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Ex-Fed chief Bernanke looks back on crisis, ahead to future

Ben Bernanke speaks at the World Business Forum at New York's Radio City Music Hall on Oct. 8.

NEW YORK -- Ben Bernanke, who stepped down after eight years as head of the U.S. Federal Reserve in January, tells a story that captures in a nutshell the strange anonymity of his challenging tenure as the world's most powerful central banker.

     One day, his daughter's college roommate asked what he did for a living. When Bernanke's daughter told her friend that her father was chairman of the Fed, the young woman exclaimed: "Your father is Alan Greenspan?"

     Bernanke spoke Oct. 8 at the World Business Forum, an event co-sponsored by the Nikkei Asian Review, at New York's Radio City Music Hall. His wide-ranging speech gave a preview of his memoir to be published next year. Looking back on the turbulent period in 2008, Bernanke touched on everything from family banter to crisis talks with President George W. Bush over how to save a financial system teetering on the brink of collapse following the Lehman Brothers meltdown.

     He also spoke forthrightly on U.S. asset prices, the Chinese economy and Abenomics, and weighed in on two hot economic debates: whether the U.S. is suffering from "secular stagnation" -- as former Treasury Secretary Larry Summers says -- and whether capitalism entails self-perpetuating inequality -- as posited by French economist Thomas Piketty, author of a much-talked-about new book, "Capital in the Twenty-First Century."

Tough act to follow

Bernanke's feelings toward his predecessor, Alan Greenspan, are complicated. "According to recent polls, 12% of the population still thinks that Alan Greenspan is the chairman, so I must have made a big impression," Bernanke joked.

     The Greenspan era is seen by many as a golden age. Greenspan was "the Maestro," who presided over a period of economic euphoria. Bernanke spent most of his term cleaning up the debris when the boom went bust. Many of his decisions were unpopular. One that stands out was the handling of Lehman Brothers, an investment bank that collapsed in mid-September 2008.

     Bernanke bristles at critics who fault his handling of Lehman Brothers. "There's kind of a view which says everybody knew that Lehman should be protected and not allowed to fail, but the Fed and the Treasury went ahead and let it fail anyway. That's really got the history exactly backwards," he said.

     At the time, newspaper editorials and prominent economists were saying Lehman should be allowed to fail, Bernanke said. "We didn't think that was right. We worked really hard over [the] weekend [of Sept. 13-14, 2008] to try to find a buyer," but the buyers backed off. There was no choice but to let it fail, Bernanke said.

     Within days, however, the Fed and the Treasury Department stepped in to save American International Group, an insurer, extending it an $85 billion emergency loan, which raised questions of consistency. Bernanke was unapologetic, saying AIG "was a hedge fund on top of an insurance company, basically. And while the hedge fund was bleeding money, the insurance company had value, and that allowed us to make a loan. ... The Fed can only lend against good collateral."

     At first, President Bush was skeptical of the idea of rescuing the failing insurance company, according to Bernanke. When he and Treasury Secretary Henry Paulson went to the White House and told Bush of their plans, Bernanke said the president's response was, "Oh, what's the other option?" But once he learned there were no other options, Bush was very supportive, Bernanke recalled.

     Congress was another matter. There was opposition among lawmakers to the AIG bailout, and even stronger resistance to the Troubled Asset Relief Program, or TARP, a bill designed to bolster financial companies' shaky capital bases and stabilize the financial system. Bernanke said when he called a senator to ask where his constituents stood on the bill, the senator said, "Well, it's about 50-50: 50% 'No,' and 50% 'Hell, no.'"

Better at home

But even during the darkest moments, the Fed chief's home life was a comfort. "My wife keeps me very grounded," he said. "I would go home and say, 'We did a $10 billion operation today.' And she would say, 'Great. Take out the garbage.'"

    Asked what the Fed could have done to avoid the economic debacle, Bernanke pointed to the debate over the housing market boom prior to the crisis. He said there was too much talk about whether there was a bubble or not. "That was the wrong way to think about it," Bernanke said. "What we should have been doing more actively was to say, 'OK, we don't know if it's a bubble, or how big of a bubble it is. But suppose it is, and suppose that it deflates. What would the consequences of that be?'"

    As for current asset prices, Bernanke said he sees no major risk of a bubble. "There are some areas that could be discussed that seem a little bit outside of the normal range," such as leverage lending and high-yield bonds, he said. "But the broad, most important asset classes, like stocks and houses, seem generally to be within where they've been for the past few decades."

    Regarding the overall U.S. economy, Bernanke was much more upbeat than the cautious views he gave as Fed chairman. This may be because the economy has genuinely improved, or it may be that he no longer has to toe the U.S. central bank's dovish line.

    The U.S. economy "is beginning to show ... the kind of momentum and sustainability that we haven't seen for quite a while," Bernanke said. "I'm feeling reasonably optimistic that this will continue."

    He dismisses the doomsayers who believe the U.S. economy is in long-term decline. "There are a lot of people who are pessimistic about the U.S. ... but I think we have some very fundamental strengths as well," such as the country's growing population and its position as the center of global innovation, Bernanke said.

Cheer up

This brings up the question of secular stagnation. Former Treasury Secretary Larry Summers and others have suggested the recent subpar growth may be the best the U.S. can do, as a lack of investment opportunities suppresses demand, hinders full employment and traps the economy in a low-interest-rate environment.

    "Larry and I have lots of discussions about these issues, and I think it's really an interesting idea." But, Bernanke said, "I don't really buy [it]."

    Bernanke argues, first, that contrary to Summers' assertion, the U.S. economy is in fact moving toward full employment and second, that it is unlikely investment will remain weak forever under the zero interest rate policy.

    But then how to explain the low-growth trend in the U.S. since the early 2000s? Bernanke points to a new culprit: the trade deficit.

     "In the early part of the 2000s, the U.S. had about a 6% [of] GDP trade deficit, arising from a lot of factors including the foreign exchange policies of other countries," Bernanke said. "And that meant that 6% of the spending of U.S. households and firms was essentially going overseas," constraining demand and growth.

    Bernanke thinks the U.S. shale gas and oil revolution may help resolve that problem. He points out that U.S. energy production has gradually pushed down the deficit. "In the longer term, more balanced trade would account for a good bit of that deficiency of demand that Larry was talking about," he said.


On the issue of economic inequality and the debate around Thomas Piketty's best-seller, Bernanke said, "I think it was a really interesting book. ... I learned a lot from it," he said, but added that he disagreed with Piketty's core premise.

    Piketty argues the rate of return on wealth is nearly always greater than the growth rate of the economy. This means people with a lot of financial assets grow wealthier faster than the typical wage earner, leading to a self-perpetuating concentration of wealth at the very top.

    Bernanke said he is uncertain whether the return on capital is really higher than the economic growth rate once taxation, spending, inheritance and philanthropy are taken into account. "I'm not entirely persuaded that [widening inequality] is an unavoidable consequence of capitalism," he said.

     Turning to China, Bernanke said he is "encouraged by Chinese efforts to try and switch their growth model" from one driven by exports and investment to one led by domestic consumption. "They can't keep growing from where they are, if they're relying entirely on selling goods to the U.S.," Bernanke said. But he acknowledged such a switch can be "tricky" as China's growth slows.

    Bernanke also said China and other emerging countries still tend to keep their exchange rates artificially low against the dollar to encourage exports. Even so, "the Chinese trade surplus is less than it had been before, and so I think that's less of a problem."

    Regarding Japan, Bernanke said Bank of Japan Gov. Haruhiko Kuroda "has been very aggressive," noting the BOJ's latest quantitative easing program is materially bigger than the Fed's effort, relative to GDP.

    But, said Bernanke, "It's a little disappointing that there isn't even stronger progress." He stressed that inflation expectations are hard to change, especially amid Japan's weak economic conditions following April's sales tax hike.

     Bernanke also said the third arrow of Abenomics -- economic reform -- has been "very slow" in coming. But he acknowledged structural reforms are always hard, commending Japan's effort and voicing hopes for Abenomics. "If they can really do that, it is a very powerful way to break expectations and get into a new regime. So I'm hopeful," Bernanke said.

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