Ben Bernanke, Former Chairman, US Federal Reserve HARDtalk

with the former governor of America's

Seven years ago Wall Street was close to meltdown.

The world economy was feeling the full force of the financial

crash that changed long-held assumptions about the stability

My guest today was in the eye of that storm.

Ben Bernanke was chairman of the Federal Reserve,

the US central bank, and he took decisions then that continue to

Can we be confident the right lessons have been learned

You've had years to reflect on those momentous events of 2008.

Now you look back on it would you have done many things differently?

Well, you know, running up to the crisis we didn't

identify everything that would happen and even in 2007-8, we were

trying to balance different risks we were looking at between inflation,

moral hazard, all kinds of things.

Once we understood the depth and severity of the crisis,

we attacked it with all the tools we could put together

and we stabilised the financial system.

--there. Certainly there was, part of what happened we thought...

I say we, the market participants, regulators, everyone,

thought financial crises were a thing of the past, at least

The Federal Reserve was created 100 years ago primarily to fight

Yes, there was complacency and that contributed no doubt to excessive

There is much talk to the degree of people like you did not understand

some of the complex derivatives and different products in the financial

marketplace and actually we now know that were so prevalent and important

that when they fell apart because of dodgy mortgages and everything else,

the whole system began to unravel, and you did not understand it.

We understood individual instruments and how they worked.

What nobody understood, including the financial institutions

was how exposed they were to sub-prime mortgages and other types

It was financial panic that created the crisis.

It was not the sub-prime mortgages themselves.

In responding to it, and we talk of a period late-2007, in particular

2008, and there were key moments like the spring 2008 when you

decided to bail out one big bank, Bear Stearns, but by autumn of the

same year, such was the level of the crisis you decided you

When you make those decisions, were you in a way following your gut?

As an academic economic historian I studied financial panics back to

It has always been the job of central banks to lend in a financial

panic and be a lender of last resort and that is most of what we did

when we addressed the failures of companies like Bear Stearns.

We were trying to prevent the panic going to a new level of fear,

but most of what we did was provide cash to the financial system so they

could fund themselves when other lenders would not provide cash.

You were trying to wrestle down the level

It has to be said the most momentous decision

of all was September 2008, when you along with the US Treasury

and other key players, decided you would not, you could not save a key

We did not have the tools necessary to save Lehman Brothers.

It was deeply in the red, no one would buy it.

We understood, unlike most of the commentators,

How can it be so many people second-guess what you have just said

to me, including the boss of Lehman, Dick Fuld, he said plainly

afterwards Lehman had adequate collateral.

You could have got involved realistically, responsibly.

You chose not to for political reasons.

The bankruptcy judge found huge holes.

After the fact we found they were worse off than we thought they were.

The head of Lehman had strong incentives to

be very optimistic in terms of what the assets of Lehman were worth.

I think about what Dick Fuld has said since and people like the CEO

of Merrill Lynch, and they have looked at your record and they say

You got so burned by putting money into Bear Stearns and being hammered

by the public and some politicians for avoiding the

consequences of moral hazard, for not appreciating banks have to be

You were hammered for it and then politically decided you

If that were true why did we save AIG the next day?

It was a political disaster. The difference was,.

we had the tools because AIG had insurance subsidiaries.

Moral hazard becomes a meaningless concept.

The idea you should let the market do its worst

if businessmen make bad decisions they have to pay the consequences.

You abided by the principle of moral hazard

What we understood was that allowing major financial institutions to

collapse in the middle of the worst financial panic probably in US

Moral hazards are an important problem.

We also addressed it during the crisis by imposing tough terms

It is not the case that allowing those firms

You say you abided by the principle of moral hazard

You made it plain in your book and elsewhere you thought the

management of AIG was incompetent, irresponsible, frankly useless.

Yet you threw billions in their direction.

Not because we wanted to save AIG per se, because we cared about

AIG shareholders, but rather that we understood that the collapse of the

world's largest insurance company in the middle of the biggest financial

crisis would have been catastrophic not for just AIG but the entire US

There should have been painful consequences

The biggest CEOs, bosses of financial institutions

like AIG that were so badly run, how many of them were really punished?

I'm talking about more severe penalties than firing,

The Federal Reserve is not an enforcement agency.

The Department of Justice has that responsibility.

I am suggesting that you with your loud and influential voice

might have said at the time and soon after, moral hazard and the

consequences for real people in the real economy are so severe these

people, for all the abuses they carried out, have to be punished

It would not have been the right thing to do.

I was in a different lane, in the Federal Reserve,

I was not in the Department of Justice, it was their call.

I believe they should have addressed this more directly,

responsibility. What they chose to do was fine the large firms billions

of dollars and I think it would have made more sense if they pursued

Now that you are free to talk openly, what did you make of the

CEOs of the biggest banks you dealt with on the crisis phone in 2008,

these guys? Many of them were complacent and took too much risk.

You cannot say this one person or that person...

Government failed, Congress failed, the public failed.

It was a complex phenomenon that many people came up short.

A lot of the masters of the universe you talk about did very poorly,

not necessarily in a criminal way, they just made bad investments.

It was a system failure and many people including the Fed

and regulators bore responsibility for that.

I am trying to bring it down to a human level.

Do you feel this group of individuals, very influential,

greed? Do you feel you could take a moral position and judgment on them?

I think what many of them did was not good business, not just in the

sense of taking excessive risk but of not paying sufficient attention

Some companies sold securities that were clearly not in the interests

of the buyers and that is bad business and immoral.

So the question today is, has that immorality been weeded out

by regulation and other instruments so it could never happen again?

I don't know about never happen again, never is

a long time, but there has been improvement in oversight

regulation and safety of the financial system which was the goal.

Paul Volcker, one of the most respected voices in Wall Street,

he worries that, yes there has been a lot of legislation that has

reformed the banking system, but he still worries that Wall Street is

vulnerable and Wall Street cannot be confident something

It would be foolish to say this could never happen,

But I think the system is stronger and safer

If we had some of the safeguards we have now then, I think we would

On the Democrat side, partly because Bernie Sanders, a socialist

populist is running against.

Hillary Clinton thinks there should be more banking regulation.

In the future she wants senior executives and financial companies

to feel more pain and to basically find a legislative way of inflicting

more pain on them if their companies abuse the system and cost

I think there are a lot of tools that have been created

by Dodd Frank and international agreements that if properly

Let's talk about some of the key decisions you took.

The big idea of your tenure at the Fed.

In terms of interest rates, you slash them down to almost zero.

You introduced the idea of greater transparency on interest

rates, to indicate to the public, forward guidance, we will keep them

at this level for a long time in a way you had not been clear before.

On interest rates, did you foresee they would be close

I thought there would be more recovery by now in terms

Unemployment came down faster than we thought so

Is it worrying for the long-term health of the US economy that you

have had cheap money, virtually free borrowing for so long yet growth is

Again there has been progress but I would say the main issue is there

has been too much reliance on the Fed and central banks in general.

Central banks are carrying most of the load for supporting the

recovery and use the tools they have which means lower interest rates.

A better balance between monetary and fiscal policy and other policies

would take some of the burden away from central banks

You can talk about slashing interest rates being a conventional tool,

but you went unconventional early on with quantitative easing.

I suppose it's another way of talking about pumping new money

You did that to the scale of trillions of dollars.

The critics will say you essentially put the US economy

on a drug that was treating the symptoms but not the

The US economy needs massive structural reform and

by making money so cheap, you gave inefficient companies licence to

continue doing business rather than ensuring only the fittest survived.

The Fed Reserve did what it's supposed to do

which is to provide monetary policy support it needs to help jobs come

The US economy has been the strongest recovery of any

Look at Europe, which did not take these policies.

Crowing about how well you are doing is not impressive because Europe

A big part of the reason is monetary policy was not as aggressive

You can say you are doing well compared with Europe but compared

with historic recoveries from other recessions in the US you are not

Latest figures suggest there is no reason to be confident

There are two things about the recovery besides monetary policy.

Fiscal policy has not carried its load.

The Fed and central banks have had to do most of the work.

To be clear, when you say fiscal policy has not delivered

You are asking me what is the economic analysis

and I am telling you since central banks are required to do most

of the heavy lifting they have had to rely on the tools they have.

What is your judgment on the politics of this?

What the Congress and President have done.

I think the Congress was too quick to cut spending, to have fiscal

All of those things have been a drag on recovery which has made it

harder for the Fed and other central banks to get recovery.

That is interesting because you were appointed by George W Bush and most

saw you as a right of centre guy, a Republican. You are telling me the

republicans who have controlled Congress for a while have been

responsible for a misguided reading of what the economy needs. I said

openly and frequently when I was chairman that short-term cuts of the

type being done were not wise and the attacks on the deficit should be

long-term and address longer-term issues. The Republican party has a

bunch of people running for presidency. Most of them say they

want to slim down government further. They are deeply suspicious

of federal institutions, including the Federal Reserve. They want to

slash taxes and don't seem to believe in spending on

infrastructure. What do you make a fair analysis? You nominee were a

Republican. I am a moderate, centrist, I do not take extreme

views of left or right. Going back the past years I think the fiscal

policy was not sufficiently supportive. There is benefit to

doing good infrastructure investment. I wonder how you reflect

on what has happened in Europe. There has been a debate about the

wisdom of those territories. It has perhaps reached its extreme form in

Greece and the argument on how to get its economy on track. Germany

saying budget responsibility has to be at the centre and Greece must run

surpluses even though they wrestle with the national debt which is 175%

of GDP. Does this focus on austerity make sense? Greece has no choice if

it is to pay its debt. The rest of Europe is not doing its part,

fulfilling its part of the bargain. There is no need to Germany to have

so much austerity and no need for such a trade surplus. If Europe were

more prosperous it would be easier for Greece to get the recovery to

pay debts. What about the UK? You are in London and you look at the UK

economy. We perform better in London and you look at the UK economy. We

perform better than is time to loosen the ties of Ulster rarity. Do

you think austerity went too far in the UK? It probably did, it did most

places. It seems to be less of a problem now and I would say the Bank

of England followed Fed policies, more or less the same going back to

2008 and that has been one reason by the UK has recovered more

effectively. I wonder if you reflected on this when you sat in

the grand office in the Federal Reserve in Washington, inequality

under your watch raise significantly in the United States. The rich

despite the economic problems did rather well through most of your

period and the middle class and working class and the poor

particularly did not do well at all. The gap has risen. Was it part of

your job to worry about that? It is part of my job as an economist to

worry. This is a long-term and important problem. Very important.

It goes back at least to the 70s. We have had 40 years of globalisation

and technical and structural change that have increased inequality. It

is not one the Fed can do much about. The Fed is supposed to do

plenty about inflation. That is the core thing you monitor. You are

supposed to do something about unemployment. Why could you not also

as your remit have to look at the levels of inequality? Some of the

things you did like quantitative easing would too many economists be

a policy that exacerbates inequality. It helps the banks and

people with capital. It does not help the poor and the working class.

That is nonsense. Qualitative easing creates jobs and jobs is the most

important the Fed can do to help the middle and working class recover.

These long-term trends are important. I follow them closely.

They are not related in any way to monetary policy. They are related to

long-term developments in the US economy. Around the world they are

happening elsewhere. Larry Elliott is an economist and he said Q E

encouraged financial speculation in property shares and commodities. He

said the bankers and shareholders did well out of it but for the

ordinary folk of the US, handing a check directly to the public would

get more money into the economy. That is possibly true but the Fed

cannot hand out checks. I have looked at this in detail. The Fed

uses the tools it has to get the economy to recover and hit low

interest rates. If you look at the implications of Fed policy for

inequality, the most important one is the fact QE has supported job

recovery, unemployment has fallen to 5%. It would not have done so

without monetary policy support which is the most important thing

for the average person. You are still influential in economics.

Qualitative easing has drawn close in the US and it is clear interest

rates will rise soon. How difficult will it be to manage that and not

destabilise the global economy? Quantitative easing itself is no

longer an issue, that ended a year ago, and the unwinding of the Fed

balance sheet will take place over a number of years and will not be an

issue for the economy markets. The raising of interest rates which the

Fed can do without unwinding quantitative easing. And will mean a

stronger dollar. That is tough monetary policy decision like

decisions we have seen in the past. It is nothing much to do with

quantitative easing. Given the strengthening dollar and rising US

interest rates, weakness in China and other emerging markets, there

could be real destabilisation across the world economy. It is exactly the

challenge the Fed is looking at. The US economy domestically is doing

pretty well and households are in better shape and the housing sector

and autos are doing well. It is moving forward pretty well. The

headwinds are coming globally from emerging markets and elsewhere. That

is the trade-off and concern the Fed has to look at. How worried should

with the? Emerging markets have not -- markets have not responded to the

slowdown in China and there are risks there may be but it is hard to

know and that is the balancing act the Fed will have to take. Thank

you.