Federal Reserve Chairman Ben Bernanke gave his third lecture on the functioning of the central bank today, this time focusing on the great panic of 2008 and the measures taken to avoid another great depression. If you’ve watched, you see Bernanke is very comfortable in the classroom (perhaps wishes he were back there), but today his voice was a little shakier. And no wonder. This was the worst financial crisis of our lifetimes (we hope) and the Fed’s actions, often frantic improvisation, were highly controversial.
He offered a fine layman’s survey. A walk down nightmare memory lane: Bear Stearns, Lehman Brothers, AIG, Washington Mutual. Too much private debt, banks’ inability to monitor risks, exotic instruments such as credit-default swaps. Poor regulatory oversight, “not enough attention to forcing banks to manage risks,” not enough attention paid by regulators to the financial system as a whole. Fannie Mae and Freddie Mac permitted to operate without adequate capital to cover losses, a danger known for a decade. The freeze-up of short-term credit, a modern bank run. When money market funds “broke the buck.” And AIG, which provided credit insurance for Wall Street’s mortgage-backed-securities house of cards. Said Bernanke, “The Failure of AIG would have been the end. We would not be able to control the crisis.”
But they did and we avoided the worst. I’ve heard from very intelligent readers who argue the mess should have been allowed to collapse. Maybe they’re right. But the results would have hurt average folks and the poor far worse than the bankers. Bernanke, our foremost scholar of the Great Depression, got it halfway right. (You can download the slideshow that accompanied the talk here.)
My problems with Bernanke’s talk included these: When asked about the mortgage securities bubble, he gave the boilerplate answer of how housing prices were rising and thus demand for these securities grew very fast, including from overseas. “It was a very profitable activity while it lasted.” The issue of widespread fraud and executive malfeasance, as well as regulatory malpractice, didn’t come up. Bernanke himself had dismissed the wider danger of falling house prices until close to when the roof fell in.
Also, he spends a great deal of time discussing the huge institutions and inter-connectivity that made this crisis so much more dangerous and costly than the 1930s. But he seems resigned to merely saving it and finding some safe way to wind down a too-big-to-fail institution next time. His own lecture, from the complexity of exotic investments to the speed with which the system will seize up to the difficulty of dealing with multinational firms, makes this unlikely.
An articulate defense of the (original) Volcker Rule hasn’t been forthcoming. Perhaps in his Thursday lecture. But as the foremost scholar of the depression, he must know the truth: We won’t be safe until Congress passes a 21st century Glass-Steagall — simple in its 37 pages, proven by decades of sound banking. We’re still waiting. Anyone…? Anyone…? Bernanke?
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