:00:00. > :00:09.with the former governor of America's
:00:10. > :00:15.Seven years ago Wall Street was close to meltdown.
:00:16. > :00:21.The world economy was feeling the full force of the financial
:00:22. > :00:23.crash that changed long-held assumptions about the stability
:00:24. > :00:29.My guest today was in the eye of that storm.
:00:30. > :00:34.Ben Bernanke was chairman of the Federal Reserve,
:00:35. > :00:37.the US central bank, and he took decisions then that continue to
:00:38. > :00:42.Can we be confident the right lessons have been learned
:00:43. > :01:20.You've had years to reflect on those momentous events of 2008.
:01:21. > :01:30.Now you look back on it would you have done many things differently?
:01:31. > :01:33.Well, you know, running up to the crisis we didn't
:01:34. > :01:38.identify everything that would happen and even in 2007-8, we were
:01:39. > :01:45.trying to balance different risks we were looking at between inflation,
:01:46. > :01:47.moral hazard, all kinds of things.
:01:48. > :01:49.Once we understood the depth and severity of the crisis,
:01:50. > :01:52.we attacked it with all the tools we could put together
:01:53. > :01:53.and we stabilised the financial system.
:01:54. > :02:03.--there. Certainly there was, part of what happened we thought...
:02:04. > :02:06.I say we, the market participants, regulators, everyone,
:02:07. > :02:08.thought financial crises were a thing of the past, at least
:02:09. > :02:27.The Federal Reserve was created 100 years ago primarily to fight
:02:28. > :02:30.Yes, there was complacency and that contributed no doubt to excessive
:02:31. > :02:34.There is much talk to the degree of people like you did not understand
:02:35. > :02:38.some of the complex derivatives and different products in the financial
:02:39. > :02:42.marketplace and actually we now know that were so prevalent and important
:02:43. > :02:47.that when they fell apart because of dodgy mortgages and everything else,
:02:48. > :02:50.the whole system began to unravel, and you did not understand it.
:02:51. > :02:55.We understood individual instruments and how they worked.
:02:56. > :02:59.What nobody understood, including the financial institutions
:03:00. > :03:02.was how exposed they were to sub-prime mortgages and other types
:03:03. > :03:07.It was financial panic that created the crisis.
:03:08. > :03:10.It was not the sub-prime mortgages themselves.
:03:11. > :03:20.In responding to it, and we talk of a period late-2007, in particular
:03:21. > :03:27.2008, and there were key moments like the spring 2008 when you
:03:28. > :03:31.decided to bail out one big bank, Bear Stearns, but by autumn of the
:03:32. > :03:34.same year, such was the level of the crisis you decided you
:03:35. > :03:42.When you make those decisions, were you in a way following your gut?
:03:43. > :03:50.As an academic economic historian I studied financial panics back to
:03:51. > :03:59.It has always been the job of central banks to lend in a financial
:04:00. > :04:02.panic and be a lender of last resort and that is most of what we did
:04:03. > :04:05.when we addressed the failures of companies like Bear Stearns.
:04:06. > :04:12.We were trying to prevent the panic going to a new level of fear,
:04:13. > :04:16.but most of what we did was provide cash to the financial system so they
:04:17. > :04:19.could fund themselves when other lenders would not provide cash.
:04:20. > :04:21.You were trying to wrestle down the level
:04:22. > :04:31.It has to be said the most momentous decision
:04:32. > :04:33.of all was September 2008, when you along with the US Treasury
:04:34. > :04:40.and other key players, decided you would not, you could not save a key
:04:41. > :04:50.We did not have the tools necessary to save Lehman Brothers.
:04:51. > :04:54.It was deeply in the red, no one would buy it.
:04:55. > :04:58.We understood, unlike most of the commentators,
:04:59. > :05:12.How can it be so many people second-guess what you have just said
:05:13. > :05:15.to me, including the boss of Lehman, Dick Fuld, he said plainly
:05:16. > :05:17.afterwards Lehman had adequate collateral.
:05:18. > :05:19.You could have got involved realistically, responsibly.
:05:20. > :05:21.You chose not to for political reasons.
:05:22. > :05:32.The bankruptcy judge found huge holes.
:05:33. > :05:36.After the fact we found they were worse off than we thought they were.
:05:37. > :05:45.The head of Lehman had strong incentives to
:05:46. > :05:49.be very optimistic in terms of what the assets of Lehman were worth.
:05:50. > :05:53.I think about what Dick Fuld has said since and people like the CEO
:05:54. > :05:56.of Merrill Lynch, and they have looked at your record and they say
:05:57. > :06:06.You got so burned by putting money into Bear Stearns and being hammered
:06:07. > :06:08.by the public and some politicians for avoiding the
:06:09. > :06:11.consequences of moral hazard, for not appreciating banks have to be
:06:12. > :06:15.You were hammered for it and then politically decided you
:06:16. > :06:29.If that were true why did we save AIG the next day?
:06:30. > :06:42.It was a political disaster. The difference was,.
:06:43. > :06:44.we had the tools because AIG had insurance subsidiaries.
:06:45. > :06:45.Moral hazard becomes a meaningless concept.
:06:46. > :06:48.The idea you should let the market do its worst
:06:49. > :06:50.if businessmen make bad decisions they have to pay the consequences.
:06:51. > :06:52.You abided by the principle of moral hazard
:06:53. > :06:57.What we understood was that allowing major financial institutions to
:06:58. > :07:00.collapse in the middle of the worst financial panic probably in US
:07:01. > :07:03.Moral hazards are an important problem.
:07:04. > :07:15.We also addressed it during the crisis by imposing tough terms
:07:16. > :07:19.It is not the case that allowing those firms
:07:20. > :07:23.You say you abided by the principle of moral hazard
:07:24. > :07:30.You made it plain in your book and elsewhere you thought the
:07:31. > :07:33.management of AIG was incompetent, irresponsible, frankly useless.
:07:34. > :07:37.Yet you threw billions in their direction.
:07:38. > :07:41.Not because we wanted to save AIG per se, because we cared about
:07:42. > :07:46.AIG shareholders, but rather that we understood that the collapse of the
:07:47. > :07:52.world's largest insurance company in the middle of the biggest financial
:07:53. > :07:55.crisis would have been catastrophic not for just AIG but the entire US
:07:56. > :07:57.There should have been painful consequences
:07:58. > :08:10.The biggest CEOs, bosses of financial institutions
:08:11. > :08:13.like AIG that were so badly run, how many of them were really punished?
:08:14. > :08:20.I'm talking about more severe penalties than firing,
:08:21. > :08:24.The Federal Reserve is not an enforcement agency.
:08:25. > :08:32.The Department of Justice has that responsibility.
:08:33. > :08:37.I am suggesting that you with your loud and influential voice
:08:38. > :08:41.might have said at the time and soon after, moral hazard and the
:08:42. > :08:46.consequences for real people in the real economy are so severe these
:08:47. > :08:49.people, for all the abuses they carried out, have to be punished
:08:50. > :08:54.It would not have been the right thing to do.
:08:55. > :08:56.I was in a different lane, in the Federal Reserve,
:08:57. > :08:59.I was not in the Department of Justice, it was their call.
:09:00. > :09:04.I believe they should have addressed this more directly,
:09:05. > :09:13.responsibility. What they chose to do was fine the large firms billions
:09:14. > :09:16.of dollars and I think it would have made more sense if they pursued
:09:17. > :09:21.Now that you are free to talk openly, what did you make of the
:09:22. > :09:30.CEOs of the biggest banks you dealt with on the crisis phone in 2008,
:09:31. > :09:41.these guys? Many of them were complacent and took too much risk.
:09:42. > :09:43.You cannot say this one person or that person...
:09:44. > :09:51.Government failed, Congress failed, the public failed.
:09:52. > :09:55.It was a complex phenomenon that many people came up short.
:09:56. > :10:01.A lot of the masters of the universe you talk about did very poorly,
:10:02. > :10:07.not necessarily in a criminal way, they just made bad investments.
:10:08. > :10:09.It was a system failure and many people including the Fed
:10:10. > :10:11.and regulators bore responsibility for that.
:10:12. > :10:16.I am trying to bring it down to a human level.
:10:17. > :10:22.Do you feel this group of individuals, very influential,
:10:23. > :10:30.greed? Do you feel you could take a moral position and judgment on them?
:10:31. > :10:40.I think what many of them did was not good business, not just in the
:10:41. > :10:43.sense of taking excessive risk but of not paying sufficient attention
:10:44. > :10:47.Some companies sold securities that were clearly not in the interests
:10:48. > :10:50.of the buyers and that is bad business and immoral.
:10:51. > :10:59.So the question today is, has that immorality been weeded out
:11:00. > :11:03.by regulation and other instruments so it could never happen again?
:11:04. > :11:10.I don't know about never happen again, never is
:11:11. > :11:13.a long time, but there has been improvement in oversight
:11:14. > :11:15.regulation and safety of the financial system which was the goal.
:11:16. > :11:19.Paul Volcker, one of the most respected voices in Wall Street,
:11:20. > :11:28.he worries that, yes there has been a lot of legislation that has
:11:29. > :11:31.reformed the banking system, but he still worries that Wall Street is
:11:32. > :11:33.vulnerable and Wall Street cannot be confident something
:11:34. > :11:46.It would be foolish to say this could never happen,
:11:47. > :11:50.But I think the system is stronger and safer
:11:51. > :12:01.If we had some of the safeguards we have now then, I think we would
:12:02. > :12:11.On the Democrat side, partly because Bernie Sanders, a socialist
:12:12. > :12:13.populist is running against.
:12:14. > :12:15.Hillary Clinton thinks there should be more banking regulation.
:12:16. > :12:18.In the future she wants senior executives and financial companies
:12:19. > :12:21.to feel more pain and to basically find a legislative way of inflicting
:12:22. > :12:24.more pain on them if their companies abuse the system and cost
:12:25. > :12:46.I think there are a lot of tools that have been created
:12:47. > :12:48.by Dodd Frank and international agreements that if properly
:12:49. > :12:55.Let's talk about some of the key decisions you took.
:12:56. > :12:59.The big idea of your tenure at the Fed.
:13:00. > :13:04.In terms of interest rates, you slash them down to almost zero.
:13:05. > :13:08.You introduced the idea of greater transparency on interest
:13:09. > :13:12.rates, to indicate to the public, forward guidance, we will keep them
:13:13. > :13:16.at this level for a long time in a way you had not been clear before.
:13:17. > :13:18.On interest rates, did you foresee they would be close
:13:19. > :13:26.I thought there would be more recovery by now in terms
:13:27. > :13:36.Unemployment came down faster than we thought so
:13:37. > :13:41.Is it worrying for the long-term health of the US economy that you
:13:42. > :13:44.have had cheap money, virtually free borrowing for so long yet growth is
:13:45. > :13:51.Again there has been progress but I would say the main issue is there
:13:52. > :13:56.has been too much reliance on the Fed and central banks in general.
:13:57. > :14:00.Central banks are carrying most of the load for supporting the
:14:01. > :14:04.recovery and use the tools they have which means lower interest rates.
:14:05. > :14:09.A better balance between monetary and fiscal policy and other policies
:14:10. > :14:12.would take some of the burden away from central banks
:14:13. > :14:18.You can talk about slashing interest rates being a conventional tool,
:14:19. > :14:24.but you went unconventional early on with quantitative easing.
:14:25. > :14:27.I suppose it's another way of talking about pumping new money
:14:28. > :14:34.You did that to the scale of trillions of dollars.
:14:35. > :14:37.The critics will say you essentially put the US economy
:14:38. > :14:40.on a drug that was treating the symptoms but not the
:14:41. > :14:53.The US economy needs massive structural reform and
:14:54. > :14:56.by making money so cheap, you gave inefficient companies licence to
:14:57. > :15:01.continue doing business rather than ensuring only the fittest survived.
:15:02. > :15:05.The Fed Reserve did what it's supposed to do
:15:06. > :15:08.which is to provide monetary policy support it needs to help jobs come
:15:09. > :15:13.The US economy has been the strongest recovery of any
:15:14. > :15:21.Look at Europe, which did not take these policies.
:15:22. > :15:24.Crowing about how well you are doing is not impressive because Europe
:15:25. > :15:32.A big part of the reason is monetary policy was not as aggressive
:15:33. > :15:45.You can say you are doing well compared with Europe but compared
:15:46. > :15:48.with historic recoveries from other recessions in the US you are not
:15:49. > :15:52.Latest figures suggest there is no reason to be confident
:15:53. > :15:55.There are two things about the recovery besides monetary policy.
:15:56. > :16:00.Fiscal policy has not carried its load.
:16:01. > :16:05.The Fed and central banks have had to do most of the work.
:16:06. > :16:08.To be clear, when you say fiscal policy has not delivered
:16:09. > :16:16.You are asking me what is the economic analysis
:16:17. > :16:19.and I am telling you since central banks are required to do most
:16:20. > :16:22.of the heavy lifting they have had to rely on the tools they have.
:16:23. > :16:29.What is your judgment on the politics of this?
:16:30. > :16:33.What the Congress and President have done.
:16:34. > :16:36.I think the Congress was too quick to cut spending, to have fiscal
:16:37. > :16:44.All of those things have been a drag on recovery which has made it
:16:45. > :16:47.harder for the Fed and other central banks to get recovery.
:16:48. > :16:55.That is interesting because you were appointed by George W Bush and most
:16:56. > :17:01.saw you as a right of centre guy, a Republican. You are telling me the
:17:02. > :17:05.republicans who have controlled Congress for a while have been
:17:06. > :17:11.responsible for a misguided reading of what the economy needs. I said
:17:12. > :17:18.openly and frequently when I was chairman that short-term cuts of the
:17:19. > :17:23.type being done were not wise and the attacks on the deficit should be
:17:24. > :17:27.long-term and address longer-term issues. The Republican party has a
:17:28. > :17:32.bunch of people running for presidency. Most of them say they
:17:33. > :17:37.want to slim down government further. They are deeply suspicious
:17:38. > :17:41.of federal institutions, including the Federal Reserve. They want to
:17:42. > :17:45.slash taxes and don't seem to believe in spending on
:17:46. > :17:51.infrastructure. What do you make a fair analysis? You nominee were a
:17:52. > :17:55.Republican. I am a moderate, centrist, I do not take extreme
:17:56. > :18:00.views of left or right. Going back the past years I think the fiscal
:18:01. > :18:03.policy was not sufficiently supportive. There is benefit to
:18:04. > :18:09.doing good infrastructure investment. I wonder how you reflect
:18:10. > :18:14.on what has happened in Europe. There has been a debate about the
:18:15. > :18:18.wisdom of those territories. It has perhaps reached its extreme form in
:18:19. > :18:23.Greece and the argument on how to get its economy on track. Germany
:18:24. > :18:29.saying budget responsibility has to be at the centre and Greece must run
:18:30. > :18:36.surpluses even though they wrestle with the national debt which is 175%
:18:37. > :18:41.of GDP. Does this focus on austerity make sense? Greece has no choice if
:18:42. > :18:46.it is to pay its debt. The rest of Europe is not doing its part,
:18:47. > :18:51.fulfilling its part of the bargain. There is no need to Germany to have
:18:52. > :18:55.so much austerity and no need for such a trade surplus. If Europe were
:18:56. > :19:01.more prosperous it would be easier for Greece to get the recovery to
:19:02. > :19:05.pay debts. What about the UK? You are in London and you look at the UK
:19:06. > :19:09.economy. We perform better in London and you look at the UK economy. We
:19:10. > :19:15.perform better than is time to loosen the ties of Ulster rarity. Do
:19:16. > :19:21.you think austerity went too far in the UK? It probably did, it did most
:19:22. > :19:27.places. It seems to be less of a problem now and I would say the Bank
:19:28. > :19:33.of England followed Fed policies, more or less the same going back to
:19:34. > :19:37.2008 and that has been one reason by the UK has recovered more
:19:38. > :19:41.effectively. I wonder if you reflected on this when you sat in
:19:42. > :19:47.the grand office in the Federal Reserve in Washington, inequality
:19:48. > :19:52.under your watch raise significantly in the United States. The rich
:19:53. > :19:56.despite the economic problems did rather well through most of your
:19:57. > :20:01.period and the middle class and working class and the poor
:20:02. > :20:05.particularly did not do well at all. The gap has risen. Was it part of
:20:06. > :20:11.your job to worry about that? It is part of my job as an economist to
:20:12. > :20:18.worry. This is a long-term and important problem. Very important.
:20:19. > :20:22.It goes back at least to the 70s. We have had 40 years of globalisation
:20:23. > :20:29.and technical and structural change that have increased inequality. It
:20:30. > :20:34.is not one the Fed can do much about. The Fed is supposed to do
:20:35. > :20:39.plenty about inflation. That is the core thing you monitor. You are
:20:40. > :20:45.supposed to do something about unemployment. Why could you not also
:20:46. > :20:51.as your remit have to look at the levels of inequality? Some of the
:20:52. > :20:56.things you did like quantitative easing would too many economists be
:20:57. > :21:00.a policy that exacerbates inequality. It helps the banks and
:21:01. > :21:07.people with capital. It does not help the poor and the working class.
:21:08. > :21:12.That is nonsense. Qualitative easing creates jobs and jobs is the most
:21:13. > :21:16.important the Fed can do to help the middle and working class recover.
:21:17. > :21:23.These long-term trends are important. I follow them closely.
:21:24. > :21:28.They are not related in any way to monetary policy. They are related to
:21:29. > :21:32.long-term developments in the US economy. Around the world they are
:21:33. > :21:37.happening elsewhere. Larry Elliott is an economist and he said Q E
:21:38. > :21:41.encouraged financial speculation in property shares and commodities. He
:21:42. > :21:46.said the bankers and shareholders did well out of it but for the
:21:47. > :21:50.ordinary folk of the US, handing a check directly to the public would
:21:51. > :21:58.get more money into the economy. That is possibly true but the Fed
:21:59. > :22:02.cannot hand out checks. I have looked at this in detail. The Fed
:22:03. > :22:08.uses the tools it has to get the economy to recover and hit low
:22:09. > :22:13.interest rates. If you look at the implications of Fed policy for
:22:14. > :22:18.inequality, the most important one is the fact QE has supported job
:22:19. > :22:24.recovery, unemployment has fallen to 5%. It would not have done so
:22:25. > :22:27.without monetary policy support which is the most important thing
:22:28. > :22:36.for the average person. You are still influential in economics.
:22:37. > :22:41.Qualitative easing has drawn close in the US and it is clear interest
:22:42. > :22:49.rates will rise soon. How difficult will it be to manage that and not
:22:50. > :22:54.destabilise the global economy? Quantitative easing itself is no
:22:55. > :22:58.longer an issue, that ended a year ago, and the unwinding of the Fed
:22:59. > :23:02.balance sheet will take place over a number of years and will not be an
:23:03. > :23:07.issue for the economy markets. The raising of interest rates which the
:23:08. > :23:13.Fed can do without unwinding quantitative easing. And will mean a
:23:14. > :23:17.stronger dollar. That is tough monetary policy decision like
:23:18. > :23:23.decisions we have seen in the past. It is nothing much to do with
:23:24. > :23:27.quantitative easing. Given the strengthening dollar and rising US
:23:28. > :23:33.interest rates, weakness in China and other emerging markets, there
:23:34. > :23:38.could be real destabilisation across the world economy. It is exactly the
:23:39. > :23:42.challenge the Fed is looking at. The US economy domestically is doing
:23:43. > :23:48.pretty well and households are in better shape and the housing sector
:23:49. > :23:53.and autos are doing well. It is moving forward pretty well. The
:23:54. > :23:57.headwinds are coming globally from emerging markets and elsewhere. That
:23:58. > :24:06.is the trade-off and concern the Fed has to look at. How worried should
:24:07. > :24:11.with the? Emerging markets have not -- markets have not responded to the
:24:12. > :24:15.slowdown in China and there are risks there may be but it is hard to
:24:16. > :24:17.know and that is the balancing act the Fed will have to take. Thank
:24:18. > :24:19.you.