The former Federal Reserve chairman thinks the U.S. government should have targeted individuals for their roles in the disaster.
Institutional Investor
November 2, 2015
By Robert Stowe England
Seven years after the financial crisis brought the world to the brink of disaster, the interventions by the U.S. Federal Reserve Board and the Department of the Treasury continue to stoke resentment. But former Fed chair Ben Bernanke has no regrets. “We were trying to protect the financial system from collapse because we knew — and the facts would bear us out eventually — that if the financial system implodes, the economy will not be far behind,” he tells Institutional Investor.
Bernanke, who headed the U.S. central bank from 2006 to 2014, is now a distinguished fellow in residence with the economic studies program at Washington-based think tank the Brookings Institution. In an effort to set the record straight, the man who played the most critical role in taming the crisis recently embarked on a tour for his new book, The Courage to Act: A Memoir of a Crisis and Its Aftermath.
In the book Bernanke, 61, recounts his break with the Republican Party, describing himself these days as a moderate independent. Having been appointed by former president George W. Bush to succeed Alan Greenspan, he writes of his frustration with GOP attacks on the Fed: “It seemed to me that the crisis had helped to radicalize large parts of the Republican Party.”
According to some critics the Fed should have raised interest rates sooner to contain the U.S. housing bubble, the bursting of which provoked the financial crisis. Many contend that the central bank is now fueling yet another bubble with zero rates.
Bernanke doesn’t comment on the policies of his successor, Janet Yellen, but he rejects his critics, insisting that monetary policy was appropriately focused on helping the economy recover from the 2001 recession and avoiding deflation risks. Between 2004 and 2006 the Fed hiked rates from 1.25 percent to 5.25 percent.
“My view of the housing bubble is that to the extent government policy was involved in it, it was primarily failures of regulation rather than monetary policy,” he says. “The Fed, along with other bank regulators, didn’t do enough to prevent bad mortgage lending.”
The central bank did too much to save Wall Street from itself, detractors charge. In March 2008 the New York Fed extended JPMorgan Chase & Co. $13 billion to lend Bear Stearns so it could stay afloat long enough to be acquired by JPMorgan, plus $29 billion to buy toxic assets from the investment bank, which was reeling from plunging values of its subprime mortgage holdings To provide this funding, Bernanke and his colleagues chose what he calls the “Hail Mary” option, invoking Section 13(3) of the Federal Reserve Act for the first time since the Great Depression.
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