March 15, 2009
Interview with Ben Bernanke
PELLEY Mr. Chairman, I'm going to start with a question that everyone wants me to ask: When does this end?
BERNANKE: It depends a lot on the financial system. The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not going to see recovery. But we do have a plan. We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year. We'll see recovery beginning next year. And it will pick up steam over time.
PELLEY you think the recession is going to end this year?
BERNANKE In the sense that this decline will begin to moderate and we'll begin to see leveling off. We won't be back to full employment. But we will see, I hope, the end of these declines that have been so-- so strong in a last couple of quarters.
PELLEY: But you wouldn't say at this point that we're out of the woods?
BERNANKE No. I think the key issue is the banking system and the financial system.
PELLEY Unemployment, as we sit here, is about 8.1 percent. I wonder, do you expect double digit unemployment?
BERNANKE Well, it's hard to forecast exactly where we're going. Unemployment is rising. Job losses are still-- still very severe. And no doubt, the unemployment rate's going to go-- go higher than it is. But I think, again, that if we do succeed in stabilizing the financial system, that we'll begin to see a-- a slower pace of decline, and eventually, a stabilization that will set the basis for a-- a recovery.
PELLEY You seem to be saying that we're not heading into a new American depression?
BERNANKE I think we've averted that-- that risk.I think we've gotten past that and now the problem is to get the thing working properly again.
BEN BERNANKE, AGE 55, HAS BEEN CHAIRMAN OF THE FEDERAL RESERVE BOARD SINCE 2006. FOR OUR INTERVIEW, HE OPENED UP THE FED HEADQUARTERS, RARELY SEEN BY THE PUBLIC. IT'S A MONUMENTAL BUILDING ALONG THE NATIONAL MALL. CONSTRUCTION STARTED IN 1935 IN THE DEPTHS OF THE GREAT DEPRESSION.
PELLEY You know Mr Chairman I think the Federal Reserve, for most people, is a mystery.
BERNANKE Well is an institution that people don't hear so much about but it's a very Important one. It manages monetary policy for the country. It's one of the main tools we have for stabilizing our economy and keeping prices stable.
PELLEY when was it founded?
BERNANKE The Fed was created by Congress in 1913. And it's original purpose was to deal with financial panics which is what we're doing right now
BERNANKE'S CRISIS STARTED IN 2007 WITH THE MORTGAGE MELT DOWN. LENDERS BEGAN TO FAIL. BERNANKE CUT INTEREST RATES REPEATEDLY. IN 2008, THE FED STOPPED THE COLLAPSE OF BEAR STEARNS BY ARRANGING A SALE TO ANOTHER FIRM. BUT THEN CAME THE END OF WALL STREET AS WE KNEW IT. MORTGAGE GIANTS FANNY MAE AND FREDDIE MAC WERE SEIZED BY THE GOVERNMENT. ON SEPTEMBER 14TH, MERRILL LYNCH WAS SOLD IN DISTRESS. THE NEXT DAY 158 YEAR OLD LEHMAN BROTHERS FAILED.
PELLEY You didn't rescue Lehman Brothers. It set off a worldwide panic when it went bankrupt. And I wonder, looking back, whether you think that was a mistake.
BERNANKE there were many people who said, "Let them fail." You know, it's not a problem. The markets will take care of it. And I-- I think I knew better than that. And Lehman proved that you cannot let a large internationally active firm fail in the middle of a financial crisis. Now was it a mistake? It wasn't a mistake for the following reason we didn't have the option we didn't have the tools -- the Federal Reserve cannot put capital into an institution. All we can do is make loans against collateral.
THE DAY AFTER LEHMAN, BERNANKE'S FED DID SOMETHING ASTOUNDING. IT LOANED 85 BILLION DOLLARS TO A COMPANY THAT WASN'T A BANK AT ALL-- AMERICAN INTERNATIONAL GROUP, THE GLOBAL INSURANCE GIANT THAT WAS ALSO INVOLVED IN BACKING RISKY MORTGAGE INVESTMENTS. BERNANKE SAYS, UNLIKE LEHMAN, THE FED COULD MAKE THE LOAN BASED ON GOOD COLLATERAL IN AIG'S PORTFOLIO.
PELLEY There have now been four rescues of AIG, for about $160 billion. Why is that necessary?
BERNANKE Let me just first say that-- of all the events and all of the things we've done in the last 18 months, the-- the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG. Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, they had a-- we had a situation where the failure of that company would have brought down the financial system.
PELLEY You say it makes you angry? What do you mean by that?
BERNANKE It makes me angry. I slammed the phone more than a few times on discussing AIG. It's-- it's just absolutely-- I understand why the American people are angry. It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets-- that was operating out of the sight of regulators, but which we have no choice but the stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy.
BY SEPTEMBER BERNANKE AND FORMER TREASURY SECRETARY HANK PAULSON WENT TO CAPITOL HILL TO URGE A MASSIVE BAILOUT OF THE BANKING SYSTEM.
BERNANKE At that period, I felt we were pretty close to a global financial meltdown.
PELLEY how much danger was there? How close a call?
BERNANKE It was very close. It was very close. The Congress passed the bill that gave Treasury the right to put capital into the banks-- in the first week of October. And it was in the second week of October that the crisis reached its peak.If we had not had those powers, we could have had a much, much worse outcome. So it was a very dangerous situation.
PELLEY Was anyone on Capitol Hill skeptical? Did they push back at all--you know, Mr. Chairman, it's probably not quite that bad?
BERNANKE: Well, I do remember one conversation I had where I was addressing a-- a caucus of-- of congressmen. And a congressman said to me-- he said, "Mr. Chairman, you know, I'm talking to bankers in my town. I'm talking to shopkeepers in my town. And they say things are normal. Nothing's going on. We don't-- we don't see any problem." And I turned to him and I said, "You will.”
THAT SECOND WEEK OF OCTOBER, THE DOW FELL 18 PERCENT. ITS WORST WEEK IN HISTORY.
IN THE MIDST OF THE CRISIS, BERNANKE HAD FREEDOM TO ACT IMMEDIATELY, HE DOESN'T NEED PRIOR PERMISSION FROM CONGRESS OR THE PRESIDENT. WHILE THEY DEBATED ON CAPITOL HILL, BERNANKE CUT INTEREST RATES NEARLY TO ZERO THEN HE USED DEPRESSION ERA EMERGENCY POWERS TO LAUNCH A DOZEN RESCUE PROGRAMS OF HIS OWN. THERE WAS SUPPORT FOR MONEY MARKET FUNDS, MORTGAGES, SHORT TERM LENDING TO SMALL BUSINESS, AND SUPPORT FOR AUTO LOANS, STUDENT LOANS AND SMALL BUSINESS LOANS. --COMMITMENTS OF A TRILLION DOLLARS�"DOUBLING THE SIZE OF THE FED'S BALANCE SHEET.
PELLEY Is that tax money that the Fed is spending?
BERNANKE It's not tax money. the banks have-- accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. so it's much more akin to printing money than it is to borrowing.
PELLEY You've been printing money?
BERNANKE Well, effectively. And we need to do that, because our economy is very weak and inflation is very low. when the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.
HE'S NOT KIDDING ABOUT PRINTING MONEY. THE FED ISSUES U.S. CURRENCY. THAT'S WHY IT SAYS FEDERAL RESERVE NOTE ON ALL THE BILLS IN YOUR WALLET. THIS IS THE BUREAU OF ENGRAVING AND PRINTING JUST A FEW BLOCKS FROM BERNANKE'S OFFICE. THE FED'S MANDATE FROM CONGRESS IS TO PUT ENOUGH MONEY IN THE SYSTEM FOR MAXIMUM EMPLOYMENT, BUT NOT SO MUCH THAT IT SETS OFF INFLATION. THE FED ACTUALLY PAYS FOR ITSELF AND RETURNS BILLIONS IN PROFITS TO THE TREASURY.
IN A SENSE BERNANKE HAS BEEN PREPARING FOR THIS EMERGENCY HIS WHOLE PROFESSIONAL LIFE. HE GOT A PhD IN ECONOMICS FROM M.I.T. HE CHAIRED THE ECONOMICS DEPARTMENT AT PRINCETON AND HIS SPECIALTY IS THE GREAT DEPRESSION. HE'S AMONG MANY ECONOMISTS WHO NOW BELIEVE IT WAS THE FEDERAL RESERVE ITSELF THAT HELPED TURN A RECESSION IN 1929 INTO A GLOBAL CALAMITY.
BERNANKE: they made two mistakes, basically. One was they let the money supply contract very sharply. Prices fell. Deflation. So monetary policy was, in fact, very contractionary. Very tight-- during that period. And then the second mistake they made was they let the banks fail. They didn't make any strong effort to prevent the failure of thousands of banks.
BERNANKE TOLD US WE WERE CLOSE TO A SECOND DEPRESSION AND HE IS DETERMINED TO NOT LET THE MAJOR BANKS FAIL ON HIS WATCH.
PELLEY: One of the things that I think many people watching this interview don't understand, is why there are multiple bailouts, four bailouts of AIG, three bailouts of Citigroup. There is a sense that this is a band-aid approach, that we're not getting to the root of the problem.
BERNANKE: Well, part of the issue is that-- you know, the economy has gotten a good bit worse. You know, the first part of the crisis was subprime and other assets that were toxic. Now, we're in a second phase, which is that the economy is very weak, So the economy's weakness has meant that some of the initial attempts to stabilize the banks haven't been enough, and we've had to do more.
PELLEY You know, Mr. Chairman, there are so many people outside this building, across this country, who say, "To hell with them. They made bad bets. the wages of failure on Wall Street should be failure."
BERNANKE Let me give you an analogy, if I might. If you have a neighbor, who smokes in bed. And he's a risk to everybody. If suppose he sets fire to his-- to his house, and you might say to yourself, you know, "I'm not going to call the fire department. Let his house burn down. It's fine with me." But then, of course, but what if your house is made of wood? And it's right next door to his house? What if the whole town is made of wood? Well, I think we'd all agree that the right thing to do is put out that fire first, and then say, "What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn't happen in the future? How can we fire proof our houses?" That's where we are now. We're having-- we have a fire going on.
PELLEY It's still burning.
BERNANKE It's still burning
PELLEY Are all the big banks that you regulate solvent?
BERNANKE I believe they are, yes. But we are doing a-- a-- a stress test right now, where we're looking at what the positions of the banks are under a tougher economic scenario than the one that we currently expect. And what we plan to do is to say how much capital would each bank need to be well capitalized. Not just solvent, but well capitalized, even in these more adverse scenarios.
PELLEY Are you committing in this interview, that you are not going to let any of these banks fail? That no matter what their balance sheet actually looks like, they are not going to fail?
BERNANKE They are not going to fail. But what we can do, should it be necessary, is-- is try to wind it down in a safe way.
IN OTHER WORDS, BERNANKE THINKS GOVERNMENT SHOULD STABILIZE FAILED FINANCIAL COMPANIES AND TAKE THEM APART SLOWLY.
BEN BERNANKE. So, for example, in the case of AIG, we've prevented a bankruptcy, because of the chaos that would create. But we're also demanding that AIG divest itself, sell off its-- subsidiaries, and use the proceeds to pay back the government.
SCOTT PELLEY: What are the dangers now? What keeps you up at night?
BEN BERNANKE the biggest risk is that, you know, we don't have the political will. We don't have the-- the commitment to-- to solve this problem, and that we let it just continue. In which case-- you know, we-- we can't-- we can't count on recovery.
THE FED ESTIMATES THE WEALTH OF AMERICAN FAMILIES FELL 18 PERCENT IN 2008 THE WORST SINCE THE GREAT DEPRESSION. IN A MOMENT BERNANKE TELLS US WHAT THE FIRST SIGNS OF RECOVERY WOULD LOOK LIKE.
BEN BERNANKE IS DOING THINGS WITH THE FEDERAL RESERVE THAT HAVE NEVER BEEN DONE. IT MAY BE BECAUSE HE'S NOT A CREATURE OF WASHINGTON OR WALL STREET. HE GREW UP, MIDDLE CLASS, THE SMARTEST KID IN A TOWN NOW FALLING ON HARD TIMES. HE TOLD US, BECAUSE THE FED IS SO POWERFUL, IT SHOULD BE MORE OPEN.
THE SEAL OF THE FEDERAL RESERVE IS EMBEDDED IN THE FLOOR JUST OUTSIDE THE ROOM THAT CHANGES THE FORTUNES OF THE WORLD.
PELLEY Wow. They don't build them like this any more.
THIS IS WHERE BERNANKE MEETS WITH HIS SIX FELLOW GOVERNORS OF THE FEDERAL RESERVE, ALL OF THEM APPOINTED BY THE PRESIDENT OF THE UNITED STATES. BERNANKE ALSO CHAIRS THE FEDERAL OPEN MARKET COMMITTEE WHICH DECIDES INTEREST RATES.
PELLEY those meetings are secret. Why is that?
BERNANKE if we held those things with a TV camera on us-- it would create lots of volatility and problems in the market. But I should say that, you know, we've come a long way. In 1994, when the Fed made a policy decision to change interest rates, wouldn't even announce that we made a change. But now, after every meeting, we put out a statement, say what we did, explain what we did, why we're doing it. And three weeks later, we put out minutes to describe everything that happened in the meeting. So we're becoming much more transparent.
PELLEY when I called and proposed this interview about a year ago, your representative laughed out loud. And said, "The Fed chairman never does an interview." I wonder why are you doing this?
BERNANKE Well, it's an extraordinary time. It's an extraordinary time. This is a chance for me, I think, to talk to-- to America directly.
AND A CHANCE FOR US TO UNDERSTAND WHERE HE COMES FROM.
BEN SHALOM BERNANKE GREW UP IN ONE OF THE FEW JEWISH FAMILIES IN DILLON, SOUTH CAROLINA, TODAY, A TOWN OF ABOUT SIX THOUSAND PEOPLE. HIS GRANDFATHER, JONAS, IMMIGRATED FROM EASTERN EUROPE, LANDED AT ELLIS ISLAND, AND CAME HERE TO START A DRUG STORE.
BERNANKE Our family came here in 1941. My-- grandfather, Jonas Bernanke bought this building-- made it-- to the JB Drugs, after his initials--
LATER HIS FATHER AND UNCLE TOOK OVER THE STORE WHICH HAS SINCE BECOME A RESTAURANT.
PELLEY We're sitting on this corner where your family's store was. And I see it's Main Street.
PELLEY People feel like guys like you are tuned into what happens on Wall Street and you forget places like this.
BERNANKE You know I come from Main Street. That's-- that's-- that's my background. And I've never been on Wall Street. And I care about Wall Street for one reason and one reason only-- because what happens on Wall Street matters to Main Street. And if we don't have stabilization in the financial markets, if we don't take the steps necessary to make sure that credit is flowing again, then my father couldn't get a loan to build his new store.
BERNANKE when I was young we had just a screen porch over here on the left side.
WE WENT TO THE OLD NEIGHBORHOOD. THE BERNANKE'S LEFT HERE YEARS AGO AND A RECENT OWNER COULDN'T QUITE MAKE THE MORTGAGE SO THE ECONOMY LITERALLY HIT HOME.
PELLEY When you first heard that your childhood home had gone into foreclosure, what did you think?
BERNANKE Well, I-- I was sorry to hear it. But, you know, I-- in a way, I wasn't surprised. Dillon is-- has taken, you know, has taken a pretty big hit in the-- in economic downturn. Unemployment rate's about 14 percent. And there have been a good number of foreclosures and plant closings and those things; I think about that.
NUMBERS WERE ALWAYS BERNANKE'S THING. HE TAUGHT HIMSELF CALCULUS AND GOT AN SAT SCORE OF 1590 OUT OF 1600. A FRIEND TALKED HIM INTO AIMING HIGH FOR COLLEGE.
BERNANKE I came home from school one day and there was a phone call for me. And I picked up the phone. They said, "This is the Harvard Admissions Department. We'd like to let you know that you're accepted-- in the freshman class." And I said, "Come on, who is this really?" But my parents had their doubts about my leaving and going too far from home.
PELLEY No! Wait a minute. Your parents weren't thrilled that you were going to Harvard? I mean this is a dream come true.
BERNANKE my mother was definitely against it. First of all, she said, you know, "You don't have the clothes. You won't be able to dress properly for-- for Harvard. And-- it's a long way from here. How you going to come home on holidays and so on. So, my parents ate into their savings to let me go, which I'm always grateful for.
BERNANKE HELPED PAY FOR COLLEGE WORKING CONSTRUCTION AND WORKING HERE. THE FUTURE CHAIRMAN OF THE FED, WORE A PONCHO AND WAITED TABLES AT SOUTH OF THE BORDER.
PELLEY What did you learn about work?
BERNANKE work is hard, that in order to feed your family and to give your kids opportunities you-- it's not an easy thing.
BACK IN THE MARBLE CONFINES OF THE FEDERAL RESERVE BERNANKE TOLD US THAT HE UNDERSTANDS THAT MANY AMERICANS ARE AFRAID.
PELLEY I've been kicking around the country. I spoke to a woman in Ohio, who took her son out of college, because she got laid off. I spoke to a woman in Nevada, who has an advanced stage of cancer. And she was told by her county hospital that they couldn't treat her because a hole had been blown in the State budget. What do you say to those people?
BERNANKE Well, I got into economics, because I wanted to make things better for the average person. When I see a job loss number, 650,000, like we saw last month-- I know that's-- that's not just a number. That's 650,000 lives that have been disrupted. Families that have had to move or take children out of school. Houses that may be in danger of foreclosure. I know something about what people are going through.
AND THAT MAKES IT ALL THE MORE OUTRAGEOUS WHEN HE HEARS OF FINANCIAL FIRMS HANDING OUT PERKS AND BONUSES AFTER THEY'VE TAKEN BAILOUT MONEY.
BERNANKE: the era of this high living, this is over now. And that they need to be responsible and use the money-- constructively.
PELLEY And you would say what to those bankers right now in this interview?
BERNANKE I'd say that-- their job right now is to find a way to make loans to creditworthy borrowers, to get their banks back on the path of making good loans, safe loans, and to-- and to have a reasonable sense of humility based on, you know, what's happened in the last 18 months.
WE ASKED BERNANKE WHAT IT'S BEEN LIKE AT THE OFFICE THE LAST 18 MONTHS, WITH HIS STAFF SOMETIMES WORKING 80 HOUR WEEKS.
PELLEY I noticed when we were in your office. You have a couch in there. You been sleeping on that couch?
BERNANKE: Once in a while.
BERNANKE Once in a while, yes. And sometimes, it goes through the weekend. Sometimes it goes overnight.
THE FEDERAL RESERVE IS THE LIFE BLOOD OF THE BANKING SYSTEM. ITS`12 REGIONAL BANKS ARE CLEARING HOUSES FOR COMMERCIAL BANKS. THIS IS ONE OF THE VAULTS ASSOCIATED WITH THE RESERVE BANK IN NEW YORK. ROBOTS CARRY CASH IN THE VAULT THAT IS AS BIG AS A FOOTBALL FIELD AND FOUR STORIES HIGH. EACH PALLET, LOADED WITH HUNDRED DOLLAR BILLS IS WORTH 64 MILLION. THE FED HAS 22-THOUSAND EMPLOYEES. IT CLEARS YOUR CHECKS AND YOUR ATM WITHDRAWALS. AND PROVIDES ECONOMIC FORECASTS. BUT ONE OF ITS MOST IMPORTANT RESPONSIBILITIES IS REGULATING THE NATION'S BIGGEST BANKS�"TO BE THE WATCHDOG.
PELLEY You're supposed to keep them out of trouble. So, how did all this happen?
BERNANKE Well, a lot of mistakes got made. No question about it. But, you know, this was a much bigger thing than any single firm or any single�"individual over the last-- dozen years or so, enormous amounts of savings has flowed into the United States, and some other industrial countries. That savings has come from China and East Asia. It's come from oil producers. And it has-- and hundreds of billions of dollars, it has come into our financial system. And, you know, that would be great if we took that money and invested it wisely, and got a high return. But instead, our financial system-- didn't-- didn't do a good job. We had a regulatory system that was like a sandcastle on the beach. When you had little small waves just lapping up against the sand castle, everything looked good. But when you had a big breaker come in, suddenly it-- the system wasn't strong enough to deal with it.
PELLEY: Does the Federal Reserve bear any responsibility for missing what was happening to the banks, as it was happening?
BERNANKE Well-- like other regulators-- we-- we probably could have done more. We've already done a lot of-- put a lot of effort into reviewing our practices. And reviewing the bank's practices. We are trying to strengthen our regulation at every point that we can. So, I don't want to deny that we certainly could have done a better job, and others could have done a better job.
NOW PRESIDENT OBAMA AND THE CONGRESS HAVE FISCAL STIMULUS PLAN OF NEARLY 800 BILLION DOLLARS. THERE'S A SEPARATE BAILOUT FOR FINANCIAL FIRMS-- THAT'S AT LEAST 700 BILLION. NEXT THE GOVERNMENT IS LOOKING FOR A WAY TO CLEAR BAD DEBT OFF THE BOOKS OF CRIPPLED INSTITUTIONS.
PELLEY There was a panic in 1907. So, the Fed was created to prevent that from ever happening again. And then we got the Great Depression. And now we have this. How do we prevent this from occurring another time?
BERNANKE well, tougher regulation of large firms. It includes having a set of laws that allows us to wind down. A large, internationally active firm, without the adverse impacts on the markets that a disorderly bankruptcy would have. It includes possibly having a systemic regulator. A-- regulator that has some responsibility to look at the system as a whole.
PELLEY Your response has been to do what the Fed didn't do in 1929, and that is pour money into the system. But there's an argument made today that that's not what the problem is. The problem isn't that there's too little money in the system. The problem is there's too much fear in the system. That with these companies being propped up by the government, no one on Wall Street can tell who's solvent and who's not. And therefore, business does not move.
BERNANKE Well, I absolutely agree that confidence is key. People don't know what's happening. And they're afraid. And they're not sure what-- you know, whether or not the-- the-- the system is going to recover. So, how do you get confidence, that's the question. And I think the way to get confidence is to show progress.
PELLEY: but are you seeing any progress? What's going well?
BERNANKE I think all of our efforts, so far-- have produced results. We're buying about $500 billion in-- mortgages-- in package and securities by-- the G.S.E.s, Fannie Mae and Freddie Mac. And-- that seems-- to have brought down mortgage rates significantly. It allows people to refinance. To get out of high rate mortgages. we are seeing progress in-- in the money market mutual funds, and in the business lending area.
And I think as those green shoots begin to appear in different markets-- and as some confidence begins to come back-- that will begin the positive dynamic that brings our economy back.
PELLEY: Do you see green shoots?
BERNANKE I do. I do see green shoots. And-- not everywhere, but certainly in some of the markets that we've been-- functioning in. And-- we've seen some improvement in-- in the banks, as well, certainly in some key cases.
PELLEY: What will be the first signs of recovery?
BERNANKE one sign would be that a large bank is successful in raising private equity. Right now, all the private money is sitting on the sidelines saying, "We don't know what these banks are worth. We don't know that they're stable." And they're not willing to put their money into the banks.
PELLEY: If you had a message for the American People in this interview, what would it be?
BERNANKE: Scott, I'd say three things. I'd say, first of all, that the Federal Reserve is here, and is going to do everything possible to support this recovery. The second thing I would say is that recovery is not going to happen until the financial markets and the banks are stabilized. And we do have a plan, we have a program for that. But it's going to take some patience. It's going to take some support, and you know, we're going to have to go forward with that. But the third and final thing I'd just like to say to the American People is that I have every confidence that this economy will recover, and recover in a strong and sustained way. The American people are among the most productive in the world. We have the best technologies. We have-- great universities. We have entrepreneurs. I just have every confidence that as we get through this crisis, that our economy will begin to grow again, and it will remain-- the most powerful and dynamic economy in the world.
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