With his tenure as Federal Reserve chairman winding down, Ben Bernanke once again defended his record in steering the central bank through the financial crisis of 2008 and the ensuing prolonged recession at an event at the Brookings Institution Thursday morning.
Echoing the words of former Rep. Barney Frank, Bernanke said the TARP bailout for financial firms that he advocated in 2008 was "one of the most successful policies ever" despite its unpopularity, then and now. During the congressional debate over TARP, Bernanke recalled, one senator told him that "calls on this from my constituents are 50-50. It's 50 percent no and 50 percent hell no."
Bernanke also said that in providing liquidity to a broad array of banks and markets during the crisis, the Fed acted as it was intended to — without regard for political pressure.
"The Fed was created to address financial panics, and its ability to react quickly is what it’s all about," Bernanke said. He added that "we did the right thing, I hope. We tried to do the right thing."
The crisis of 2008, which affected the entire world and caused the Dow Jones Industrial Average to fall more than 50 percent and the U.S. unemployment rate to spike to over 10 percent, occurred during Bernanke's first term as Fed chairman. He was appointed by President George W. Bush in 2006, with the housing bubble already inflated to levels that would later prove dangerous.
At its core, Bernanke said, the banking crisis of '08 wasn't different from Depression-era banking panics like the one depicted in the classic film "It's a Wonderful Life." But it looked different: "Instead of having retail depositors lining out the door … we had instead runs by wholesale short-term lenders," or shadow banks, Bernanke said. It was those kinds of runs that he claimed he tried to solve with his actions.
The financial panic did cause Bernanke sleepless nights, he said, but he was only able to appreciate the enormity of the problems the country faced after the most hectic and frenzied days were over. He compared it with a near-car wreck in which "you’re mostly concerned with not going off the bridge, but later on you’re like, 'oh my God.' "
The 60 year-old Bernanke thinks that there's a chance history will vindicate his actions. He expressed hope that as more information comes out about the decisions the Fed and other agencies made in 2008, public anger will subside. The Fed releases transcripts from its meetings after five years, meaning that most of the major discussions that took place during the height of the crisis will be available in the next year or two.
Bernanke also defended the Fed's zero interest rate policies and aggressive large-scale bond purchases, known as quantitative easing, that he has overseen in the years following the recession and the weak labor market recovery that have swelled the Fed's balance sheet to more than $4 trillion.
Bernanke dismissed the criticism that quantitative easing creates a risk of high inflation, saying, "Those who have been saying for the past five years that we're on the brink of hyperinflation, I would just point them to this morning's CPI number." The consumer price index released Thursday morning showed inflation remaining low in December, rising 0.3 percent.
The possibility that quantitative easing could create an unsustainable bubble in asset prices, however, is a threat that Bernanke takes seriously. He said the Fed is "extraordinarily sensitive to that risk” following the collapse of the housing bubble. For now, however, "market valuations are broadly within historical ranges,” Bernanke claimed, meaning that fears of inflating a bubble are secondary to keeping monetary conditions loose to foster a stronger recovery.
The Fed announced in December that it would begin to slow down its monthly bond purchases from $85 to $75 billion. Most analysts expect the purchases to be wound down to zero over the course of 2014.
Thursday was Bernanke's last scheduled appearance as Fed chairman, although it's possible he may attend other events before his term expires at the end of the month. He is slated to run the Fed's Jan. 28-29 meeting, after which the current vice chairwoman, Janet Yellen, will take his place.