Six years after the worst financial crisis since the Great Depression, former Federal Reserve chairman Ben Bernanke is still trying to get the facts out to a sceptical public.
The softly spoken and typically reserved Bernanke this week told an audience of business leaders in New York that “there was a lot of revisionism out there,” particularly when it came to what he dubs as the “Lehman-AIG weekend”.
The tumultuous weekend ultimately saw the end of investment bank Lehman Brothers and what the former Fed leader views as the beginning of affirmative action. But, contrary to popular opinion, the central bank wasn’t sitting on its hands when it came to Lehman’s demise.
“[Many people say that] everyone knew Lehman shouldn’t be allowed to fail, but the Fed and Treasury went ahead and let it fail anyway. That’s really got history exactly backwards,” he explained at the World Business Forum.
Instead, the former Fed chair insists, the US central bank fought hard against a widespread view in the media that Lehman could be ditched without considerable pain.
“Conventional wisdom was that Lehman should be allowed to fail,” he stressed.
“We didn’t buy that. We didn’t think that was right.”
That led the Fed to chase a buyout of Lehman, with a meeting held with a dozen of Wall Street’s elite.
The upshot was that offers were pitched by Bank of America and Barclays, before the former backed out on balance sheet worries and the latter met regulatory resistance back in its home market of the UK.
“With no acquirer and no sufficient capital there was really nothing we could do,” Bernanke, who led the Fed from 2006 until February this year, asserted.
“It was unfortunate, but it was not really a choice.”
AIG, described by the central banker as a “hedge fund on top of an insurance company,” was able to avoid collapse as the insurance part of the business “had value”. This meant the Fed, which could only lend against good collateral, was able to help deliver a company-saving loan.
The loan came amid the introduction of the controversial Troubled Asset Relief Program, which drew support from then president George W Bush, but a hostile response from Congress, with several high-ranking members making their unsympathetic feelings known to Bernanke and Secretary of the Treasury Henry Paulson.
“Mr Chairman and Mr Secretary we want to tell you how much we appreciate you coming over here to tell us all about this and answer all our questions, but I want you to understand one thing: nobody here is giving you permission to do this. It is your decision and your responsibility,” one senior senator cautioned after a discussion to trumpet TARP, according to Bernanke.
It’s the kind of pressure he would seem capable of dealing with in light of his reassuringly calm demeanour, but nonetheless, it’s a heavy burden to carry.
Despite this, the challenges of public office don’t appear to have dimmed his sense of humour. In response to a question on whether he regretted anything during the heady days of the crisis, he countered in jest: “besides taking the job, you mean?”
In reality, however, you can’t go through the most tumultuous economic period in 70 years as the head of the world’s largest central bank without holding a few regrets.
For Bernanke, it’s a lack of public awareness that appears to irk him the most.
“It was a very complex crisis and very difficult to address,” he confided.
“(But) I wish we had done more to get better understanding in the public about why we were doing what we were doing.”
The crisis has changed his outlook on central banking, with ‘talking the talk’ the most critical part of the job.
“My view on central banking now is it’s about 2 per cent action and about 98 per cent talk – and if you don’t do the talk right, you’re going to have some problems.”
The comment shows great faith in the concept of ‘forward guidance’, a tool brought to prominence by Bernanke two years ago to further explain the central bank’s thinking.
The other error from the Fed came in being too optimistic about the recovery early on, he added, which helps explain the cautious approach from US central bankers in the current environment.
Bernanke, who now reportedly commands $US250,000 for every speech he delivers, has since moved on and, so it seems, has the US economy. But while he is more optimistic on the economy now than at any point in the last six years, he concedes the unprecedented approach from the Fed remains a worry for many.
“A lot of people have concerns about the long period of zero or low interest rates,” he noted.
“But basically the Fed was the only game in town. That was the tool the Fed has and that’s therefore what the Fed has been using.”
It remains the only game in town, and now we await the final verdict on the boldest central bank action the world has ever seen. But, for Ben Bernanke, the verdict appears less important than a broader understanding of just what took place.
“Nobody’s going to come out looking all that good when historians write it,” he said. “But I would only ask those future historians to think in real-time and don’t impose the retrospective knowledge on what we were seeing.”