Eugene Grygo, Chief Content Editor, FTF News
As the world waits breathlessly for the Federal Reserve to render a decision on interest rates, it’s probably a good time to look back to when things really did cause you to stop breathing for a second. That would be the Great Recession when it kicked in during the fall of 2008.
On a recent episode of the brilliant Freakonomics Radio show, dubbed “Ben Bernanke Gives Himself a Grade,” the former chairman of the Federal Reserve tells show cohost Stephen Dubner about the unforeseen panic that ushered in the Great Recession.
An expert on the Great Depression of the 1930’s, Bernanke was on Freakonomics Radio (available via public radio stations and online) to tout his recent book, “The Courage to Act.”
Dubner asked Bernanke to provide details about something he wrote in his new book: “Toward the end of my tenure as chairman, I was asked what had surprised me the most about the financial crisis. ‘The crisis,’ I said.”
Bernanke and others in the George W. Bush administration had inklings that a drop in housing prices could set off a bad chain of events, even a potential recession.
“And what I got right was that it would cause a recession,” he tells Dubner. “And what I got wrong was that I didn’t appreciate that the decline in house prices and the problems in the mortgage markets would generate this big panic that was, in fact, the reason why the recession was so, so deep.
“So, we understood about house prices; we understood about subprime mortgages; we understood that there were risks in the financial system. What we didn’t appreciate was the vulnerability of the overall system to a panic. And that panic, once it became evident, then we had to address it very vigorously,” Bernanke tells Dubner.
Bernanke, who served as Fed Chairman from February 2006 to February 2014, and a few others did address the Great Recession and the firms that were too big to fail quite vigorously during those dark days.
(He may find things a bit tame since he since he left the Fed. He is slated to be chairman of a new advisory board for the Pacific Investment Management Co. or PIMCO. He will oversee a group that consists of Gordon Brown, former U.K. prime minister, Jean-Claude Trichet, ex-president of the European Central Bank, Ng Kok Song, the former chief investment officer of the Government of Singapore Investment Corp. (GIC), and Anne-Marie Slaughter, who served as the director of policy planning for the U.S. Department of State from January 2009 to February 2011.)
It is interesting that he and others missed the depth of the emotional response that set in, particularly after the fall of Lehman Brothers — an example of what would happen if something that is TBTF actually fails. That apparently was a new lesson for Bernanke and the others overseeing the crisis.
The former head of a very powerful arm of the federal government was asked if he regretted taking the job.
“Well, at some level,” Bernanke says. “I mean, obviously I got a lot more than I anticipated, you know. But, it was an important time and I feel like I made a contribution. And so I’m happy about that.”
Overwhelmed or not, Bernanke was in the right place and the right moment to put his expertise to the test when the economy cratered like a sinkhole.
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