A Conversation with Ben Bernanke

At the 2014 Association of Financial Professionals Annual Conference in Washington D.C. there were a number of incredibly insightful sessions. Perhaps the most interesting, at least on the playbill, was the opening general session, which featured Ben Bernanke, the former chairman of the Federal Reserve.

bernanke_benBernanke is on tour selling his upcoming 2015 book, a memoir focused on his front row seat and actions during the Financial Crisis, for which he has received an advance of roughly $8 million.

He took the opportunity to speak to over 5,000 members of the AFP, ourselves included, on November 2, 2014 in Hall E of the Walter E. Washington Convention Center in Washington, DC.

Bernanke addressed the audience for approximately 30 minutes in what, for the most part, appeared to be an apologetic for the actions of the Federal Reserve and other major actors who found themselves in the middle of the Financial Crisis.

The final 60 minutes of the session were much more interesting as the presentation changed in format to that of an interview conducted by Bernanke’s friend and former Princeton and Federal Reserve Colleague, Alan S. Blinder. We will have more insights from Blinder later in this series of AFP sessions on The Mint.

You can hear a large portion of the conversation between Bernanke and Blinder by listening to the audio file below:

On AIG: At minute 11:30 – Bernanke observes that the only “True Bailout” performed by the government during the Financial crisis was that of AIG. He observed that AIG was like an unregulated hedge fund. They doubled down by taking the cash they received from insuring the CDO’s against the risk of default and purchasing those same CDOs, essentially leaving them with double exposure to the CDO market. There was a sense that they were either not doing proper risk management or that their actions were cynical. Bernanke was most irritated by the AIG bailout of all of the actions that were taken to stave off the Financial Crisis.

On His scariest moment during the crisis: The Tuesday that they went to Congress to propose TARP when some of the largest firms under pressure. Not unsurprisingly, Bernanke maintains that TARP was good policy under the circumstances, and it gave the Fed the legal authority to take many of the actions that, in Bernanke’s opinion, staved off the total collapse of the financial system.

On Lehman Brothers: There was no legal way to save Lehman Brothers. At 7:00 he addresses this. There was not buyer for Lehman Brothers, and at the time, everybody was pulling away from Lehman, and the firm would have collapsed with a week anyway.

On Quantitative Easing: At minute 16, Blinder brings up the fact that Bernanke lobbied for a time for the series of programs which were known as “Quantitative easing” to be called “Credit easing” in order to distinguish it from the actions previously taken by the Bank of Japan. The key difference being that while the Bank of Japan pumped funds directly into the banks as reserves, the Fed was creating liquidity to the system as a direct actor in the credit markets.

{Editor’s Note:  Those interested in satire can see our 2010 rendition of the Bare Naked Ladies hit If I had a Million Dollars as sung by Ben Bernanke, inspired by the early rounds of QE here}

On the stock vs. flow theory: Around minute 21, Blinder and Bernanke move into a conversation about the “stock” versus the “flow” view of the Fed’s balance sheet. The key difference being that those holding the stock (meaning money stock) view look at the Fed’s balance sheet as it actually is to infer the effects that the Fed is having on monetary policy, while those that hold to the “flow” view, namely almost everyone on Wall Street, look at the Fed’s buying and selling of assets to infer the effects.

Bernanke is a strict adherent to the stock view, and wonders what will happen if and when the Fed looks to unwind its Balance sheet at a future date.

For those who followed the Financial Crisis closely, Bernanke offers his own, less guarded take of the events in the interview, which we assume will be a precursor for the contents of his upcoming memoir.

One of the stark takeaways that we are compelled to pass on to our readers is the following: Bernanke’s assertions that the Fed did not have the legal authority to save the financial system until TARP was passed. TARP was essentially railroaded through Congress on the advice of then Treasury Secretary Henry Paulson. While it may have been the expedient thing to do at the time, it is unclear whether it was a good idea to give the Federal Reserve and the Treasury (for they work in tangent with one another) the authority to backstop the financial system.

It is a question that is still waiting to be answered today, on the eve of yet another great inflation event.

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