that the federal government can pay certain bills and not other bills oh there there are some there are some practical issues I mean the Federal Reserve actually we did a lot of contingency planning for this when I was chairman because the Fed actually makes a lot of the payments yeah processes to payments but not all the payments come to the Fed some come from other parts of the government so I would be at least somewhat worried in that case about from a technical point of view about about making it happen in a way that this bill envisions and the other thing that to say is that you know maybe the immediate effect within hours of not paying a Social Security check is a little different from not paying interest on on the debt but it's also a default it also represents a failure to meet obligations and it would go into the u.s. credit rating and so on so I I really think that you know we ought to pay the bills yeah do you think markets would react to a default on other payments in a similar way it would react to default on an actual existing debt obligation well I think the the debt obligations frankly would be would be worse because it would immediately affect you know financial holdings and create a lot of confusion one of the things we found out was that the computer systems they don't have a button for default on the national debt you know I don't think they could really handle it so I think that would be extremely disruptive but it would be disruptive in any case and again again I strongly advise against it it's really not the right way to make the arguments that you know the substantive arguments it's fine to have debates about government spending and all these other issues but this is not this is not the right tool yeah let's pull back the lens a little bit from Washington although obviously a crisis on the debt ceiling or on any of the other fiscal deadlines coming up in the fall and winter could damage the the US which is not exactly moving very quickly there are some economists now who are increasing their odds of a recession coming to the United States you know by next year and I wonder in your review of the data both unemployment all the other economic data coming in how would you categorize the risk of recession in the United States right now so it should be said that economists are really really terrible in predicting recessions I think your best shot there's a lot of false alarms you know it can always be a shock there are concerns now about the global economy what's happening in emerging markets how they're gonna react to Fed tightening and so on but I guess I would say that looking at the fundamentals of the US recovery at this point there's not much there that signaling recession we still have slack of the economy we don't have an inflation issue which has been the source of recessions in the past there you know the housing sector for example which is often the the driving force behind cyclical dynamics it's still in a relatively you know middle of a recovery type phase so there's a lot of domestic momentum in our economy now the main risks are international but there's nothing to me that suggests that a recession is is a high risk other than the fact that the average growth rate has been relatively low and that's so you're a little bit closer to zero than we would be if we had a four percent economy but you know that internally it looks like the US economy looks has a good bit of room to run at this point right and in terms of those international risks obviously we had a significant impact from the tumult in China and the Chinese markets which carried over into the United States still some issues in Europe continuing to be a risk to the United States how would you categorize the what are the biggest risks externally to the US economy and can we weather those without much significant damage to two hours well you know during the crisis everybody went down together it was a global event now we have a bunch of different stories around the world you know Europe and Japan are different stories I think the the biggest risk and and it's pretty much general agreement about this at the IMF Fidel and elsewhere would be emerging markets at this point they have not responded quite as well to the slowdown in China even though there was a predicted slowdown as as it was generally hoped and there's some financial risks there a number of countries like Brazil and Russia which are having particular stress emerging markets are about half the world economy now so both financially and in terms of growth I think that's where the greatest risks are in part because we don't have as much information understanding of them as we do about the advanced economies so that's where I would that's where I would identify it but the fact that Europe is still quite slow Japan is quite slow China is making a transition to a slower growth rate none of that really helps that much obviously but the most uncertainty would be in countries like Brazil obviously the biggest market focus over the last few months has been on the Federal Reserve and the timing of a rate increase I know you're sensitive about talking about decisions that chair Yellen might make in the future but you have commented on the decision to hold at the last meeting as the proper one I wonder if you could talk about the dilemma that the Fed faces right now markets are discounting an increase this month and now even in December the odds I think in the futures market are down at 30% or below there is obviously a desire on the part of the central bank to have liftoff and to move into a more normal monetary policy but there are no indications of inflation and we have some slowing and employment growth it just seems like an exquisitely difficult time for the central bank right now not as difficult as what you went through and your tenure of course but in terms of policy very difficult describe what you think the Fed needs to be weighing now and do you think it's time to move away from the effective zero interest rate policy well I don't want to I don't want to second-guess Janice very tough decision but I can tell you what you know what they're looking at what they're thinking about I mean it boils down to kind of a risk management kind of decision you know the arguments against action or at least for going very slow or that as you say there's no inflation yet the economy is growing but it's not booming there are some risks internationally which are the primary drags on our recovery right now and from a risk management perspective the the risk of going to soon whatever that might be are enhanced by the fact that we are at zero interest rates are close to zero and so if in fact the economy does falter and you have to come back to zero you don't really have as much space to ease as you would under normal circumstances so there are definitely some some risks in that direction the the Fed though has also talked about the risks in the other direction the the basic model of inflation that the Fed uses is really the only one that economists have is the so-called Phillips curve model and it says basically that as the amount of slack and the economy gets used up that conflation pressure will eventually begin to show up and we do have unemployment 25.1% and and despite relatively weaker numbers last couple of months the unemployment still moving in that direction and the argument would be that at some point you know wages and prices will start to pick up and and what makes it difficult you know you can say well we haven't seen inflation yeah then it's true but but what makes it a harder calculation is that monetary policy that this works with a lag it takes six nine months or even more to have its effect and therefore there's a need somehow to get ahead of the curve a little bit so that's that's where the debate is right now I think I would put inflation in the very center of that debate is inflation about to take off in which case policy needs to be pre-emptive or do we have time to wait and be cautious because of the zero lower bound and and a weaker global economy is there any real way to answer that question to me talk about the Phillips curve and the only tools available to you know look at inflation and where it's going and those in the dovish camp would say what are you talking about in terms of inflation there's no indication that it's gonna start building anytime soon the Fed is or the Hawks are tilting at windmills here and that the real problem is wage growth is not what we'd like it to be there's still a very low work force participation rate so nonsense to talk about inflation but as you say there's a lag policy implementation and it's it's impacts how serious are the risks of the Fed getting behind inflation well you just sort of stated a dovish case which is that we haven't seen much yet so you know it's it's hard it's hard to judge I mean that's that's what they're grappling with this is why in my opinion you know there's people have talked about putting in a computer or automatic rules to make these decisions I think you know they're tough decisions and nobody can make them perfectly but I think you do need human judgment to look at the range of factors here and again there's if you look at the models the models will tell you at this point that which is all they have the models would say at this point that unemployment is getting very low and and and slack is being eaten up and that would suggest that inflation should appear some town sometime down the road but then you've got sort of the Larry Summers view that you so wait to see that whites of the eyes of inflation again I don't want to I don't want them second-guessed Janis I'll be a little careful about that but but that is really the what the debate is you know is there more slack will the economy slow because of global forces and will that you know mean inflation is really something that's down the road and it's about risk management it's not you know the Fed actually forecasts that inflation won't get to 2% until 2018 but as Janet Yellen talked about in her press conference of course there are the scenarios in which the economy goes faster and gets hotter and inflation moves quicker than that those are the ones that she's trying to head off yeah let's talk about the other tools that the feds disposal if we stay at the zero limit bound and no increase is made this year or even in the next year and we do get more of a slowdown and we do get the unemployment rate either stalled or going back up again and wages not rising the issue of negative rates could we do that is there room for more quantitative easing which Republicans in Congress are not going to want to support what tools are at the feds disposal if indeed we stay at zero and the economy slows down so you know so if that happens which we hope it won't happen obviously there are things the Fed can do the first and best thing they can do is go down Capitol Hill and say please help us with fiscal policy because good luck when you have good luck when when monetary policy is at its limits there then fiscal policy can be extremely helpful but if you don't get that and if you do get the significant slowdown it requires a response there are things that they can do but none of them are incredibly attractive so what what obviously they could do would you know just the fact that they are not going to raise rates since they were you know in that contingency we're gonna stay at zero and we think we'll stay at zero for a long time that kind of communication that would certainly have effects on market so that would be sort of the first thing to do obviously beyond that there there are various tools you know the Europe has demonstrated that negative rates are possible we were we didn't think that this was a very good approach because we were afraid of the impact of negative rates on money markets and other institutions and we didn't think it would give very much oof because rates can't go that negative well maybe they can go more negative than we thought as we've seen in Switzerland and in other places so mildly negative interest rates would be a possibility in the first place to do that would be to pay negative rates to banks who deposit reserves at the Fed beyond that you could imagine trying to peg rates over a longer period like a two year rate and ultimately of course you know quantitative easing is there I would hope that there would be more support in the situation where the economy really is needing help and if the Fed could explain it but but that was standing the political situation you know quantitative easing is probably at this point less effective than it was and say 2009 as we have approached zero interest rates and as you know the term premiums have been taken out of long-term interest rates so the fact is that the tools are not super strong and it would be extremely helpful in that contingency to get a little bit of fiscal fiscal health yeah I want to switch a little bit to politics just for a minute because I saw this yesterday Rand Paul I think on CNBC said he wanted to debate you about Federal Reserve transparency audit the Fed the other initiatives that he and other Republicans in Congress have championed to in their view make the Fed a more open institution I know you talked a lot about in your book about making the Fed more transparent and moving to press conferences I want to ask you a will you debate Rand Paul we can get them up here may think we can get them up here secondly if you want a bit rent Rand Paul talk a little bit about your experience with the audit the Fed advocates the extent to which the Fed is more transparent now than it was when you got there and are there measures that could be implemented that would make the central bank somehow more transparent to taxpayers into Congress sure so I don't think I want to get involved in the Republican presidential primaries but so first let me just say transparency the Fed is really important the Fed has made huge strides over the last decade including press conferences including you know I think it'd be hard to convince this audience that they don't hear enough about monetary policy convinced me is a continuous debate going on in public about what policy is going to be the books of the Fed are completely open and completely to anybody who wants to go on the website so yes I'm sure you know that we could think about ways to to make the Fed more accessible you know I you know the chair can always do more public outreach you can try to you know even increase further but I spent about a third of my time in one way or another dealing with Congress and in some capacity or another but you could do even more of that so I think there are things that the Fed could do as an institution presumably to to go even further to make help the public understand what it is and what it does I mean you know many people out there just don't even know what the Fed is still even after all this has happened so I think all that is valuable and the Fed should continue to explore those things I know that they're doing that but you know the audit the Fed me just a word about that I mean I think this is a very deceptive this bill is very deceptively titled because it the average person says audit the Fed you mean you've got this institution with the four trillion dollar balance sheet you're not auditing it of course they're auditing it the the financial books of the Fed are completely open they're audited by the announces they're audited by an outside accounting firm they're audited by the Inspector General they're audited by the GAO Congress has complete access to every element of the feds books to every element of its operations with just one exception and the one exception is that the GAO is not allowed to have and and essentially investigate individual policy decisions monetary policy decisions so that's the one thing that that there's an exemption for and what audit the Fed would do is basically allow Congress to say although we didn't think the Fed made the right decision in September Gao should investigate that ask for all the materials you know I mean you're basically saying that the Congress should run monetary policy I always like to say if you love the way they're managing fiscal policy let them run monetary policy so so I'm totally open I'm totally open to having more open more open fed more transparency more outreach terrific idea a lot of that happens in local communities now but I think they should retitle the audit the Fed bill to the Congress runs monetary policy bill and then it would be more accurate description of what it's about yeah I mean what would be the outcome if if in fact that Gao provision got reversed and Congress were able to in real time go in and get all of the discussions from FOMC meetings and publicize them in the short term the negative impacts that would be it would obviously very inhibit decision-making inhibit the policy choices and I would give you a very explicit decision with explicit example which is when we introduced quantitative easing the second round of quantitative easing in November 2010 we received a letter from Congress from Boehner and from and some other Republican leadership saying we don't think you should do this don't do it and of course we did what we had to do and I think it was the right choice but you know arguably the Congress could have stopped many of the tools that we used in the recovery and and I suspect that you know we would now be in a much worse situation than we are you know speaking of Republicans and their dealings with the Fed I always wondered when Rick Perry made that famous comment about how you'd be treated roughly if you came down to Texas what you made of that at the time and have you had enjoyable experiences in Texas since those comments well so I don't know how to take it exactly I didn't think it was a very good sign in terms of Fed Congress relations I have to say although I remember telling the staff meeting that if this be treason let's make the most of it but I did I did actually it happened by coincidence that a couple months after this comment I had playing the trip Richard Fisher the Federal Reserve Bank president from Dallas had arranged a trip for me to meet to Texas and I went to Fort Bliss which is an army base and El Paso and I met with the troops I met troops coming back from Iraq I met with business leaders I went to the I went to the Austin I went to a bunch of places and I had a great I had a great reception so I was was treated pretty well in Texas no no policies were out looking for you and yeah yeah I mean I don't know where Rick was but the resident the rest of the state was pretty good to me you know one place he wasn't is the Oval Office but in any event sorry sorry Rick Governor Perry I you there's a lot of great anecdotes in your book it's mainly you know very serious-minded discussion of your background and time at the Fed and the crisis and the aftermath but there's some good stuff about your personal story I wanted to ask you about the time that George W Bush talked about your socks but tell us about what your relationship was like with the president what it was like working in his White House when you were of the CEA chair and tell the socks story I had a good I had a very good relationship with President Bush he was very supportive even though you know the Fed took actions which the Republican Party in general didn't didn't approve of during the crisis but I relationship was enhanced because I I spent some time my only really political job in Washington was I spent less than a year as the head of accounts of Economic Advisers in the White House and so I had a pretty good you know relationship I saw the president pretty frequently and on one particular instance sort of once a week or so the CEA would go into the Oval Office and make a presentation to to President Bush and Vice President Cheney about what's going on the economy the latest data that kind of thing and so this was one of these presentations I was in there and I was explained you know some economic data it's at the president and he's just listening kind of half you know half listening and then he leans over and he pulls up my pant leg like this and with my finely honed sense of sartorial elegance I was wearing a gray suit like this and light tan socks and he said man he said this is the White House he says we have certain standards here and he said you know you know what's with the socks and I said well mr. president I said you know this is a fiscally conservative administration I got these four for $10 at the gap and he laughed you know it was a joke he kind of thing that was the way he that was the way he operated in meetings and so you know we went on with the presentation well the next day I had had some discussions with Keith Hennessy who was the deputy director of NEC the next day there was another meeting and I was again in the Oval Office and the president comes in into the Oval Office and every man in the in the room including Vice President Cheney was sitting like this wearing tan socks so it was you know it was a light-hearted relationship and it continued I saw him quite frequently after I became became chair and of course we had a lot to talk about because the crisis went into high gear in the fall of 2007 right let's move off of socks on to breaking up the big banks on Wall Street I wanted to ask you there's clearly a debate in the Democratic Party right now to a certain extent in the Republican Party as well with populist and progressives continuing to suggest that financial institutions after the crisis are too large they have to too much of the nation's assets and should be broken up in one way or another I wonder obviously the Fed has a Prudential responsibility to oversee the the largest banks in your analysis of this situation is it true that banks have gotten too big after the crisis and that things need to be done to make them smaller and less risky or is the increase in capital that these banks hold enough to protect the safety and soundness of the system well the the increased capital and tougher supervision clearly makes them safer than they were before but I think we still have to worry about size complexity interconnectedness and what impact that might have both on the efficiency of markets you know are these they dominating the banking markets too and what risks do they present from a financial stability point of view and the the the challenging thing is to simplify banks and make them smaller in a way that preserves you know what they mean they actually provide important services to the economy so can you do it in a way that isn't sort of like a blunt you know way of doing it and I think that you know well it may no he fully appreciated that a lot of what dodd-frank did and and and some of the other international agreements have moved us in a direction where we are moving towards you know a situation where banks are now evaluating their own size and complexity in light of the fact that on the one hand there aren't economic benefits to size but on the other hand it's becoming much tougher to be a big bang for example GE Capital General Electric was divest in its financial arm because it didn't want to be a systemically important firm and therefore subject to fed consolidated oversight some large banks are trying to shrink because they're don't like the fact that the largest banks have to hold more capital than other banks so by making it costly to be a big bank and making it you know more tougher regulations more capital those sorts of things you put the incentives in the right place and force the banks to think about you know whether their size and complexity is justified in an economic sense or whether it's basically you know can be dispensed with and you can get simpler banks I think over time the pressure will be on banks to simplify the most important tool and I need to say is the liquidation authority that dodd-frank created which allows the Fed and the FDIC to unwind firms after the fact but also before the fact to require them to simplify in ways that they could be unwound so there's this living will requirement that every year the banks have to provide a blueprint for how they would be unwound and if the Fed and the FDIC aren't satisfied they can require them to get smaller to simplify etc so I think there is in fact a process underway that will lead over time to a more rational banking system but just breaking them into tiny little pieces you know you're gonna lose a lot of value if you do that without thinking about you know what what the economics is and finally didn't you say that you know in the 1930s we had a huge banking crisis and mostly small banks failed so you can't even guarantee that with small banks that you're not going to have some problems I mean I guess JP Morgan's attempt to sell its hybrids private equity unit would be another example of large banks that trying to divest themselves of certain I wouldn't say non core but parts that require them to hold more capital on that same topic the issue of glass-steagall re-imposition it's constantly one that's brought up in the Democratic presidential debate martin O'Malley Bernie Sanders both very strong supporters of reinstituting that division at banks do you have a position on whether that would be helpful at all in terms of safeties actually little puzzled by the focus on that particular provision there many provisions you know that you could look at glass-steagall of course is the ruled in the 1930s era rule that separates commercial banking lending deposit-taking from investment banking underwriting securities and alike and that was repealed in the 90s I think that if you look at the cracks well you know what happened a few years ago in the crisis that glass-steagall was pretty irrelevant to it because you've had banks like Wachovia or WaMu that went bad because they made bad loans and you had investment banks like Bear Stearns and Lehman that went bad because of their investment banking activities and and glass-steagall could have been in place it would have had no effect on most of these firms AIG would not have been honest it would have been unaffected by glass-steagall I think the only major financial institution that glass-steagall would have a major effect on it's probably city yeah which still has some of the supermarket elements but for the most part you know I I think it would just be an example of breaking up firms for the purpose of breaking them up without a clear rationale for doing that I think there are other ways to simplify banks that will be more effective yeah you talked a little bit about the book in the book and more broadly in recent interviews about the lack of prosecutions of individuals following the financial crisis the focus of the Justice Department on firms and banks and not individual executives obviously it's hard to put a bank itself in jail although I guess you could build a big enough jail to put you know inside but the practically a difficult thing I wonder specifically what executives broke laws which laws did they break and who is it that the Justice Department should have gone after and didn't well no your I want you to provide me with a list yeah well I left it in my other pants yeah we could start know what I was talking about there was I was talking about there was really about prosecution strategy I mean what the Department of Justice did so first of all some people have gone to jail and some traders who rigged markets and and and committed fraud and I think you know obviously you should commit fraud you should be prosecuted for it I think my complaint was was that I didn't understand frankly I didn't understand why the Department of Justice often chose to penalize large financial institutions which basically amounts to penalizing the shareholders rather than going after you say executive I didn't use the word executives you have people at all levels you have traitors you have loan officers you have and you have executives risk officers and so on you know in situations where there were civil or criminal culpability then obviously that's something in an individual does it's not something that a fictitious corporation does so I think it would have been more informative and possibly more fair if the Department of Justice had taken a strategy of looking for individual responsibility rather than corporate responsibility I don't have you know I think it would have been part of the process to find out where culpability was you know a lot of things that happen were were you know bad practices irresponsible but there's a line between being irresponsible and and and taking making a criminal act those are the kinds of distinctions and decisions that really belong to the courts and to the Department of Justice so I'm not saying that you know we should been carting off bankers in in buses but I do think that it would been informative if there had been more analysis of where the individual responsibility lay yeah I think Senator Warren might like the idea of big buses a lot of bankers to to prison will present that to her people are going to be mad at me if i go back to lehman brothers again i say we've talked enough about the crisis and the collapse of Lehman and Bear Stearns I personally don't agree with that I think we could talk about it till the the end of time and you write it about it very captivating Lee in the book and I'm still trying to figure out a little bit the decision making process on Lehman obviously they had a potential buyer and Barclays that fell through with the regulatory problems that they faced but you know Bear Stearns rescued into the arms of JP Morgan Lehman Brothers teetering on the point of bankruptcy with potentially well I don't know at the time how catastrophic you thought the consequences of that would be talk us through the decision-making process to let Lehman Brothers fail when you actually helped rescue Bear Stearns well why was that done when Bear was well is very important and I think we were right in the following sense at the time of Lehman weekend there was a pretty broad range of views which said that it was time to let a company fail I mean the editorial pages were pretty much take the weekend off let the market do its thing and we I think we were right exposed we were proven right that we were very worried about what would happen and we thought that it would greatly worse than the financial panic and so we made an extraordinary effort to prevent his failure including calling you know major CEOs Wall Street CEOs the Fed Reserve Bank in New York and and basically marshaling a institution-wide effort over that weekend basically and the book goes into Grunch more detail about this basically it was not a decision it was necessity we didn't have the tools we needed it with other institutions we used three different tools one of them was to have a buyer so embarrassed earns us by Bear Stearns Bear Stearns was bought by JP Morgan and JP Morgan came in and skerin teed Bear Stearns his liabilities and that solved a problem the Fed helped JP Morgan but JP Morgan was there to buy Bear Stearns by the way which it could not have done if glass-steagall had been in place so that was that was one way buying but in the case of Lehman we had two potential buyers we thought one of them would come through but both Bank of America and Barclays for reasons I can get into if you want we're unable to - were unwilling unwilling to make that make that acquisition even with you know hints and promises of help from other bankers and from from the Fed so we couldn't do that the second option was to put capital in which is what we did with you know Bank of America and city later on but this was before the tarp of course Lehman's failure was the thing that essentially the heads of the tarp so we didn't have any capital to put into Lehman and the third option was basically fed loans which is what we did for a lot of banks it was ultimately the way we saved AIG because AIG was able to put up as collateral as subsidiary insurance companies Leoben was did not have the collateral it was it was suffering a tremendous run it was already losing not only its short-term funding it was losing its customers it was just falling apart and it didn't have remotely enough cash enough collateral to to legally sustain the the loans that I make sure loans could have saved it frankly because we would have needed a buyer but anyway so again I go with much more detail in the book but you know it was our view at the time that and I say this from the perspective you know I remember had the conversation with Tim Geithner who was he was the most anti you know most hawkish about trying to save firms of anybody and you know he said you know we have looked everywhere we cannot find a way to do this so it was in fact unavoidable and we knew I think even maybe it was worse even than we thought but we knew it was gonna be a huge problem and we reacted to that on on the same day on Sunday by expanding our willingness to take this collateral for repo for repo financing essentially anything that was acceptable in the repo market so we greatly broaden our collateral cuz we knew there was gonna be a huge funding problem so that's that's that's the basic answer so says a lot more Peter Wallison and others who say that Lehman in fact did have the collateral was a candidate for a bailout you just say they're flat-out wrong collateral was not so yeah I think they're wrong and it certainly certainly certainly we believed at the time that they were wrong and I think the ex post you know you you know many of these securities have come back and if their value has improved but you know the losses in bankruptcy to Lehman by the creditors are hundreds of billions of dollars and and this was even there were things going on in leamanczyk accounting we didn't even know about at the time like the repo 105 transaction so I don't think it wasn't even a question of legality I don't think it was feasible now you know again I'm relying to some extent in what I was hearing from Tim and Hank you know from New York I was in Washington but but we certainly were you know there were discussions with Bear Stearns there were phone calls with many people on them which said you know should we do this or not we think it's necessary how would we do it and so on with Lehman there's no such phone call because we never had there never sort of where'd a position where we said okay we have to decide yes or no we'd ever got to that point in the book one of the hardest decisions you make is the decision to bail out AIG and there's you know an excellent discussion of how you sort of held off on the press release till the last possible moment until Michelle Smith came in and told you it's time to push the button talk to us quickly were running low on time but just how hard was that decision to make what went into it and what would have happened had you not saved a well you know it was incredibly hard decision I'll tell you a story about in just a second which because it was we knew it was gonna be a political disaster and it was AIG was the gift that kept on giving you know after the after the bailout there was bonuses and all these other things that happened that really hurt the Fed and hurt the bailout and the and the stabilization effort you know very seriously so it was a really costly action but here we have you know after Lehman's collapsed the financial panic went into huge you know - it's almost complete cardiac arrest you know the economy and the financial system so here we had a trillion dollar insurance company that had connections to financial institutions all around the world and we thought this would just pretty much not the lights out so we thought it was really important but even so it was a close call because it was really tough to to make a deal that we thought would would work and I remember Paul said and I went to went to an ad hoc meeting of Congress and we were explained to them Bush Bush accepted to this and he sent us to talk to Congress we went to Congress we met with the leaders of Congress and of the financial and banking committees and we were you know we explained what we were going to do and we took their questions and you know tried to be reassuring and and at the end of it Harry Reid said to us he said he said mr. chairman mr. secretary says I want to thank you for coming down here and explaining this to us very helpful appreciate you taking our questions he said but I want you to understand one thing he said nothing that you've heard here tonight constitutes congressional approval for what you're about to do he said this is your decision this is your responsibility and I'm thinking 85 billion dollars so it was very scary because it basically Congress said we're washing our hands of this this is your responsibility bill you know I was absolutely confident at this point and I think the facts bear us out that if AIG had collapsed on top of Lehman that you know we would still be digging out of the financial system so we did what we had to do and you know ultimately ultimately we did get the system working again but it was a very tough tough time yeah running low in time a couple of speed round questions a what happened to the Washington Nationals this year that's your team B would you be interested in being baseball commissioner and the well on the second one yeah absolutely but but yes Rob Manfred you know they just they just made a transition and they have a new commissioner and I think he's he's very he's a very solid guy the Nationals so my story in the Nationals was meeting Jayson Werth you know Jayson Werth and diving practice nation where it's his hips his cap to you it's Mike Chateauguay mer but he's a just tall you know rangy looking bearded guy you know it's like a large act scary lumberjack looking guy and the manager took me up to meet him and said Ben I want you to meet Jayson Werth Jayson says hi and he says Ben's the chairman of the Federal Reserve and jason says oh yeah I said yeah he says so what's the deal with qe3 anyway so anyway so it's very very broad very broad interest in monetary policy yes that's mine anyway no they they just had I mean the Mets turned out to be really impressive yeah yeah I meant to bring up the Mets and Murphy break up Daniel Murphy break the Murphy's he too big to fail right now he is and between injuries and poor performances and bad luck you know that's that's why they play the games as they say right Yeah right right no no we should end on a fun sports note but I'm instead gonna ask one more really wonky question because I it was interested me in the in the book your discussion of ng DP targeting as a potential framework for the Fed as opposed to inflation targeting and it sounded like you really thought it was a reasonable approach but would be politically difficult particularly you know in a time of crisis to explain and put into place do you think of that has a future targeting a growth rate rather than an inflation rate as a way to manage Fed policy well it's very treating because in in in models it it works quite well and the reason it works well is because under nominal GDP targeting when the economy's slow then the Fed temporarily targets a higher inflation rate so it's more counter cyclical kind of policy but you know I'm not willing to endorse it necessarily because it it does require a huge amount of credibility it requires the the public in the markets to understand this more complicated strategy and for them to believe that it's going to be followed for years into the future no matter who becomes Chairman no matter who becomes president so I'm not sure yet I I think that's a really interesting thing to study but making the transition to that approach and making sure that it is sufficiently credible and supported enough that and understood well enough is still pretty problematic yeah yeah before we go tell us what was the scariest moment of the crisis for you imagine it was Lehman weekend or somewhere in that area and Hank Paulson you know tells the story about how he believed we were not very far from you know red lines and ATMs failing to give out money and that you know he really worried that there would be a complete collapse of the system did you have that same view and at what point did you have it that night of the soul Lehman weekend was really Lehman week because you had Lehman Merrill Lynch AIG Goldman Sachs Morgan Stanley walked over yeah I mean all these big firms were on the on the brink in this one very short period of time and I knew enough about financial history I just gave a lecture yesterday about financial panics at Princeton and historically you know all the evidence is that when you have a huge financial panic the economy goes totally into the into the tank and the recent research by blinder and Zandi and by the White House CEA and so on shows that at the very beginning of this process in 2008 early 2009 the declines in the economy were worse than in the Great Depression so I thought it was you know and I think the facts bear out that it was extremely dangerous for the economy and that period in September October of oh eight we were very uncertain as to whether or not we could get the thing under control it was very scary good ok running out of time I want to say that's time to wrap up the conversation thank all of you for being here thanks everyone to joined on the livestream thanks of course to Nasdaq for hosting us for this interesting conversation and we'll look forward to Ben Bernanke tweeting about the the Mets victory

Channel: POLITICO

Views: 1,282

Rating: 5 out of 5

Keywords: 4570493875001, syndicate, chairman, Federal Reserve, ben bernanke, Politico.com, events, event, youtube, americas fiscal future, politico

Id: wb8IRsYKeQY

Length: 46min 58sec (2818 seconds)

Published: Fri Oct 23 2015