Bernanke on the Financial Crisis: Interventions Prevented Cataclysm
"In the current episode, in contrast to the 1930s, policymakers around the world worked assiduously to stabilize the financial system," U.S. Federal Reserve
Bernanke on the Financial Crisis: Interventions Prevented Cataclysm
"In the current episode, in contrast to the 1930s, policymakers around the world worked assiduously to stabilize the financial system," U.S. Federal Reserve Chairman Ben said in speech Thursday at the Center for the Study of the Presidency and Congress in Washington. "As a result, although the economic consequences of the financial crisis have been painfully severe, the world was spared an even worse cataclysm that could have rivaled or surpassed the Great Depression."
Inaction in the 1930s Worsened the Great Depression
The key failing of 1930s policymakers concerned their inability to fully appreciate "the importance of a healthy financial system for economic growth" and the timidity of their response to the financial crisis, Bernanke said. What's more, some policymakers even viewed the financial and economic crisis of the 1930s as desirable to rid the financial system of excesses that had built up during the 1920s.
"Indeed, the treasury secretary at the time, Andrew Mellon, believed in the tonic effects of weeding out weak banks and famously advised President Herbert Hoover, 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... It will purge the rottenness out of the system,'" Bernanke said.
In 2008 and 2009, Intervention Averted a Calamity
The Fed made no such mistake of indifference or timidity early in the crisis this time, Bernanke said. Effective policy responses during the Great Depression took place after three to four years of financial crisis and economic contraction. Bernanke cited President Franklin D. Roosevelt's actions declaring a bank holiday upon taking office in March 1933 and severing the link between the dollar and gold as helping to end the descent of the U.S. financial system. "In our own time, policymakers acted sooner and with greater force than in the 1930s," Bernanke said.
He cited the quick authorization by the U.S. Congress of the $700 billion Troubled Asset Relief Program, as "far from perfect legislation," but a move that "was essential for preventing an imminent financial collapse." Further, along with the Fed's interest rate reductions, Bernanke cited the central bank's unprecedented (for the U.S.) program to purchase long-term securities as essential to keeping credit markets functioning, and the bank stress test -- a program similar to Roosevelt's bank holiday in 1933, in his interpretation -- as critical to banks' ability to attract capital.
"Critics had warned that the stress test could backfire, but as it turned out, the release of the results last May helped restore confidence in banks, and many institutions have since been able to raise capital from investors and r