Bernanke Lecture Four

8/2/2019 Bernanke Lecture Four

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Lecture4:

TheAftermathoftheCrisis

2


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TheFedsEffortsto

RestoreFinancial

Stability

Afinancialpanicinfall2008threatenedthe

stabilityoftheglobalfinancialsystem.

Initslenderoflastresortrole,theFederal

Reserveprovidedliquidity(shortterm

collateralized

loans)

to

help

stabilize

key

financial

institutionsandmarkets.


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TheFedsEffortsto

RestoreFinancial

Stability

TheFedworkedcloselywiththeTreasury,other

regulatoryagencies(suchastheFDICandSEC).

Coordinationwith

foreign

central

banks

included

thecreationofforeigncurrencyswaps.

TheFedprovideddollarstoothercentralbanksin

exchangefor

foreign

currencies.

Theswapsenabledforeigncentralbankstomeetthe

dollarfundingneedsoftheirownfinancial

institutions.


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TheFedsContinuingEffortsto

Strengthenthe

Banking

System

TheFedledstresstestsofthe19largestU.S.

banksinthespringof2009,whichhelpedrestore

investorconfidenceandallowedbankstoraiseabout$140billioninprivatecapital.

RecentstresstestsconductedbytheFedshowed

substantialfurtherimprovementsinbankcapital

andbanks

resilience

to

shocks.


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EvaluationoftheSpecial

Lenderof

Last

Resort

Programs

Results: Theprograms

arrestedrunsonvarioustypesoffinancial

institutions

restoredfinancialmarketfunctioning,restarted

flow

of

credit,

and

supported

resumption

of

economicgrowth

ProgramswerelargelyphasedoutbyMarch

2010.


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EvaluationoftheSpecial

Lenderof

Last

Resort

Programs

FinancialriskstotheFederalReservewere

minimal:

Lendingwasmostlyshorttermandbackedby

collateral;thousandsofloansweremade,none

defaulted.

Althoughtheobjectiveoftheseprogramswas

stabilization,notprofit,taxpayerscameout

ahead.


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MonetaryPolicyduringtheCrisis

TheFedusedlenderoflastresortpolicytohelp

stabilizethefinancialsystem. Tostabilizethe

economy

and

promote

economic

recovery,

the

Fedturnedtomonetarypolicy.


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Conventionalmonetarypolicyinvolves

managementofatargetshortterminterestrate

(the

federal

funds

rate).

Because

longer

term

ratestendtofallwhentheFedlowerstheshort

termrate,andbecauselowerlongertermrates

tend

to

encourage

purchases

of

long

lasting

consumergoods,houses,andcapitalgoods,

cuttingthefederalfundsratehelpsstimulatethe

economy.


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MonetarypolicyisconductedbytheFederalOpen

MarketCommittee(FOMC).

TheFOMCmeetsinWashington,D.C.eighttimesa

year. Duringthecrisis,itsometimesalsoheld

unscheduledvideoconferences.


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TheFOMCconsistsof12members:

the7membersoftheBoardofGovernorsofthe

Federal

Reserve

System thepresidentoftheNewYorkFederalReserveBank

4oftheremaining11ReserveBankpresidents,who

serveone

year

terms

on

arotating

basis

OtherReserveBankpresidentsparticipatein

deliberationsbutdonotvote.


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Federal Funds Rate

Federal

Funds

Rate

Tosupportthe

recovery,theFed

reducedthefederal

fundsratefrom

5 percentin

September2007to

nearly zeroin

December

2008,

whereithas

remainedsince.


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LargeScaleAssetPurchases

Withthefederalfundsratenearzero,thescope

forconventionalmonetarypolicywasexhausted.

Buttheeconomyremainedweakandsome

worriedabouttheriskofdeflation(fallingwages

andprices).


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Toinfluencelongertermratesdirectly,theFed

undertooklargescalepurchasesofTreasuryand

governmentsponsoredenterprise(GSE)

mortgagerelatedsecurities.

Largepurchaseprogramswereannouncedin

March2009

and

November

2010.

TheseactionsboostedtheFedsbalancesheetby

morethan$2trillion.


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Federal Funds Rate

Large

Scale

Asset

Purchases

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WiththeavailablesupplyofTreasuryandGSE

securitiesreducedbyFedpurchases,investors

werewillingtoacceptloweryields. Lower

longertermrateshelpedstimulatetheeconomy,

justastheydounderconventionalpolicies.

Reducedavailability

of

Treasury

and

GSE

securitiesledinvestorstopurchaseotherassets,

suchascorporatebonds,loweringtheyieldson

thoseassets

as

well.


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Thesesecuritiespurchaseswerefinancedby

addingtothereservesheldbybanksattheFed;

theydidnotsignificantlyaffecttheamountof

moneyincirculation. TheFedhasmultipleways

tounwindthelargescaleassetpurchases

(LSAPs),includingsellingthesecuritiesbackinto

themarket.


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Federal Funds Rate

Large

Scale

Asset

Purchases

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EffectsofLargeScaleAssetPurchases

LSAPs(alsoknownasquantitativeeasing)loweredlongerterminterestrates.

30yearmortgageratesfellbelow4percent.

Corporatecreditbecamemoreavailable,andstock

pricesrose.

Lower

longer

term

interest

rates

helped

promote

recovery,thoughtheeffectonhousingwas

weakerthanhoped.


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TheFedscredibilityandlongstandingcommitmenttopricestabilityhashelpedanchor

inflationandinflationexpectations,whichhave

remainedlow.

Atthe

same

time,

LSAPs

guarded

against

the

risk

ofdeflation(fallingwagesandprices).


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TheFedsassetpurchasesarenotgovernmentspending,becausetheassetstheFedacquired

willultimatelybesoldbackintothemarket.

Indeed,theFedhasmademoneyonitspurchasessofar,transferringabout$200billion

totheTreasuryfrom2009through2011,money

thatbenefitedtaxpayersbyreducingthefederaldeficit.


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MonetaryPolicyCommunication

Clearcommunicationfromthecentralbankcanhelpmakemonetarypolicymoreeffectiveby

helpinginvestorsbetterunderstandpolicygoals

andbetteranticipatefuturepolicyactions.


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TheFedhasbecomemore

transparentabout

monetarypolicy.Forexample,the

Chairmanbegan

holdingnewsconferencesin

2011.


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TheFedalsohasrecentlyprovidedmoreinformationaboutitsgoalsandpolicyapproach

(forexample,bydefiningpricestabilityas

inflationof2percentinthemediumterm).


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TheFedhasalsobegunprovidingguidancetoinvestorsandthepublicabouthowitexpectsto

adjustthefederalfundsrateinthefuture,given

currentinformationabouttheeconomicoutlook.

This

guidance

helps

the

public

better

understand

theFOMCsviewsandpolicy.


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EconomicRecovery

Aidedbytheeffectsofmonetaryandfiscalpolicyaswellastheeconomysnaturalrecuperative

powers,economicactivitybegantorecoverin

mid2009.

Since

then,

real

GDP

has

increased

at

an

average

annualrateofabout2percent.


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Federal Funds Rate

SluggishEconomicRecovery

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Butthepaceof

recoveryhas

been

extremelysluggish

comparedwith

previouspost

WorldWarIIcyclical

recoveries.


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Federal Funds Rate

SluggishEconomicRecovery

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Asaresult,job

prospectshave

improvedonly

graduallyandthe

unemploymentrate

remainspainfully

high.


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Federal Funds Rate

SlowingtheRecovery: Housing

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Whyhastherecovery

beenslowerthan

hoped?

Aresurgenthousing

market

normally

helps

powereconomic

recoveries,butnot

this

time.


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Federal Funds Rate


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Factorsweighingon

thehousingmarket

include

acontinuinghigh

foreclosurerate

anoverhangof

unsoldhomes

falling

house

prices


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Federal Funds Rate


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Verytightlending

standardson

mortgageshave

bluntedsomeofthe

effectsoflow

mortgagerates.


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Federal Funds Rate


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Declininghouseprices

discouragenew

construction.

Moregenerally,sharp

declinesinhouse

pricesmakeconsumersfeelpoorer,

andthuslesswillingto

spend.


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SlowingtheRecovery:

Financialand

Credit

Markets

TheU.S.bankingsystemissignificantlystronger

thanitwasthreeyearsago,andcreditismore

availableto

households

and

businesses.


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SlowingtheRecovery:

Financialand

Credit

Markets

However,difficultiesremainforsomeborrowers:

Forhouseholds,mortgagesaredifficulttoobtain

forborrowers

with

less

than

pristine

credit

scores.

Forsmallbusinesses,creditmarketconditions

remaintightbutappeartohavebegunto

improve.


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SlowingtheRecovery:

Financialand

Credit

Markets

ConcernsaboutEuropeanfiscalandbanking

conditionshavealsostressedfinancialmarkets

andled

to

more

conservative

lending

and

diminishedconfidence.


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LongTermEconomicGrowth

inthe

United

States

Thefinancialcrisisandrecessionwereamajor

trauma. Manypeoplewhohavebeen

unemployedfor

along

time

have

seen

their

skills

erode. Andlongertermproblems,likerising

federaldeficits,havenotgoneaway.


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inthe

United

States

Ontheupside,however:

TheU.S.economyremainsthelargestinthe

world,with

ahighly

diverse

mix

of

industries.

Oureconomyhasarobustentrepreneurial

culture,withflexiblecapitalandlabormarkets.


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inthe

United

States

Ontheupside,however:

Weremainatechnologicalleader,withmanyof

theworld's

top

research

universities

and

the

highestspendingonresearchanddevelopmentof

anynation.

And,in

the

aftermath

of

the

crisis,

we

have

strengthenedourfinancialregulatorysystem.


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Federal Funds Rate


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PostcrisisRegulatoryChanges

Thecrisis

revealed

many

important

regulatory

gaps

andweaknesses.

LehmanBrothersandAIGendangeredthefinancial

systemandhighlightedtheneedfornewtoolsto

addressproblemsatsystemicallyimportant

financialinstitutions.

Moreoversightofthesystemasawholewas

needed.


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Federal Funds Rate

PostcrisisRegulatoryChanges

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TheDoddFrank

WallStreetReform

andConsumer

ProtectionActof

2010instituted

wideranging

reformsoffinancial

regulationinthe

UnitedStates.

Rep.BarneyFrank Sen.ChristopherDodd


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KeyProvisionsoftheDoddFrankAct:

Supervisionand

Regulation

Theactexpandedthefinancialstabilitydutiesof

financialregulators,includingtheFed:

Itcreated

the

Financial

Stability

Oversight

Council

(FSOC)tohelpregulatorscoordinatetheirefforts.

Itgaveallregulatorstheresponsibilitytotrackand

respondto

possible

risks

to

the

financial

system

as

awhole.


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Supervisionand

Regulation

Itclosedgapsintheoversightofthefinancial

system:

TheFSOC

can

designate

systemically

important

nonbankinstitutionstobesupervisedbytheFed.

TheFSOCcanalsodesignatekeyfinancialmarket

utilities(for

example,

stock

exchanges)

for

enhancedsupervision.


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SystemicallyImportant

Institutions

Theactsubjectedsystemicallyimportantfinancial

institutionstotoughersupervisionand

regulation: Highercapitalrequirementswereestablishedfor

mostsystemicfirms.

Bankaffiliates

are

prohibited

from

trading

on

their

ownaccount(Volckerrule).


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Institutions

Theactmadesystemicallyimportantfinancial

institutionssubjecttotoughersupervisionand

regulation: Regularstresstestsarebeingconductedto

ensurethatfirmswillhaveadequatecapitaleven

inbad

economic

scenarios.


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Institutions

Italsotackledtheproblemoftoobigtofail

financialfirms:

Neworderly

liquidation

authority

allows

the

FederalDepositInsuranceCorporation(FDIC)to

closefailingsystemicfirmsinawaythatcauses

lessdamage

to

the

financial

system.


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OtherFeatures

Theacttookstepstomakethefinancialsystem

moreresilient:

Itrequired

more

transparency

and

standardization

ofderivativetransactions.


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OtherFeatures

Itcreatedanewagency(theConsumerFinancial

ProtectionBureau)withbroadpowerstoprotect

consumersin

their

financial

dealings.

Financialregulatorsareimplementingtheseand

otherprovisions,inconsultationwithforeign

regulators.


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TheEffectsoftheCrisison

CentralBank

Practice

Inthedecadesbeforethecrisis,centralbanks

oftenviewedfinancialstabilitypolicyasthe

juniorpartner

to

monetary

policy.

Thecrisisunderscoredthatmaintainingfinancial

stabilityisanequallycriticalresponsibility.


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TheEffectsoftheCrisison

CentralBank

Practice

Financialcriseswillalwaysbewithus. Butas

muchaspossible,centralbanksandother

regulatorsshould

try

to

anticipate

and

defuse

threatstofinancialstabilityandmitigatethe

effectswhenacrisisoccurs.


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Conclusion

Webegan

by

noting

the

two

principal

tools

and

responsibilitiesofcentralbanks

servingaslenderoflastresorttopreventor

mitigatefinancial

crises

usingmonetarypolicytoenhanceeconomic

stability


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Conclusion

TheFed

and

other

central

banks

used

both

tools

extensivelyinthecrisisanditsaftermath. These

toolshelpedpreventarepeatoftheGreat

Depressionof

the

1930s

and

set

the

stage

for

a

slowbutcontinuingeconomicrecovery.


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Conclusion

Anew

regulatory

framework

will

reduce,

but

not

eliminate,theriskoffinancialcrisesinthefuture.

Greatermonitoringofpotentialsystemicrisks

shouldhelp.

However,

the

recent

financial

crisis

shows

both

thatacrisiscanbehardtoanticipateandthatit

cancausemajordamagetotheeconomy.


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Bernanke Lecture Four