Read the writeup of this interview from Prospect's December issue
Bronwen Maddox: What are the enduring lessons of the Great Depression?
Ben Bernanke: From an economist's and central banker's perspective, I think there are two. The first is the one I learned in graduate school when I read Milton Friedman and Anna Schwartz's book A Monetary History of the United States: you don't let the money supply collapse. You avoid inflation. You make sure monetary policy is sufficiently aggressive to avoid the worst outcomes. As you know, in the United States and in the United Kingdom monetary policy was used aggressively to help the economy recover and to move away from the crisis.
The second lesson came from research, including my own: the financial system is critical to the health of the economy. Major financial crises are almost always followed by deep recessions, and it's essential to do whatever possible to avoid the collapse of the financial system. My own own most cited paper was about the collapse of the banking system of the US in the 1930s. Once it become clear that the panic of 2007 was not a small matter, it became essential to address it with all the tools we had available. So those are the two economic lessons. From a policy perspective, I think the lesson are that orthodoxy doesn't suffice, and you need to look for alternative strategies.
BM: Do you think we learned and applied the first lesson about the money supply?
BB: I think we did. The Fed and other major central banks cut interest rates pretty quickly, even though there were inflation risks from commodity prices—in 2008, for example, the price of oil was $145 per barrel. The European Central Bank in fact raised interest rates that summer but for the most part major central banks cuts rates. Once rates hit zero in late 2008, the Fed and the Bank of England moved on to other methods.
Jonathan Derbyshire: But it's your view that monetary policy can't do all the heavy lifting, and that fiscal policy has a role to play?
BB: Right. The profession had come to the view that monetary policy, under normal circumstances, was probably the better tool for managing short-term movements in the economy. However, when the recession is sufficiently deep and interest rates are close to zero, it makes monetary policy less effective and a better mix of monetary and fiscal policy is appropriate. We had that for a time in the US but after 2010 or so there was considerable retrenchment at the federal level to go along with continuous retrenchment at state and local level. The net fiscal impulse after 2009 or so was actually contractionary.
BM: Was the second lesson, about the importance of the financial system to the health of the economy, not learnt well enough if we look back at the Bear Stearns and the Lehman Brothers decisions?
BB: There were two parts in our response, at least. One was to be the service lender of last resort, which was the lessons of Bagehot from 1873—I had a copy of that [Lombard Street: A Description of the Money Market] on my desk—and going back to the practices of the Bank of England in the 19th century when they addressed Overend, Gurney and Company and the other major panics of that period. The reason that the Federal Reserve was created was to address lender of last resort needs, and in that respect we were aggressive and creative. We lent not only to banks but to primary dealers, securities dealers, we lent to commercial paper market, the money market funds, the asset-backed securities market and others trying to make sure there was enough liquidity in the system. In that respect we were early and aggressive.
The other aspect which was actually a little bit less part of the orthodox view was that we knew that panics thrive on fear and uncertainty. And we believed that the collapse of major highly interconnected financial firms in the middle of the crisis would greatly exacerbate that fear and uncertainty and make the panic much worse. And for that reason, against the views of many in the media and in the academy and in politics, we were aggressively trying to prevent the failure of some major financial firms. In the case of Bear Stearns, which you mentioned, we found a buyer for Bear Stearns and then—very unpopularly—we helped to midwife that acquisition so Bear Stearns didn't fail. In the case of Lehman, I can you that you're subject to the delusion that we allowed them to fail. We did not. We did everything we could. We brought together all the major CEOs on Wall Street to the New York Fed that weekend. We found two potential buyers, and we looked at every possible option we had to save the firm. We were unable to do so. We knew it was going to be a big problem, but as I discuss in some detail in my book, we made every effort, we didn't have the tools that we now acquired after Lehman when Congress passed the TARP [Troubles Asset Relief Programme] bill. When AIG, the insurance company, came to the brink the next day we did find tools, not because we changed our strategy or changed our policy but because we had the tools we needed, in that case a collateralised loan. So we were consistent in our desire to avoid the collapse of a major firm but we didn't have adequate tools and therefore, understandably, from the outside it looked as though we changed policy.
JD: Does some of the blame lie with the British Financial Services Authority? As you discuss in the book, they refused to ratify the acquisition of Lehmans by Barclays.
BB: In a narrow sense, yes because Barclays had expressed an interest in buying Lehman and ultimately they did buy the broker dealer and the British authorities essentially nixed the acquisition. At the time it was a crushing blow because we felt that was our last chance, and we were told no. That was when Timothy Geithner [US Treasury Secretary] called me and said it's over, there's nothing that we can do. However, I think there are a couple of qualifications in retrospect. The first was, as Alistair Darling wrote in his book, the British were really unwilling to have Lehmans' bad assets essentially on a British balance sheet—which was at least understandable as their concern. But as I also discuss in the book, in retrospect, since it took the US Congress two tries to pass a relief bill even after Lehman failed, it seemed evident that Congress was not going to act until some company failed and the panic got sufficiently bad. I think that's fairly obvious in retrospect. At the time we were trying desperately to save the company.
BM: Where are we now? There's been a vast amount of regulation, about rules on capital requirements and so on, but has the banking system been required to do enough?
BB: I think there's been a great deal of progress. The system is much stronger. The amount of capital liquidity the banks and other financial institutions have to hold is much larger. There is considerably better oversight in the US. Before the crisis the financial regulatory system had been highly fragmented and full of gaps. They have been mostly closed. There are tools in place for continued development of oversight and for the system to adjust to changes as they occur over time. Very importantly, two things: the underlying philosophy of oversight has switched from what we call micro-credential, which is institution-oriented oversight to macro-credential, which means that at least part of the effort of regulators has to be looking at the system as a whole and the systemic risks that might cause problems in the system overall.
The other important change has been the introduction in the United States of the orderly liquidation authority, which is a set of tools that allows the Fed and the FD|C [Federal Deposit Insurance Corporation] to unwind a failing financial firm that is less dangerous to the overall system. Obviously that has not been tested, but it already provides considerably more flexibility to the authorities than we had when Lehman was failing.
JD: You may have read that John McDonnell, the new Shadow Labour Chancellor in this country, has suggested that the Bank of England's mandate should be widened in be more like the Fed's: full employment and price stability? [check]
BB: I don't know much about the politics of the central bank in the UK. In the United States, it's a sensible mandate. My observation is that most central banks do in fact pay attention to economic and employment when they make their decisions. This simply makes that predilection explicit. It does work for the US. Though I would add that even if the Federal reserve had a single mandate, it probably would not have conducted policy radically differently because throughout the recession and recovery, inflation has been below target.
BM: How does what's been called the great experiment of Quantitive Easing look now? And do you think Europe has gone though a very different experience?
BB: Of course the experiment isn't over but I think at this point it looks pretty good. Two observations: one is that the US and the UK, the two countries that have been most aggressive in using QE, have had the best recoveries. And the area that made the least use of QE, the Eurozone, has had the worst recovery. So there's at least some gross evidence that QE has been effective in avoiding deflation and proving support for economic recovery. And the fact that Japan and the Eurozone have adopted these measures after seeing what happened in the US and the UK is a bit of practical evidence in that regard.
The other observation is that when this policies were adopted they were certainly many predicted disastrous outcomes, either in effectiveness or high inflation, collapse of the currency and many other draconian outcomes. Of course as we know none of those things has happened. While it is important to maintain vigilance for any financial imbalances that might result from low interest rates, we've not seen extreme inflation, we've not seen currency collapse or commodity price spikes. The only concern about QE, which has not yet been conclusively eliminated, is the concern about financial balances, and that's something that the Fed and other central banks pay very close attention to.
JD: The Queen famously asked a group of economist in 2009 why they hadn't seen the crisis coming. If she had asked you that question, what would you have said?
BB: I would have said that the reason the crisis was so severe was not because of sub-prime mortgages per se, but rather because sub-prime mortgages and similar problems triggered a broad-based financial panic. Financial panics are not a new thing. They have been around for hundreds of years. Economists have studied them. They have been studied in the context of emerging markets in Asia in the 1990s, for example. The mistake was that neither economists nor regulators nor leaders of major financial firms fully appreciated that the system in the advanced industrial economies was still vulnerable to such a panic. I don't think it was primarily a failure of economic theory, it was really a failure to recognise that there were important vulnerabilities in the structure of our financial system which, when the triggers occurred, were transmitted into a panic. And that panic, we know, can be very destructive to the economy. It was less a failure of physics more a failure of engineering. We understand how bridges work but we don't always build them safely.
JD: Isn't a a sort-of theoretical failing not to acknowledge the role that panics and manias play in apparently self-regulating markets?
BB: Well, perhaps. Certainly there are schools of economic thought that downplay or ignore financial factors. I'm at least happy to say that my research were not been guilty of that. I worked with others such as Mark Gertler to develop models in which the financial system does play an important role and Mark has taken some of the papers we wrote in the 1980s and 1990s to explain what happened in 2007.
BM: Has one unfortunate consequence of QE been the pushing up asset values and the consequences for inequality?
BB: It remains to be seen. Those who don't like QE have decided they don't like QE. Then they look for reasons. People who never expressed much interest in inequality before have suddenly started saying it's a central issue in monetary policy. In fact I think the inequality case against QE is extremely weak. The most important effect of QE over the last few years has been to create jobs. There's nothing better you can do for the middle class and working class than to create opportunities for work. I think that's very important. The effects on asset prices come primarily through lowering rates of return. So ironically those who say that QE helps the rich also say it hurts savers—and of course there's a substantial overlap between those two groups. Stock prices are high but in part that's because the rate of return on stocks is low. Stock prices collapsed during the crisis. They're in recovery, they've essentially returned to trend. They've done that not just because of QE but because the economy's recovered and profits have recovered very substantially. And so, I agree that part of what interest rates do is to increase asset prices although via the low return channel, but I hardly think that's a reason not to use it to help provide the economic recovery which is of primary interest concern to people who work for a living.
BM: How is the recovery going in the US, and how relevant are low energy prices?
BB: Looking at the US recovery, I think it's interesting that since 2009 the Federal Reserve and other forecasters have consistently been too optimistic about the pace of economic growth. But at the same time the Fed and other economic forecasters have been too pessimistic about the rate at which unemployment will fall. Unemployment has come down fairly quickly. In some respects the economy has moved back to its potential, as measured by the level of unemployment, at a moderately rapid pace. The disappointing aspect is that the potential itself is not as strong as we would like. That's one way of thinking about the recovery. Unfortunately the potential output, which is driven primarily by labour force growth and productivity, is for the most part not something that central bank policy can do much about. That comes from on the one hand from the private sector and technology, and also from other government policies that promote skills training, innovation and the like. So that part has been a disappointment. In the US productivity growth since the recession has been very disappointing, well below post-war norms. It's not clear how much the crisis contributed to that. Probably to some extent it did, the lack of new firm formation, RND spending, capital investment, all those things can be traced to some extent to the crisis itself and perhaps as we get further away from the crisis we'll see better gains in productivity.
But some research also suggests that the slowdown in productivity began before the crisis. In the US, the turning point according to some recent research, was 2005, just before the crisis. The US had better productivity performance than the UK and Europe in the 1990s and early 2000s. At the time, it was argued that the US had made better use of IT in such areas as retail. But there's been a broad slowdown in measured productivity gains in IT and IT-related industries since 2005. Whether there's temporary, whether that's an artifice of measurement, that's not entirely clear but that seems to be another theme of what's been happening in our economies over the last 10 or 15 years.
JD: What about Larry Summers's contention that the US is in the grip of secular stagnation. The they're doomed, as you put it in the book, to "sub-par" growth?
BB: Secular stagnation is not the same thing as slow long-term growth. There's a point of view associated with Robert Gordon, whose an economist at North-Western University, which is that because of slowing population growth, lack of revolutionary technological change and other factors, our long-term growth prospects in the US, the UK and Europe are at best moderate. That could be the case. I think the history of our ability to predict technological change over decades is very poor, so I would be somewhat agnostic about that.
The secular stagnation thesis is somewhat different—more extreme I would argue. It argues that the rate of return on fiscal capital is so low that even at zero nominal interest rates or negative real interest rates there won't be enough demand to bring the economy up to its potential. The Gordon thesis is that the potential itself will grow only slowly over the next few decades; the secular stagnation thesis is that the rate of return on capital is so low we can't even reach that potential because zero interest rates won't be enough.
I'm not without sympathy with this. I have my own version of this: it's called the global savings glut, which is more international version of the same basic idea, which says that there are an awful lots of savings in the world looking for relatively few high return capital investments which is why interest rates are so low. Nevertheless, I don't think the evidence suggests, at least in the US, that full employment is out of reach. We're almost at full employment—five per cent. But the basic idea that the return to capital appears quite low around the world, at least for now, seems hard to deny given that real interest rates in all advanced economies are exceptionally low.
BM: What about fracking and the Iran deal and their effects on energy prices? Is that significant on growth outlook?
BB: It is significant and ultimately it's a positive. We're had some positive surprises on the supply side, most notably the US, which is now approaching independence in terms of its hydrocarbon needs. At the same time, in China seems to be transferring from a heavy-industry led economy to a more services-led economy, and the combination of those things and other factors is bringing commodity prices down to levels we haven't seen for some time. It's striking that in the US that gasoline prices are under $2 a gallon, which is very low for recent years. From an economic point of view that's generally a very positive development, at least for those countries which are not primarily produces of energy. For those countries such as the US and China, which are net importers of energy, it's a tail-wind. It increases consumer purchaser power, lowers the cost of production. And for the world as a whole greater energy abundance has to be a positive thing. Obviously suppliers and users of energy are going to have different views on this subject. Emerging market economies are suffering strains now and are responding to the fact that they were used to large revenues from energy production and those have declined significantly in the last couple of years.
BM: What about the Chinese slowdown?
BB: We used to debate in the Federal Reserve, what was the effect of a slowdown in China on the US. On the one hand a Chinese slowdown meant a slower pace of international trade. The US does not export a lot to China but it does export some to China and China's other trading partners. On the other hand a slowdown in China tended to lower commodity prices, which was undeniably a good thing for the US. So lower commodity prices were a mitigating factor for China's slowing, at least for countries like the US, which are net importers of commodities.
BM: What are the economic prospects of the EU?
BB: We need to divide it between the medium term and the longer term. In the medium term the EU has lagged behind the UK and the US in using monetary fiscal policies to help recover from the great recession. Fiscal policy has been most austere in Europe compared to other industrial countries. and monetary policy is now appropriately aggressive but because of political opposition that took six years for the ECB to follow the the US and the UK in introducing quantitive easing and other aggressive policies. So Europe is well behind other industrial countries in its cyclical recovery, and no doubt that process is going to take some time.
BM: By opposition you mean Germany?
BB: Yes, Germany. In the long term, Europe faces some of the same growth issues that the US and the UK face, namely adverse demographics—though Europe's are probably worse—and uncertainty about technological change and productivity growth. So the concerns about long-term growth we were just discussing regarding the US and the UK are, in anything, more serious in Europe.
BM: Do you think the Eurozone has solved its problems? This is a leading question...
BB: As I said, I think their monetary and fiscal policies are better today than they were a few years ago but they're behind in the race and it's going to take a long while to catch up.
JD: Do you think Europe has treated Greece too harshly?
BB: In a narrow sense, what Europe has done has allow Greece the option of staying in the Eurozone and remaining current on its debts. Greece ultimately decided that it would prefer to stay in the Eurozone and to continue to service its debts. So in that respect Europe gave Greece the option and Greece did what it felt was best for itself. In a broader sense, though, the Eurozone has not provided Greece with the broad prosperity that would have helped it escape from its problems more quickly. Again I would point to inadequacy of the response to the recession on both the monetary and the fiscal sides in Europe.
BM: Do you think George Osborne should be credited with achieving growth in the UK?
BB: As a practical matter, presidents and prime ministers take too much credit and too much blame for economic growth. Fundamentally growth depends on a variety of factors that leaders don't control from demography to technological change. Central banks are important for short-term economic growth and I would argue that the Bank of England has been effective in helping to restore growth. I don't think you can attribute a preponderance of short-term growth to political leaders—not that political decisions aren't important, but in the short run other factors are probably more important.
BM: Do you have a strong view on whether Britain should stay in the EU?
BB: I don't have a strong view. I'm an outsider on that question. The debate no doubt turns on whether the benefits of being in a larger market and in a larger economic unit—the EU—whether those benefits outweigh whatever loss of autonomy there is in local regulations and local economic management. But I don't have a sense of what that balance is.
JD: You're on record as being worried by the political climate in the US and how partisan gridlock makes the formulation of a sensible economic policy difficult. You're particularly worried by the growth of populism on both right and left.
BB: I am yes. It was a predictable outcome. Knowing something about history helps you on the political side as well on the economic side. In the 1930s in the US as result of the reaction to the Great Depression there was a great deal of populist agitation. There were marches on Washington. There were at times concerns about the survival of capitalism itself. There has been nothing recently to match the extent of political unrest we saw in the 1930s.
BM: Do you see this populism as a direct response to the recession? Rather something that's been happening for several decades, the rise of the internet, lack of deference to institutions...
BB: Looking at the it from the perspective of a central banker, and knowing that populists have always been distrustful of central banks, in the US particularly so. Various populist movements prevented the creation of the central bank in the United States until 1913. And even today much of the opposition to the Fed and its policies comes from the populist left and the populist right. But you're right that while the crisis and the recession no doubt help to trigger some of the recent upsurge in populist feelings, that the longer term trend towards inequality, frustrations about globalisation and technological change as well as changes in communications media like the internet have no doubt contributed to a surge in populism, which is not just an American phenomenon, it's something that's happened around the world.
In the US, which has a political system which is very status quo orientated and requires substantial cooperation and consensus to move, the polarisation of politics with so much energy on the extremes of left and right has made it very difficult for the government to take actions that would be constructive in terms of addressing some of the problems that the populists themselves point to.
BM: There's a strain in the British left—though not all on the left—that says America is dysfunctional, ungovernable, it's come to a standstill. Others rebut it by saying that's the way the constitution was set up that way. Is the politics choking the US's capacity to run itself?
BB: It's not choking it off. The US has tremendous strengths—the vitality of its private sector, the leadership of its academic institutions, its demography is relatively good...
BM: Those are the non-government bits.
BB: But those are very strong. And they ultimately determine much of what happens in the US economy.
BM: Take the ideology out of it. After years, not just in the Middle East but when the US has been telling people that we've got a good way of running a country— with my sympathy—and then we had the financial crisis and the Iraq war and people turned round and said, are you quite so sure. It matters whether the US can shake itself out of this.
BB: There's an interesting contrast between the foreign policy side and the financial crisis. The constitution, while being very status quo and consensus oriented on the domestic side, it actually gives the President more flexibility on foreign policy and military issues on the grounds that it presumably requires quicker and more decisive action that can't be achieved through congressional debate. I'm not sure that the gridlock that we're seeing in Washington necessarily constrains foreign policy and strategic issues in the same way it constrains economic issues. The response to the financial crisis fell on the divide between those two areas. I discuss in the book how Britain responded more effectively and quickly in the fall of 2008 than the US did because the parliamentary government was able to work together, and find an acceptable solution over a weekend. While in the US it was a long contentious debate that made it much more difficult to address the problems we had.
JD: You mentioned the British response. Do you think Gordon Brown will be judged favourably by history for what he did in the fall of 2008?
BB: From my perspective he was very effective. The British were the first to implement a comprehensive response to the fragility of the banking system. And it was done in a way that brought many parts of the government instead of in the United States relying very heavily on the central bank and elements of the Treasury. My sense is that he showed good leadership in that period and was one of the people in the international community who was important in trying to restrain the crisis.
BM: Should undergraduate economics students be taught differently from the way they were 20 years ago? What should they be taught about Keynes, about development economics?
BB: I actually do write textbooks. Putting aside development for just a second, I'd say in US economics there's not so much again a radical change in the theoretical framework but there's some areas that students need to know about that perhaps received short-shrift in pre-crisis editions of the textbook. One would be the role of the financial sector: the risk of financial crisis, the importance of financial regulation, that is often left to the advanced course and I think now students would want to understand more about what a financial crisis is, and how you respond to them. The second would be unconventional monetary policies, which again were again thought of as an advanced course topic before. Now in order to understand what's happening in the US and the UK you need to understand what quantitive easing is and how it works. The third, longer-term issue was inequality, which you raised before, and income distribution. These again are issues that economists have talked about since Mill but have become much more central in recent political and economic debates. It probably requires a more extensive presentation in the freshman textbook than you might have had before now. Those are some areas where I think the freshman textbook should be, will be, revised to not so much to change the overall framework as much as to change the degree of emphasis on different topics.
On economic development, I was very pleased to see my former colleague at Princeton Angus Deaton receive the Nobel Prize for his work on development. He, as much as anyone, represents a shift in economists' thinking about development. The early work in the 1950s and 1960 had a very much a top-down flavour. That development was something that could be accomplished by governments and international agencies through large building projects, though the introduction of educational and health initiatives, whereas what Deaton and others in his school advocate instead is a more bottom-up approach that relies more on improving opportunities at the village level, at the level of individuals. He has taken, I think, a very admirable scientific approach in terms of actually conducting experiments and developing data that describe how individuals in developing economies react to changes in their economic environment. I think there has been an important shift in thinking about economic development. The experience of some countries such as China, which have shown remarkable success in achieving economic development have influenced this as well. Again Deaton and Esther Duflo and others in that field have really changed how economists have thought about this process.
JD: You are among other things a historian of the Great Depression. Should freshman economics students also be doing some economic history?
BB: I think economic history is extremely important in general. I've studied economic history for a long time and I've found it extremely useful for thinking about real economic problems, which often are far more complicated than the simple textbook exposition provides. History gives you some perspective of the political and social dimensions of an economic problem, it alerts you to the complexity and subtlety of economic issues and the responses. So I think yes, economic history is a very important complement for the practising economist in terms of addressing real problems. I think that the freshman textbook is already pretty overburdened and I think it would be difficult to do more than a cursory review—which I would do, I would certainly want the student to know what the Depression was and what the basic facts about it were. But I guess I would leave the economic history details to a separate course that would allow more in-depth knowledge.
JD: You'd suggesting there that a well-developed historical sense is an important part of the central banker's arsenal. To know what mistakes to avoid.
BB: Absolutely. For me, knowing the history was helpful in thinking about so many of the dimensions of the crisis. Personally, it was what I brought to the policy discussion and I found it very helpful.
BM: How concerned should governments be about inequality and the impact on growth?
BB: I wouldn't put the impact on growth of inequality at the top of the list of concerns. I think inequality is itself the problem. If the economy is growing but it's not delivering rewards and opportunities to the broad mass of the population then evidently the economy's not achieving what we hope for. I think addressing inequality—or perhaps we might want to call it lack of opportunity—is a very important task for economic policy. But I'm not convinced that promoting more growth is the main reason for addressing inequality.
Sameer Rahim: Are we doing enough to regulate the economic system now, and is there a danger of squeezing too much risk out of the economy?
BB: I don't think we can eliminate completely the risk of financial instability—at least if we want to retain dynamism and risk-taking in our economy, which I think we do. But what we can do is first make the system much more resilient, which we can do. Obviously we will not be able to anticipate every shock. I think we've made a lot of progress in that respect, in particular the banking system in the US has a lot more capital, a lot more liquidity than it did before the crisis. If a similar shock occurred today the system would be a lot stronger and better able to withstand the effects. As I mentioned before, the gaps and omissions in the prior regulatory system have been largely addressed—not completely—so that the possibility of very large firms such as Lehman and AIG could essentially escape any regulatory oversight is no longer there. So the breadth of vision of the regulators is now much greater so they can better see what's going on. They are conditioned now to look for systemic risk as opposed to risks that only affect individual institutions. And I think that people may not appreciate the potential power of the liquidation authority which not only provides powers after the fact for regulators to address a failing firm, but provides before the fact authorities to force large financial institutions to simplify and if necessary to shrink. So I think a lot of progress has been made, but by the very nature of financial stability regulation it's an ongoing process.
SR: Those on the populist left, and even some not on the populist left, have argued for some sort of Glass-Steagall act. But you don't agree with that.
BB: I'm puzzled by that. I think it's been treated as a symbol of a previous regulatory age. The Glass-Steagall act itself would not have been any significant help during the financial crisis. What Glass-Steagall does is prohibit the combining of commercial and investment banking activities in a single firm but during the recent crisis you had bank that got into trouble because of bad loans and you had investment firms that got into trouble because of bad securities market investments. It would be very hard, except maybe in the case of Citigroup, it would be very hard to identify any firm that got into trouble specifically because of the combination of commercial and investment banking activities. I think what we saw was that the rules that were set up during the 1930s and which were related to the problems of the Depression were antiquated by 2007. Glass-Steagall was repealed [in 1999] because it wasn't appropriate for the contemporary financial system, but it was not replaced with a set of rules that would have been more consistent with where the financial system actually was in 2007. After the crisis, at least, Dodd-Frank [Wall Street Reform and Consumer Protection Act, passed in the US in 2010], and other responses do take into account much better the evolution of the financial system since the 1930s.
Bronwen Maddox: What are the enduring lessons of the Great Depression?
Ben Bernanke: From an economist's and central banker's perspective, I think there are two. The first is the one I learned in graduate school when I read Milton Friedman and Anna Schwartz's book A Monetary History of the United States: you don't let the money supply collapse. You avoid inflation. You make sure monetary policy is sufficiently aggressive to avoid the worst outcomes. As you know, in the United States and in the United Kingdom monetary policy was used aggressively to help the economy recover and to move away from the crisis.
The second lesson came from research, including my own: the financial system is critical to the health of the economy. Major financial crises are almost always followed by deep recessions, and it's essential to do whatever possible to avoid the collapse of the financial system. My own own most cited paper was about the collapse of the banking system of the US in the 1930s. Once it become clear that the panic of 2007 was not a small matter, it became essential to address it with all the tools we had available. So those are the two economic lessons. From a policy perspective, I think the lesson are that orthodoxy doesn't suffice, and you need to look for alternative strategies.
BM: Do you think we learned and applied the first lesson about the money supply?
BB: I think we did. The Fed and other major central banks cut interest rates pretty quickly, even though there were inflation risks from commodity prices—in 2008, for example, the price of oil was $145 per barrel. The European Central Bank in fact raised interest rates that summer but for the most part major central banks cuts rates. Once rates hit zero in late 2008, the Fed and the Bank of England moved on to other methods.
Jonathan Derbyshire: But it's your view that monetary policy can't do all the heavy lifting, and that fiscal policy has a role to play?
BB: Right. The profession had come to the view that monetary policy, under normal circumstances, was probably the better tool for managing short-term movements in the economy. However, when the recession is sufficiently deep and interest rates are close to zero, it makes monetary policy less effective and a better mix of monetary and fiscal policy is appropriate. We had that for a time in the US but after 2010 or so there was considerable retrenchment at the federal level to go along with continuous retrenchment at state and local level. The net fiscal impulse after 2009 or so was actually contractionary.
BM: Was the second lesson, about the importance of the financial system to the health of the economy, not learnt well enough if we look back at the Bear Stearns and the Lehman Brothers decisions?
BB: There were two parts in our response, at least. One was to be the service lender of last resort, which was the lessons of Bagehot from 1873—I had a copy of that [Lombard Street: A Description of the Money Market] on my desk—and going back to the practices of the Bank of England in the 19th century when they addressed Overend, Gurney and Company and the other major panics of that period. The reason that the Federal Reserve was created was to address lender of last resort needs, and in that respect we were aggressive and creative. We lent not only to banks but to primary dealers, securities dealers, we lent to commercial paper market, the money market funds, the asset-backed securities market and others trying to make sure there was enough liquidity in the system. In that respect we were early and aggressive.
The other aspect which was actually a little bit less part of the orthodox view was that we knew that panics thrive on fear and uncertainty. And we believed that the collapse of major highly interconnected financial firms in the middle of the crisis would greatly exacerbate that fear and uncertainty and make the panic much worse. And for that reason, against the views of many in the media and in the academy and in politics, we were aggressively trying to prevent the failure of some major financial firms. In the case of Bear Stearns, which you mentioned, we found a buyer for Bear Stearns and then—very unpopularly—we helped to midwife that acquisition so Bear Stearns didn't fail. In the case of Lehman, I can you that you're subject to the delusion that we allowed them to fail. We did not. We did everything we could. We brought together all the major CEOs on Wall Street to the New York Fed that weekend. We found two potential buyers, and we looked at every possible option we had to save the firm. We were unable to do so. We knew it was going to be a big problem, but as I discuss in some detail in my book, we made every effort, we didn't have the tools that we now acquired after Lehman when Congress passed the TARP [Troubles Asset Relief Programme] bill. When AIG, the insurance company, came to the brink the next day we did find tools, not because we changed our strategy or changed our policy but because we had the tools we needed, in that case a collateralised loan. So we were consistent in our desire to avoid the collapse of a major firm but we didn't have adequate tools and therefore, understandably, from the outside it looked as though we changed policy.
JD: Does some of the blame lie with the British Financial Services Authority? As you discuss in the book, they refused to ratify the acquisition of Lehmans by Barclays.
BB: In a narrow sense, yes because Barclays had expressed an interest in buying Lehman and ultimately they did buy the broker dealer and the British authorities essentially nixed the acquisition. At the time it was a crushing blow because we felt that was our last chance, and we were told no. That was when Timothy Geithner [US Treasury Secretary] called me and said it's over, there's nothing that we can do. However, I think there are a couple of qualifications in retrospect. The first was, as Alistair Darling wrote in his book, the British were really unwilling to have Lehmans' bad assets essentially on a British balance sheet—which was at least understandable as their concern. But as I also discuss in the book, in retrospect, since it took the US Congress two tries to pass a relief bill even after Lehman failed, it seemed evident that Congress was not going to act until some company failed and the panic got sufficiently bad. I think that's fairly obvious in retrospect. At the time we were trying desperately to save the company.
BM: Where are we now? There's been a vast amount of regulation, about rules on capital requirements and so on, but has the banking system been required to do enough?
BB: I think there's been a great deal of progress. The system is much stronger. The amount of capital liquidity the banks and other financial institutions have to hold is much larger. There is considerably better oversight in the US. Before the crisis the financial regulatory system had been highly fragmented and full of gaps. They have been mostly closed. There are tools in place for continued development of oversight and for the system to adjust to changes as they occur over time. Very importantly, two things: the underlying philosophy of oversight has switched from what we call micro-credential, which is institution-oriented oversight to macro-credential, which means that at least part of the effort of regulators has to be looking at the system as a whole and the systemic risks that might cause problems in the system overall.
The other important change has been the introduction in the United States of the orderly liquidation authority, which is a set of tools that allows the Fed and the FD|C [Federal Deposit Insurance Corporation] to unwind a failing financial firm that is less dangerous to the overall system. Obviously that has not been tested, but it already provides considerably more flexibility to the authorities than we had when Lehman was failing.
JD: You may have read that John McDonnell, the new Shadow Labour Chancellor in this country, has suggested that the Bank of England's mandate should be widened in be more like the Fed's: full employment and price stability? [check]
BB: I don't know much about the politics of the central bank in the UK. In the United States, it's a sensible mandate. My observation is that most central banks do in fact pay attention to economic and employment when they make their decisions. This simply makes that predilection explicit. It does work for the US. Though I would add that even if the Federal reserve had a single mandate, it probably would not have conducted policy radically differently because throughout the recession and recovery, inflation has been below target.
BM: How does what's been called the great experiment of Quantitive Easing look now? And do you think Europe has gone though a very different experience?
BB: Of course the experiment isn't over but I think at this point it looks pretty good. Two observations: one is that the US and the UK, the two countries that have been most aggressive in using QE, have had the best recoveries. And the area that made the least use of QE, the Eurozone, has had the worst recovery. So there's at least some gross evidence that QE has been effective in avoiding deflation and proving support for economic recovery. And the fact that Japan and the Eurozone have adopted these measures after seeing what happened in the US and the UK is a bit of practical evidence in that regard.
The other observation is that when this policies were adopted they were certainly many predicted disastrous outcomes, either in effectiveness or high inflation, collapse of the currency and many other draconian outcomes. Of course as we know none of those things has happened. While it is important to maintain vigilance for any financial imbalances that might result from low interest rates, we've not seen extreme inflation, we've not seen currency collapse or commodity price spikes. The only concern about QE, which has not yet been conclusively eliminated, is the concern about financial balances, and that's something that the Fed and other central banks pay very close attention to.
JD: The Queen famously asked a group of economist in 2009 why they hadn't seen the crisis coming. If she had asked you that question, what would you have said?
BB: I would have said that the reason the crisis was so severe was not because of sub-prime mortgages per se, but rather because sub-prime mortgages and similar problems triggered a broad-based financial panic. Financial panics are not a new thing. They have been around for hundreds of years. Economists have studied them. They have been studied in the context of emerging markets in Asia in the 1990s, for example. The mistake was that neither economists nor regulators nor leaders of major financial firms fully appreciated that the system in the advanced industrial economies was still vulnerable to such a panic. I don't think it was primarily a failure of economic theory, it was really a failure to recognise that there were important vulnerabilities in the structure of our financial system which, when the triggers occurred, were transmitted into a panic. And that panic, we know, can be very destructive to the economy. It was less a failure of physics more a failure of engineering. We understand how bridges work but we don't always build them safely.
JD: Isn't a a sort-of theoretical failing not to acknowledge the role that panics and manias play in apparently self-regulating markets?
BB: Well, perhaps. Certainly there are schools of economic thought that downplay or ignore financial factors. I'm at least happy to say that my research were not been guilty of that. I worked with others such as Mark Gertler to develop models in which the financial system does play an important role and Mark has taken some of the papers we wrote in the 1980s and 1990s to explain what happened in 2007.
BM: Has one unfortunate consequence of QE been the pushing up asset values and the consequences for inequality?
BB: It remains to be seen. Those who don't like QE have decided they don't like QE. Then they look for reasons. People who never expressed much interest in inequality before have suddenly started saying it's a central issue in monetary policy. In fact I think the inequality case against QE is extremely weak. The most important effect of QE over the last few years has been to create jobs. There's nothing better you can do for the middle class and working class than to create opportunities for work. I think that's very important. The effects on asset prices come primarily through lowering rates of return. So ironically those who say that QE helps the rich also say it hurts savers—and of course there's a substantial overlap between those two groups. Stock prices are high but in part that's because the rate of return on stocks is low. Stock prices collapsed during the crisis. They're in recovery, they've essentially returned to trend. They've done that not just because of QE but because the economy's recovered and profits have recovered very substantially. And so, I agree that part of what interest rates do is to increase asset prices although via the low return channel, but I hardly think that's a reason not to use it to help provide the economic recovery which is of primary interest concern to people who work for a living.
BM: How is the recovery going in the US, and how relevant are low energy prices?
BB: Looking at the US recovery, I think it's interesting that since 2009 the Federal Reserve and other forecasters have consistently been too optimistic about the pace of economic growth. But at the same time the Fed and other economic forecasters have been too pessimistic about the rate at which unemployment will fall. Unemployment has come down fairly quickly. In some respects the economy has moved back to its potential, as measured by the level of unemployment, at a moderately rapid pace. The disappointing aspect is that the potential itself is not as strong as we would like. That's one way of thinking about the recovery. Unfortunately the potential output, which is driven primarily by labour force growth and productivity, is for the most part not something that central bank policy can do much about. That comes from on the one hand from the private sector and technology, and also from other government policies that promote skills training, innovation and the like. So that part has been a disappointment. In the US productivity growth since the recession has been very disappointing, well below post-war norms. It's not clear how much the crisis contributed to that. Probably to some extent it did, the lack of new firm formation, RND spending, capital investment, all those things can be traced to some extent to the crisis itself and perhaps as we get further away from the crisis we'll see better gains in productivity.
But some research also suggests that the slowdown in productivity began before the crisis. In the US, the turning point according to some recent research, was 2005, just before the crisis. The US had better productivity performance than the UK and Europe in the 1990s and early 2000s. At the time, it was argued that the US had made better use of IT in such areas as retail. But there's been a broad slowdown in measured productivity gains in IT and IT-related industries since 2005. Whether there's temporary, whether that's an artifice of measurement, that's not entirely clear but that seems to be another theme of what's been happening in our economies over the last 10 or 15 years.
JD: What about Larry Summers's contention that the US is in the grip of secular stagnation. The they're doomed, as you put it in the book, to "sub-par" growth?
BB: Secular stagnation is not the same thing as slow long-term growth. There's a point of view associated with Robert Gordon, whose an economist at North-Western University, which is that because of slowing population growth, lack of revolutionary technological change and other factors, our long-term growth prospects in the US, the UK and Europe are at best moderate. That could be the case. I think the history of our ability to predict technological change over decades is very poor, so I would be somewhat agnostic about that.
The secular stagnation thesis is somewhat different—more extreme I would argue. It argues that the rate of return on fiscal capital is so low that even at zero nominal interest rates or negative real interest rates there won't be enough demand to bring the economy up to its potential. The Gordon thesis is that the potential itself will grow only slowly over the next few decades; the secular stagnation thesis is that the rate of return on capital is so low we can't even reach that potential because zero interest rates won't be enough.
I'm not without sympathy with this. I have my own version of this: it's called the global savings glut, which is more international version of the same basic idea, which says that there are an awful lots of savings in the world looking for relatively few high return capital investments which is why interest rates are so low. Nevertheless, I don't think the evidence suggests, at least in the US, that full employment is out of reach. We're almost at full employment—five per cent. But the basic idea that the return to capital appears quite low around the world, at least for now, seems hard to deny given that real interest rates in all advanced economies are exceptionally low.
BM: What about fracking and the Iran deal and their effects on energy prices? Is that significant on growth outlook?
BB: It is significant and ultimately it's a positive. We're had some positive surprises on the supply side, most notably the US, which is now approaching independence in terms of its hydrocarbon needs. At the same time, in China seems to be transferring from a heavy-industry led economy to a more services-led economy, and the combination of those things and other factors is bringing commodity prices down to levels we haven't seen for some time. It's striking that in the US that gasoline prices are under $2 a gallon, which is very low for recent years. From an economic point of view that's generally a very positive development, at least for those countries which are not primarily produces of energy. For those countries such as the US and China, which are net importers of energy, it's a tail-wind. It increases consumer purchaser power, lowers the cost of production. And for the world as a whole greater energy abundance has to be a positive thing. Obviously suppliers and users of energy are going to have different views on this subject. Emerging market economies are suffering strains now and are responding to the fact that they were used to large revenues from energy production and those have declined significantly in the last couple of years.
BM: What about the Chinese slowdown?
BB: We used to debate in the Federal Reserve, what was the effect of a slowdown in China on the US. On the one hand a Chinese slowdown meant a slower pace of international trade. The US does not export a lot to China but it does export some to China and China's other trading partners. On the other hand a slowdown in China tended to lower commodity prices, which was undeniably a good thing for the US. So lower commodity prices were a mitigating factor for China's slowing, at least for countries like the US, which are net importers of commodities.
BM: What are the economic prospects of the EU?
BB: We need to divide it between the medium term and the longer term. In the medium term the EU has lagged behind the UK and the US in using monetary fiscal policies to help recover from the great recession. Fiscal policy has been most austere in Europe compared to other industrial countries. and monetary policy is now appropriately aggressive but because of political opposition that took six years for the ECB to follow the the US and the UK in introducing quantitive easing and other aggressive policies. So Europe is well behind other industrial countries in its cyclical recovery, and no doubt that process is going to take some time.
BM: By opposition you mean Germany?
BB: Yes, Germany. In the long term, Europe faces some of the same growth issues that the US and the UK face, namely adverse demographics—though Europe's are probably worse—and uncertainty about technological change and productivity growth. So the concerns about long-term growth we were just discussing regarding the US and the UK are, in anything, more serious in Europe.
BM: Do you think the Eurozone has solved its problems? This is a leading question...
BB: As I said, I think their monetary and fiscal policies are better today than they were a few years ago but they're behind in the race and it's going to take a long while to catch up.
JD: Do you think Europe has treated Greece too harshly?
BB: In a narrow sense, what Europe has done has allow Greece the option of staying in the Eurozone and remaining current on its debts. Greece ultimately decided that it would prefer to stay in the Eurozone and to continue to service its debts. So in that respect Europe gave Greece the option and Greece did what it felt was best for itself. In a broader sense, though, the Eurozone has not provided Greece with the broad prosperity that would have helped it escape from its problems more quickly. Again I would point to inadequacy of the response to the recession on both the monetary and the fiscal sides in Europe.
BM: Do you think George Osborne should be credited with achieving growth in the UK?
BB: As a practical matter, presidents and prime ministers take too much credit and too much blame for economic growth. Fundamentally growth depends on a variety of factors that leaders don't control from demography to technological change. Central banks are important for short-term economic growth and I would argue that the Bank of England has been effective in helping to restore growth. I don't think you can attribute a preponderance of short-term growth to political leaders—not that political decisions aren't important, but in the short run other factors are probably more important.
BM: Do you have a strong view on whether Britain should stay in the EU?
BB: I don't have a strong view. I'm an outsider on that question. The debate no doubt turns on whether the benefits of being in a larger market and in a larger economic unit—the EU—whether those benefits outweigh whatever loss of autonomy there is in local regulations and local economic management. But I don't have a sense of what that balance is.
JD: You're on record as being worried by the political climate in the US and how partisan gridlock makes the formulation of a sensible economic policy difficult. You're particularly worried by the growth of populism on both right and left.
BB: I am yes. It was a predictable outcome. Knowing something about history helps you on the political side as well on the economic side. In the 1930s in the US as result of the reaction to the Great Depression there was a great deal of populist agitation. There were marches on Washington. There were at times concerns about the survival of capitalism itself. There has been nothing recently to match the extent of political unrest we saw in the 1930s.
BM: Do you see this populism as a direct response to the recession? Rather something that's been happening for several decades, the rise of the internet, lack of deference to institutions...
BB: Looking at the it from the perspective of a central banker, and knowing that populists have always been distrustful of central banks, in the US particularly so. Various populist movements prevented the creation of the central bank in the United States until 1913. And even today much of the opposition to the Fed and its policies comes from the populist left and the populist right. But you're right that while the crisis and the recession no doubt help to trigger some of the recent upsurge in populist feelings, that the longer term trend towards inequality, frustrations about globalisation and technological change as well as changes in communications media like the internet have no doubt contributed to a surge in populism, which is not just an American phenomenon, it's something that's happened around the world.
In the US, which has a political system which is very status quo orientated and requires substantial cooperation and consensus to move, the polarisation of politics with so much energy on the extremes of left and right has made it very difficult for the government to take actions that would be constructive in terms of addressing some of the problems that the populists themselves point to.
BM: There's a strain in the British left—though not all on the left—that says America is dysfunctional, ungovernable, it's come to a standstill. Others rebut it by saying that's the way the constitution was set up that way. Is the politics choking the US's capacity to run itself?
BB: It's not choking it off. The US has tremendous strengths—the vitality of its private sector, the leadership of its academic institutions, its demography is relatively good...
BM: Those are the non-government bits.
BB: But those are very strong. And they ultimately determine much of what happens in the US economy.
BM: Take the ideology out of it. After years, not just in the Middle East but when the US has been telling people that we've got a good way of running a country— with my sympathy—and then we had the financial crisis and the Iraq war and people turned round and said, are you quite so sure. It matters whether the US can shake itself out of this.
BB: There's an interesting contrast between the foreign policy side and the financial crisis. The constitution, while being very status quo and consensus oriented on the domestic side, it actually gives the President more flexibility on foreign policy and military issues on the grounds that it presumably requires quicker and more decisive action that can't be achieved through congressional debate. I'm not sure that the gridlock that we're seeing in Washington necessarily constrains foreign policy and strategic issues in the same way it constrains economic issues. The response to the financial crisis fell on the divide between those two areas. I discuss in the book how Britain responded more effectively and quickly in the fall of 2008 than the US did because the parliamentary government was able to work together, and find an acceptable solution over a weekend. While in the US it was a long contentious debate that made it much more difficult to address the problems we had.
JD: You mentioned the British response. Do you think Gordon Brown will be judged favourably by history for what he did in the fall of 2008?
BB: From my perspective he was very effective. The British were the first to implement a comprehensive response to the fragility of the banking system. And it was done in a way that brought many parts of the government instead of in the United States relying very heavily on the central bank and elements of the Treasury. My sense is that he showed good leadership in that period and was one of the people in the international community who was important in trying to restrain the crisis.
BM: Should undergraduate economics students be taught differently from the way they were 20 years ago? What should they be taught about Keynes, about development economics?
BB: I actually do write textbooks. Putting aside development for just a second, I'd say in US economics there's not so much again a radical change in the theoretical framework but there's some areas that students need to know about that perhaps received short-shrift in pre-crisis editions of the textbook. One would be the role of the financial sector: the risk of financial crisis, the importance of financial regulation, that is often left to the advanced course and I think now students would want to understand more about what a financial crisis is, and how you respond to them. The second would be unconventional monetary policies, which again were again thought of as an advanced course topic before. Now in order to understand what's happening in the US and the UK you need to understand what quantitive easing is and how it works. The third, longer-term issue was inequality, which you raised before, and income distribution. These again are issues that economists have talked about since Mill but have become much more central in recent political and economic debates. It probably requires a more extensive presentation in the freshman textbook than you might have had before now. Those are some areas where I think the freshman textbook should be, will be, revised to not so much to change the overall framework as much as to change the degree of emphasis on different topics.
On economic development, I was very pleased to see my former colleague at Princeton Angus Deaton receive the Nobel Prize for his work on development. He, as much as anyone, represents a shift in economists' thinking about development. The early work in the 1950s and 1960 had a very much a top-down flavour. That development was something that could be accomplished by governments and international agencies through large building projects, though the introduction of educational and health initiatives, whereas what Deaton and others in his school advocate instead is a more bottom-up approach that relies more on improving opportunities at the village level, at the level of individuals. He has taken, I think, a very admirable scientific approach in terms of actually conducting experiments and developing data that describe how individuals in developing economies react to changes in their economic environment. I think there has been an important shift in thinking about economic development. The experience of some countries such as China, which have shown remarkable success in achieving economic development have influenced this as well. Again Deaton and Esther Duflo and others in that field have really changed how economists have thought about this process.
JD: You are among other things a historian of the Great Depression. Should freshman economics students also be doing some economic history?
BB: I think economic history is extremely important in general. I've studied economic history for a long time and I've found it extremely useful for thinking about real economic problems, which often are far more complicated than the simple textbook exposition provides. History gives you some perspective of the political and social dimensions of an economic problem, it alerts you to the complexity and subtlety of economic issues and the responses. So I think yes, economic history is a very important complement for the practising economist in terms of addressing real problems. I think that the freshman textbook is already pretty overburdened and I think it would be difficult to do more than a cursory review—which I would do, I would certainly want the student to know what the Depression was and what the basic facts about it were. But I guess I would leave the economic history details to a separate course that would allow more in-depth knowledge.
JD: You'd suggesting there that a well-developed historical sense is an important part of the central banker's arsenal. To know what mistakes to avoid.
BB: Absolutely. For me, knowing the history was helpful in thinking about so many of the dimensions of the crisis. Personally, it was what I brought to the policy discussion and I found it very helpful.
BM: How concerned should governments be about inequality and the impact on growth?
BB: I wouldn't put the impact on growth of inequality at the top of the list of concerns. I think inequality is itself the problem. If the economy is growing but it's not delivering rewards and opportunities to the broad mass of the population then evidently the economy's not achieving what we hope for. I think addressing inequality—or perhaps we might want to call it lack of opportunity—is a very important task for economic policy. But I'm not convinced that promoting more growth is the main reason for addressing inequality.
Sameer Rahim: Are we doing enough to regulate the economic system now, and is there a danger of squeezing too much risk out of the economy?
BB: I don't think we can eliminate completely the risk of financial instability—at least if we want to retain dynamism and risk-taking in our economy, which I think we do. But what we can do is first make the system much more resilient, which we can do. Obviously we will not be able to anticipate every shock. I think we've made a lot of progress in that respect, in particular the banking system in the US has a lot more capital, a lot more liquidity than it did before the crisis. If a similar shock occurred today the system would be a lot stronger and better able to withstand the effects. As I mentioned before, the gaps and omissions in the prior regulatory system have been largely addressed—not completely—so that the possibility of very large firms such as Lehman and AIG could essentially escape any regulatory oversight is no longer there. So the breadth of vision of the regulators is now much greater so they can better see what's going on. They are conditioned now to look for systemic risk as opposed to risks that only affect individual institutions. And I think that people may not appreciate the potential power of the liquidation authority which not only provides powers after the fact for regulators to address a failing firm, but provides before the fact authorities to force large financial institutions to simplify and if necessary to shrink. So I think a lot of progress has been made, but by the very nature of financial stability regulation it's an ongoing process.
SR: Those on the populist left, and even some not on the populist left, have argued for some sort of Glass-Steagall act. But you don't agree with that.
BB: I'm puzzled by that. I think it's been treated as a symbol of a previous regulatory age. The Glass-Steagall act itself would not have been any significant help during the financial crisis. What Glass-Steagall does is prohibit the combining of commercial and investment banking activities in a single firm but during the recent crisis you had bank that got into trouble because of bad loans and you had investment firms that got into trouble because of bad securities market investments. It would be very hard, except maybe in the case of Citigroup, it would be very hard to identify any firm that got into trouble specifically because of the combination of commercial and investment banking activities. I think what we saw was that the rules that were set up during the 1930s and which were related to the problems of the Depression were antiquated by 2007. Glass-Steagall was repealed [in 1999] because it wasn't appropriate for the contemporary financial system, but it was not replaced with a set of rules that would have been more consistent with where the financial system actually was in 2007. After the crisis, at least, Dodd-Frank [Wall Street Reform and Consumer Protection Act, passed in the US in 2010], and other responses do take into account much better the evolution of the financial system since the 1930s.
