In response to Jordi’s request today that we focus on something pertaining to the recession, I thought it would be helpful and interesting to recap the recent Ben Bernanke interview on CBS’s 60 minutes. This interview was particularly significant because Bernanke has never been interviewed like this before, and it was mentioned during the show that the show was absolutely shocked when they heard he had agreed to do it. The interview was conducted in the Fed Headquarters, which was also a significant occurrence, as it is rarely seen by the public. So, in case some of you missed it, here are some key takeaways. (Some of this will be from memory, but I’m also going to pull from the CBS website because it’d be hard to remember everything…)
I can’t decide if it’s condescending or legitimate to assume that just a brief summary of who Bernanke is and what the Federal Reserve does would be helpful, but I guess it can’t hurt. Ben Bernanke is the chairman of the Fed. The main purpose of the Fed is to control the economy by determining interest rates, but the recent economic crisis has forced the Fed to take extreme measures and throw trillions of dollars into the economy. Interesting to note is that when the Fed was founded by Congress in 1913, it’s primary purpose was to manage panic, which is exactly what they’re doing now.
I guess the first obvious question is…why has he never done an interview before, and why did he finally decide to do one now? He said that the reason most of what they do is kept private is because they would risk causing a lot of market volatility otherwise. He said that he agreed to do it now because it is an extraordinary time for America, it’s a chance for him to speak to America directly, and it’s also a time for America to see where he comes from. He then went on to explain his upbringing in a very small town as the son of a small shop owner. He wants America to know that he comes from Main Street, so he understands the position that most Americans are in right now.
When asked about when we will see an end to this recession, he essentially said that we will start to see a leveling off of the decline by the end of this year, and a climb will start to occur at the beginning of next year. He thinks recovery will be highly dependent on the banking and financial system. He thinks we have averted the risk of going into another American Depression, and that we should focus our efforts on repairing what has fallen apart.
The interview also helped set up a timeline of key events:
– Crisis started in 2007 – mortgage meltdown
– Lenders began to fail – Bernanke cut interest rates repeatedly
– 2008 – Fed stopped collapse of Bear Stearns by arranging sale to another firm
– Mortgage giants Fannie Mae and Freddie Mac seized by the government.
– Sept. 14 – Merrill Lynch sold in distress
– Next day – 158-year-old investment bank Lehman Brothers failed
In response to not rescuing Lehman, he stated, “we didn’t have the option, we didn’t have the tools. All the Federal Reserve can do is make loans against collateral.”
– Next day – Fed lends $85 billion to insurance giant AIG (also backed by risky investments)
In response to the choice to bail out AIG, he replied, “Let me just first say that of all the events and all of the things we’ve done in the last 18 months, the single one that makes me the angriest…is the intervention with AIG. Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, we had a situation where the failure of that company would have brought down the financial system.”
– Following the passing of the bailout plan, the Dow fell to 18% in the second week of October (its lowest in history). $8 trillion had been lost. Interest rates were cut to nearly 0 and Bernanke launched several rescue plans.
It gets very long and complicated, but these were just a few key things that I thought might be helpful to sum up. I’ll end with one of the most controversial issues surrounding the whole crisis…
When asked about the people who think the Fed should’ve just let the banks fail because it was their greed that caused this, he responded with what I thought was a really helpful analogy. He said: “If you have a neighbor, who smokes in bed. And he’s a risk to everybody. If suppose he sets fire to his house, and you might say to yourself, you know, ‘I’m not gonna 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 have a fire going on.”
Although Bernanke did say that he will not let the banks fail, he kind of covered himself by saying that they might have to let them “wind down in a safe way.” I’m interested to know what you all think about this idea of saving the guys who presumably caused this whole thing, and do you think Bernanke would save them if he didn’t think it was absolutely crucial to the survival of our economy and country as a whole?
Here is the link to where I pulled some of this information: