1. PowerPoint Templates Shared Library
Marketing Communications Office \ March 23, 2016

2. Educational and Professional Background Build-up to Financial Crisis
Bailout of Bear Stearns
Failure of Lehman Brothers and Failure to Bailout Lehman
Turnaround and Bailout of AIG
Political Reaction and Post Crisis Monetary Policy
Penn Wharton Public Policy Initiative

3. Courage to Act: September 16, 2008:Bailout of AIG
“Don’t mistake anything anyone has said here as constituting congressional approval of this action. I want to be completely clear. This is your decision and your responsibility.”
Harry Reid, Senate Democratic Majority Leader (D-Nev)
Just two weeks earlier, the Republican Party declared flatly in its 2008 convention platform, “We do not support government bailouts of private institutions.”
Penn Wharton Public Policy Initiative

4. Bernanke Credentials
Born: December 13, 1953, Augusta, GA, Hometown: Dillon SC
Undergraduate: Harvard College
Ph.D. Economics MIT
Professor, Grad. School of Bus, Stanford University
Professor of Economics, Princeton University
Chairman of Economics Department
Governor Federal Reserve
Chairman Council of Economic Advisors
Chairman Federal Reserve Board
Research Fellow, The Brooking Institution 2014-present
Born: December 13, 1953 Augusta, GA, Hometown Dillon, South Carolina
Undergraduate Harvard College, ?
Ph.D. Economics MIT ?
Asst. Professor, Graduate School of Business, Stanford University
Professor of Economics, Princeton University,
Chairman of Department
Governor, Federal Reserve Board
Chairman, President’s Council of Economic Advisors
Chairman Federal Reserve Board
Research Fellow, The Brookings Institution present
Penn Wharton Public Policy Initiative

5. Bernanke finished 26th in the Scrips Howard National Spelling Bee in 1965 at Age 11
E-D-E-L-W-E-I-S-S
Penn Wharton Public Policy Initiative

6. Two Economists Schooled in Monetary Policy
Developed Early Interest in Great Depression
Started Out in Mathematics, Switched to Economics
Pursued Ph.D. at MIT / Greatly Influenced by Friedman’s Monetary History
Contact with Prof. Friedman as Assistant Professors
Both of us nominated to Board of Governors of Federal Reserve
Penn Wharton Public Policy Initiative

7. Stan Fischer’s Advice to Ben Bernanke on finding area of study
SUBHEAD STYLE FOR LIST TITLE
Level two body text
SUBHEAD STYLE FOR LIST TITLE
Level two body text
Your Advisor’s, M.I.T. Prof. Stan Fischer Advice: “Read some books, including A Monetary History of the United States, by Milton Friedman.” Fisher told me that the 860 page book would either excite me or put me to sleep and that I should draw the correct inference from my reaction.” I found the book fascinating and would devote the rest of my career to studying these issues.
Penn Wharton Public Policy Initiative

8. “ Today I’d like to honor Milton Friedman by talking about one of his greatest contributions to economics. This achievement is nothing less than to provide what has become the leading and most persuasive explanation of the worst economic disaster in American history, the onset of the Great Depression – or, as Friedman and Schwartz dubbed it, the Great Contraction of
“ As a personal aside, I note that I first read A Monetary History of the United States early in my graduate school years at M.I.T. I was hooked, and I have been a student of monetary economics and economic history ever since. I think many others have had that experience, with the result that the direct and indirect influences of the Monetary History on contemporary monetary economics would be difficult to overstate.
Friedman’s
90th Birthday
Celebration
Nov
“ Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton: Regarding the Great Depression, you’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.
Best wishes for your next ninety years.
Remarks by Governor Ben S. Bernanke
At the Conference to Honor Milton Friedman, University of Chicago,
November 8, 2002 Milton Friedman’s Ninetieth Birthday Celebration
Penn Wharton Public Policy Initiative

9. Impact of Differing Monetary Policies on Two Business Cycles
Economic Variable
Great Depression
Great Recession
Changes in Bank Reserves
-20%
+380%
Change in Money (M2)
-31%
+13%
Change in the Price Level
-25%
+3%
Real GDP Decline
27% 6%
Max Unemployment Rate
28%
10%
Max Decline in Stocks
89%
65%
Years to Stock Recovery
25 years
3 ½ years
Penn Wharton Public Policy Initiative

10. Section 13(3) Saved the World
Section 13(3) of the 1932 Amendments of the 1913 Federal Reserve Act In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal Reserve Bank,…, to discount [lend] to any individual, partnership, or corporation, against notes, drafts and bills of exchange when [they] are secured to the satisfaction of the Federal Reserve bank.
Known Dangers of Lehman Bankruptcy
“Jean-Claude Trichet [Head of ECB] said [Lehman’s failure] would lead to a ‘total meltdown.” I told him I agreed and that we would do everything we could. p.266
“I asked Tim [Geithner] whether it would work for us to lend to Lehman on the broadest possible collateral to try to keep the firm afloat. ‘No,’ Tim said. ‘We would only be lending into an unstoppable run.” p.267
It was a terrible, almost surreal moment. We were staring into the abyss. Lehman’s collapse…would be an epic disaster, and,
While we should do whatever we could, there wasn’t much we could do. p.268
Penn Wharton Public Policy Initiative

11. Opposition to Bailouts
Meanwhile, as what became known as Lehman weekend approached, popular, political and media views were hardening against the idea of the Fed and the Treasury taking extraordinary measures to prevent [Lehman’s] failure. … Republicans had been unequivocal: No Bailouts. p.260 Our challenge that weekend went beyond finding a solution for Lehman. We would have to do so in the face of bitter criticism. p.261
Inevitability of a Lehman Type Failure
In short, even if it had somehow been possible for the Fed on its own to save Lehman, and then perhaps even AIG, we would not have had either the capacity or the political support to undertake any future financial rescues. It seems clear that Congress would never have acted absent the failure of some large firm and the associated damage to the system. In that sense, a Lehman- type episode was probably inevitable. pp
Section 13(3) is Gone, Gone, Gone ….
“This is one authority that I was happy to lose. I didn’t consider [the need for Treasury Secretary’s approval] much of a concession, since I couldn’t imagine a major financial crisis in which the Fed and the Treasury would not work closely.” p.264
Penn Wharton Public Policy Initiative

12. Who’s to Blame for the Crisis?
Investment Bankers: Criminal …. Or just plain stupid?
Rating Agencies: How Did they Rate this Stuff AAA?
The Fed: Missed Building Crisis Completely
Fannie, Freddie, and Congress: Encouraged Subprime Mortgages and wider home ownership.
Or was it just a “Perfect Storm”?
Penn Wharton Public Policy Initiative

13. Time Magazine 2008 Person of the Year
In response to that honor, Senator Jim Bunning stated in the Senate Banking Committee, “Chairman Bernanke may wonder if he really wants to be honored by an organization that has previously named people like Joseph Stalin twice, Yasser Arafat, Adolph Hitler, the Ayatollah, Khomeini,
Vladimir Putin, and Richard Nixon twice as their persons of the year.”
Penn Wharton Public Policy Initiative

14. Republican Hostility to Fed
The increasing hostility of Republicans to the Fed and to me personally troubled me, particularly since I had been appointed by a Republican president who supported our actions during the crisis. The late Senator Patrick Moynihan said that everyone is entitled to his own opinion but not to his own facts. Some Republicans, particularly on the far right, increasingly did not draw the distinction… I had lost patience with Republicans’ susceptibility to the know-nothing-ism of the far right.
Penn Wharton Public Policy Initiative

15. Name of Initiative

16. Collapse of Productivity Growth
Productivity Growth Averaged about 2% per year since the 19th century. Since 2010 it has barely been positive.
Average 2.2% per year
Reasons?
Mismeasurement
Technology Lull
Increased Regulation
Poor Job Preparation
Younger Labor Force
Non-farm Business Productivity Growth averaged 2.2% per year since 1947, approximately the same rate economists estimate it has averaged since the middle of the 19th century.
This has led to a doubling of the standard of living every 35 or so years.
Yet since 2010, the average rate of productivity growth is less than ½ percent.
What accounts for this productivity collapse?
Penn Wharton Public Policy Initiative

17. Fall in Real (and Nominal) Interest Rates
Sources of Real Interest Rate Decline?
Savings Glut
Low Growth
High Risk Aversion
Monetary Policy
Penn Wharton Public Policy Initiative

18. Negative Interest Rate Policy (NIRP)
Is this an Effective Central Bank Policy?
How Low can they go?
Are Negative Rates a possibility near term for the US?
Evaluation of Current Fed policy.
Penn Wharton Public Policy Initiative

19. Quantitative Easing (QE) and the Fed’s Balance Sheet
Quantitative Easing (QE) refers to large-scale assets purchases by the Federal Reserve, particularly of Treasure debt and mortgage-backed securities, in order to lower long-term yields and reduce the spreads between mortgage rates and Treasury rates.
QE2
QE1
Open Letter to Ben Bernanke
Published New York Times, Wall Street Journal Nov 15, 2010
We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued.  We do not believe such a plan is necessary or advisable under current circumstances.  The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.
Signed by John Taylor, Ron McKinnon, John Cogan (Stanford), Kevin Hassett (AEI). Charles Calomiris (Columbia), Niall Ferguson (Harvard), James Grant, Douglas Holtz-Eakin (CBO), and others.
Penn Wharton Public Policy Initiative

20. PowerPoint Templates Shared Library
Marketing Communications Office \ March 23, 2016