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Former Fed Chair Ben Bernanke on Inflation, Bank Runs and More

I called Ben S. Bernanke, the former chairman of the Federal Reserve, late in the debt-ceiling standoff. It hadn’t been concluded quite yet but soon would be. This time, at least, the financial system averted another full-fledged crisis.

But when truly dire events happen and Congress and the White House are focused on political battles, the Fed often ends up as the “only game in town,” Mr. Bernanke said, “the only policymaker that can help an economy in trouble.”

Fixing the world’s urgent problems is no longer Mr. Bernanke’s responsibility. In 2014, he stepped down as Fed chair, after leading it through the global financial crisis. Now, at 69, he is a scholar at the Brookings Institution in Washington, devoting himself mainly to research and writing.

His research, showing “that bank crises can potentially have catastrophic consequences” and illustrating “the importance of well-functioning bank regulation,” earned him a Nobel Prize in economics in 2022. That academic work, and the changes he made at the Fed, have altered the way we understand financial news, even if he is making fewer headlines himself.

Yet, Mr. Bernanke said he still “monitors the Fed very carefully,” and in a wide-ranging interview, he discussed many thorny issues, including bank runs, inflation and threats to financial stability.

At the moment, the banking system appears to be stable, he said, but you never know. In the summer of 2007, for instance, when the global financial crisis started, Mr. Bernanke said he didn’t immediately recognize how “devastating” it was going to be. Now, he said, he regrets that it took “some months” to “appreciate the magnitude of the crisis.”

Conditions in the financial system appear to be fairly calm today, he said, but added, “I’ve learned from painful experience that one never says never; it’s always possible.”

In agreeing to an open-ended conversation, he insisted on one ground rule: He would not “second-guess the Fed.”

“I will tell you what I think the Federal Reserve is doing and why it’s doing it,” he said, “but I will not tell you what I think they should do at the next meeting,” he said.

Once Mr. Bernanke got rolling, his comments included these highlights:

Further bank runs could be headed off by raising the ceiling for deposit insurance. That insurance “should cover more than $250,000 per account,” perhaps by requiring larger bank depositors “to pay some kind of premium” for the benefit. His research, and that of his two fellow 2022 Nobel laureates, Douglas W. Diamond and Philip H. Dybvig, showed that fear of losing money at a weakened bank could set off or worsen bank runs, like those earlier this year, and lead to deep economic stress.

If the Fed had the legal authority that other central banks possess, it wouldn’t need to invoke emergency powers and set up temporary rescue “facilities” every time a crisis demands that it backstop “shadow banks,” which include hedge funds, investment banks, private equity funds, money market funds and the like. These giant institutions perform many of the functions of traditional banks. The Fed is hampered by “a structural flaw that was never corrected by Congress, which is that the Fed is restricted on normal grounds to lending only to banks and not to other types of financial institutions,” he said.

Don’t ever assume everything in the financial system is OK. It may not be. There is a need for constant monitoring and bolstering of systemic regulatory oversight to head off major problems. Mr. Bernanke’s research showed that “the financial crisis of the 1930s was a major factor in the Great Depression,” an insight that, he recalls, people “laughed at” when he first wrote about it. “I think it’s become quite conventional wisdom at this point that a big financial crisis is really bad for the economy.”

The Fed may need time to get inflation down to the 2 percent target he helped institute, but unlike some writers — including this columnist — he said that target must stand. Two percent isn’t an “ideal” number, he said, and during his early academic career, he advocated a higher target, of 3 or 4 percent, for Japan. But now, U.S. politics and practical reality mean the 2 percent target should be preserved, he said. “I would think that if the Fed announced tomorrow that it was raising the inflation target, that would destroy its credibility,” he said. And any attempt to raise the target might set off Congressional action that could have the opposite effect.

Are we in an A.I. bubble? Mr. Bernanke said it was hard to identify bubbles as they were forming, and to know what to do when one existed. “A.I. stocks are zooming up despite the fact that the overall economic environment is worrisome,” he said. “Is that a bubble? It depends on whether A.I. turns out to be the transformative technology that some people think it will be. Maybe it is, maybe it isn’t.” The problem is that when some bubbles collapse, they can wreak havoc, as the housing bubble did in 2008. Such a collapse can “bring down critical financial institutions and that creates tremendous financial distress.” He added, “If you have a strong and well-regulated financial system, then even if you have a bubble that comes down, the system should be able to weather it without massive effects on the economy.”

Regular news conferences by the Fed chair, which Mr. Bernanke initiated, and which his successors, Janet L. Yellen and Jerome H. Powell, expanded, are essential, he said. They are needed not just to convey the Fed’s messaging to market specialists, but also to explain what’s going on to the general public. At the onset of the 2007-8 crisis, he said, the Fed took a lot of heat for rescuing big Wall Street firms while, supposedly, neglecting the little guy. “It probably was impossible, but at least I should have tried to explain why it was important to preserve the stability of the financial system,” he said. “And why it would benefit everyone and not just the Wall Street C.E.O.s. There’s this feeling that the Fed is captured by Wall Street, which is just not true. But if you’re asking for regrets, I think that’s one thing I should have done more actively.”

The Fed, he said, had to innovate in those years because the economy was in a severe downturn and needed more help, yet the Fed had already reduced short-term interest rates to close to zero.

By 2011, he said, “we were facing a very, very bad situation with no more ammunition, in terms of the Fed funds rate.”

More fiscal stimulus — more spending — might have done the trick, he said. But, he recalled, “Congress was already trying to go to an austerity program, trying to cut back on fiscal policy.”

“And so essentially, the Federal Reserve was left as the only policymaker in Washington that could do anything about this desperately deep recession and all the job losses and all the cost that was imposing on workers and their families,” he said. “So we needed a new set of tools.”

By that point in his academic work, Mr. Bernanke had formulated the principles for quantitative easing (purchasing bonds and other securities to reduce longer-term interest rates) and forward guidance (using messaging to shift expectations). These become permanent parts of the Fed tool kit.

Large-scale fiscal stimulus certainly occurred in the recent pandemic downturn, but with inflationary consequences, so the Fed has been not only raising interest rates, but also using its new tools, too. In a reversal of quantitative easing, it has been paring down the assets it has purchased through the years, and sent out plenty of belt-tightening messages. At a policymaking meeting next week, the Fed will assess whether all these measures are slowing the economy.

The Fed’s job would be easier if fiscal policy were “more cooperative,” he said, but it’s most likely the central bank will frequently find itself “the only game in town.”

Mr. Bernanke has been churning out a stream of books and articles on both abstruse and topical subjects, including a paper in the American Economic Review based on his December Nobel lecture summarizing his life work. The paperback edition of his book, “21st Century Monetary Policy” was released in May, with a fresh analysis of recent events.

Like many of us, Mr. Bernanke is putting away money for retirement. A cottage industry of Fed watchers base their investment strategies on what they believe the Fed is doing. Mr. Bernanke may be the most sophisticated of Fed watchers, but he said he was “a very boring investor.” “I basically have a well-diversified portfolio,” he said. “I do not try to pick individual stocks. I don’t base my investments on what I think the Fed is going to do.”

In fact, Mr. Bernanke told me that he essentially practiced the straightforward approach that “you advocate in your column.” He added, “I’m certainly not going to advise people to buy meme stocks, or to do anything unusual.”

He summarized his approach this way: “The other day you said something like, you know, have your portfolio consistent with your risk aversion and with your liquidity needs.”

I’d say, make sure you can pay the bills first. Don’t put any money into the stock market that you can’t stand to lose. And invest for the long haul.

Based on Mr. Bernanke’s own example, I’d add: Think, study, innovate and do all you possibly can to keep the world afloat. But for your own personal investing, keep it simple.


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