WASHINGTON (MNI) – The following is the text of the remarks of
Federal Reserve Chairman Ben Bernanke prepared Thursday for the 43rd
Annual Alexander Hamilton Awards Dinner Center for the Study of the
Presidency and Congress:
Good evening. It is a great pleasure to share a meal with the
Center for the Study of the Presidency and Congress, and especially with
the Centers fellows. Doubtless your participation in the fellowship
program as undergraduate and graduate students — writing and thinking
about leadership, governance, and public policy — will prove immensely
valuable as you develop your own intellectual and leadership skills and
embark on careers that I hope will include a period of public service.
I must begin this evening by expressing my appreciation to the
Center and to Ambassador Abshire for selecting me as this year’s
recipient of the Hamilton Award. Im truly honored to join the ranks of
such past Center honorees as Sandra Day OConnor, Robert Rubin, Al Gore,
and Gerald Ford. Thank you also, Chairman Volcker, for your very kind
introduction. As you all know, the award is named after Alexander
Hamilton, who of course is best known as our nation’s first Secretary of
the Treasury. From my perspective, at least equally important is that
Hamilton, as the founder of the First Bank of the United States, was, in
a sense, also our nation’s first central banker.
These days central banking is my line of work as well. Before that,
I was an academic economist and economic historian, with a particular
interest in the causes of the Great Depression. So, given my background
and the Centers abiding interest in applying the lessons of history to
todays critical issues, I thought that I would speak to you about the
parallels — and differences — between that crisis and the more recent
one, particularly regarding the responses of policymakers. I draw four
relevant lessons from the financial collapse of the 1930s; I will first
list these lessons, then briefly elaborate.
First, economic prosperity depends on financial stability; second,
policymakers must respond forcefully, creatively, and decisively to
severe financial crises; third, crises that are international in scope
require an international response; and fourth, unfortunately, history is
never a perfect guide.
The first lesson — economic prosperity depends on financial
stability — seems obvious, but this connection was not always well
understood. After the stock market crash of 1929, many thought a
financial and economic crisis was necessary–even desirable–to wring
out speculative excesses that had built up in the 1920s. Remarkably,
despite the fact that the Federal Reserve had been founded to mitigate
financial panics, the central bank made essentially no effort to prevent
the wave of bank failures that paralyzed the financial system at the
start of 1930s.
Indeed, the Treasury Secretary at the time, Andrew Mellon, believed
in the tonic effects of weeding out weak banks and famously advised
President Herbert Hoover, “Liquidate labor, liquidate stocks, liquidate
the farmers, liquidate real estate — It will purge the rottenness out
of the system.”
Economists themselves have not always fully appreciated the
importance of a healthy financial system for economic growth or the role
of financial conditions in shortterm economic dynamics. Even after the
Depression, some economists found it useful to think of the financial
system as a “veil,” which helped allocate the returns to physical assets
but did little to affect so-called real economic outcomes. In contrast,
more recent work on the subject, to which I contributed, showed that the
health of the financial system and the performance of the broader
economy are closely interrelated, both in the short run and in the long
run. Indeed, in a historical context, some of my own research on the
Great Depression showed that countries such as the United States that,
for institutional or other reasons, suffered severe banking problems,
had significantly worse depressions than countries in which the banking
system was more stable, such as Great Britain.
(See Herbert Hoover (1952), The Memoirs of Herbert Hoover, vol. 3:
The Great Depression, 1929-1941 (New York: Macmillan), p. 30.)
The lesson has been learned. In the current episode, in contrast to
the 1930s, policymakers around the world worked assiduously to stabilize
the financial system. As a result, although the economic consequences of
the financial crisis have been painfully severe, the world was spared an
even worse cataclysm that could have rivaled or surpassed the Great
Depression.
That lesson brings me to the second one — policymakers must
respond forcefully, creatively, and decisively to severe financial
crises. Early in the Depression, policymakers responses ran the gamut
from passivity to timidity. They were insufficiently willing to
challenge the orthodoxies of their day — such as the liquidationist
doctrine of Mellon and others, or the rigid adherence to the variant of
the gold standard adopted after World War I. A key turning point, in the
United States, came with Franklin Roosevelts commitment to bold
experimentation after his inauguration in 1933. Some of his experiments
failed or were counterproductive, but his decisions to declare a bank
holiday upon taking office in March 1933 and to sever the link between
the dollar and gold helped arrest the descent of the U.S. financial
system and set off a strong, albeit incomplete, recovery.
(See Ben S. Bernanke and Harold James (1991), “The Gold Standard,
Deflation, and Financial Crisis in the Great Depression: An
International Comparison,” in R. Glenn Hubbard, Financial Markets and
Financial Crises (Chicago: University of Chicago Press for NBER).)
In the Depression, effective policy responses came only after three
to four years of financial crisis and economic contraction. In our own
time, policymakers acted sooner and with greater force than in the
1930s. For example, in October 2008, just weeks after the sharp
intensification of the crisis, the Congress authorized the Troubled
Asset Relief Program (TARP) to support stabilization of the financial
system. It was far from perfect legislation, but it was essential for
preventing an imminent financial collapse. For its part, the Federal
Open Market Committee, the monetary policymaking arm of the Federal
Reserve, sharply and proactively cut its target for short-term interest
rates from the fall of 2007 through 2008. After the target could go no
lower, the Committee embarked on an unprecedented (for the United
States) program of long-term securities purchases, recently completed,
to support private credit markets, including the mortgage market.
Also, in the spring of 2009, the Federal Reserve led the
Supervisory Capital Assessment Program, known as the bank stress test.
In some ways, its effect was similar to Roosevelts national bank
holiday. During the holiday in 1933, banks temporarily shut their doors.
Examiners were dispatched to evaluate them, and banks that were declared
sound reopened to renewed depositor confidence. In the 2009 stress
tests, multidisciplinary teams of examiners, economists, financial
experts, and other specialists calculated how much capital 19 of the
nations largest bank holding companies would need to remain healthy and
continue lending during a hypothetical worse-than-expected economic
scenario. The Treasury Department committed to supplying additional
capital as necessary from the TARP. Critics had warned that the stress
test could backfire, but as it turned out, the release of the results
last May helped restore confidence in banks, and many institutions have
since been able to raise capital from investors and repay the capital
the government had injected.
(The historical linkages between financial stability and economic
performance have been explored in great detail in recent work. For
example, see Carmen M. Reinhart and Kenneth S. Rogoff (2009), This Time
is Different: Eight Centuries of Financial Folly (Princeton and Oxford:
Princeton University Press.)
(See Ben S. Bernanke (2009), “The Supervisory Capital Assessment
Program,” speech delivered at the
Federal Reserve Bank of Atlanta 2009 Financial Markets Conference, Jekyll Island, Ga., May 11,
www.federalreserve.gov/newsevents/speech/bernanke20090511a.htm.)
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** Market News International Washington Bureau: 202-371-2121 **
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