Read the full transcript of the interview
During his time as Chairman of the United States Federal Reserve from 2006 to 2014, Ben Bernanke had to cope with a financial crisis that almost brought down the global banking system, and with the worst recession since the 1930s. In London, Prospect spoke to Bernanke about the state of the economy in the US, whether the European Union has treated Greece fairly and Britain’s controversial role in his efforts to stabilise the financial system.
When asked whether George Osborne should be credited with achieving growth in the UK, Bernanke said: “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 short-term growth to political leaders—not that political decisions aren’t important, but in the short run other factors are probably more important.”
The Shadow Chancellor John McDonnell has suggested that the Bank’s mandate should be widened to be more similar to the Fed’s and include full employment and price stability. Did he agree? “I don’t know much about the politics of the central bank in the UK,” said Bernanke. “It does work for the US. Though I would add that even if the Fed had a single mandate, it probably would not have conducted policy radically differently because throughout the recession and recovery, inflation has been below target.”
Bernanke was critical of the European Central Bank’s (ECB) initial response to the 2008 crisis. “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. Monetary policy is now appropriately aggressive, but because of political opposition it took six years for the ECB to follow the US and the UK in introducing Quantitative Easing (QE) and other aggressive policies.” By “political opposition” did he mean Germany? “Yes, Germany. In the long term, Europe faces some of the same growth issues as the US and the UK, namely adverse demographics—though Europe’s are probably worse—and uncertainty about technological change and productivity growth. So the concerns about long-term growth regarding the US and the UK are, if anything, more serious in Europe.”
Bernanke was largely responsible for implementing QE. How does that experiment look now? “It isn’t over but I think at this point it looks pretty good. 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.”
Has one consequence of QE been the pushing up of asset values and increasing inequality? “It remains to be seen. Those who don’t like QE have decided they don’t like QE. 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. 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 there’s a substantial overlap between those groups.”
Has Europe treated Greece too harshly? “In a narrow sense, what Europe has done is to 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. 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.”
Britain played an important role during the financial crisis, notably during the attempt to find a buyer for troubled investment bank Lehman Brothers. Barclays wanted to buy Lehman but the Financial Services Authority (FSA) refused to ratify the acquisition. Does some blame for Lehman’s collapse lie with Britain? “In a narrow sense, yes,” replied Bernanke, “because Barclays had expressed an interest in buying Lehman 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.
“However, 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 Lehman’s bad assets essentially on a British balance sheet—which was at least understandable.” He added that the Lehman collapse prompted necessary reforms. “Congress was not going to act until some company failed and the panic got sufficiently bad. At the time we were trying desperately to save the company.”
Bernanke had warm words for Britain’s swift response to the Northern Rock crisis. For this he credits Britain’s parliamentary system. “Britain responded more effectively and quickly in the fall of 2008 than the US did because the government was able to work together, and find an acceptable solution over a weekend. While in the US, it was a long contentious debate.” How will Gordon Brown be judged by history? “From my perspective Brown was very effective. The British were the first to implement a comprehensive response to the fragility of the banking system.”
The economic downturn has seen the rise of populist movements. Was Bernanke worried by such populism? “I am, yes. It was a predictable outcome. Populists have always been distrustful of central banks, particularly in the US. Various populist movements prevented the creation of the central bank in the US until 1913. But while the recession no doubt helped to trigger some of the recent upsurge in populist feelings, they also originate in the longer-term trend towards inequality, frustrations about globalisation and technological change as well as changes in communications media like the internet. And it is not just an American phenomenon.”
Did that cause problems in implementing policy? “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 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.”
Have regulations been strengthened enough? “I think there’s been a great deal of progress. 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, the underlying philosophy of oversight has switched from what we call micro-prudential, which is institution-oriented oversight, to macro-prudential, 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.”
How is the recovery going in the US? “Since 2009 the Fed 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. 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. 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. 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.”
What about Larry Summers’s contention that the US economy is in the grip of secular stagnation. “Secular stagnation is not the same thing as slow long-term growth. There’s a point of view associated with Robert Gordon [who spoke to Prospect last year], 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.
“The secular stagnation thesis is more extreme. 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. 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. 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.”
The Queen famously asked a group of economists in 2009 why they hadn’t seen the crisis coming. What would he have replied? “I would have said that the reason the crisis was so severe was 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. 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.”
During his time as Chairman of the United States Federal Reserve from 2006 to 2014, Ben Bernanke had to cope with a financial crisis that almost brought down the global banking system, and with the worst recession since the 1930s. In London, Prospect spoke to Bernanke about the state of the economy in the US, whether the European Union has treated Greece fairly and Britain’s controversial role in his efforts to stabilise the financial system.
When asked whether George Osborne should be credited with achieving growth in the UK, Bernanke said: “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 short-term growth to political leaders—not that political decisions aren’t important, but in the short run other factors are probably more important.”
The Shadow Chancellor John McDonnell has suggested that the Bank’s mandate should be widened to be more similar to the Fed’s and include full employment and price stability. Did he agree? “I don’t know much about the politics of the central bank in the UK,” said Bernanke. “It does work for the US. Though I would add that even if the Fed had a single mandate, it probably would not have conducted policy radically differently because throughout the recession and recovery, inflation has been below target.”
Bernanke was critical of the European Central Bank’s (ECB) initial response to the 2008 crisis. “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. Monetary policy is now appropriately aggressive, but because of political opposition it took six years for the ECB to follow the US and the UK in introducing Quantitative Easing (QE) and other aggressive policies.” By “political opposition” did he mean Germany? “Yes, Germany. In the long term, Europe faces some of the same growth issues as the US and the UK, namely adverse demographics—though Europe’s are probably worse—and uncertainty about technological change and productivity growth. So the concerns about long-term growth regarding the US and the UK are, if anything, more serious in Europe.”
Bernanke was largely responsible for implementing QE. How does that experiment look now? “It isn’t over but I think at this point it looks pretty good. 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.”
Has one consequence of QE been the pushing up of asset values and increasing inequality? “It remains to be seen. Those who don’t like QE have decided they don’t like QE. 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. 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 there’s a substantial overlap between those groups.”
Has Europe treated Greece too harshly? “In a narrow sense, what Europe has done is to 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. 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.”
Britain played an important role during the financial crisis, notably during the attempt to find a buyer for troubled investment bank Lehman Brothers. Barclays wanted to buy Lehman but the Financial Services Authority (FSA) refused to ratify the acquisition. Does some blame for Lehman’s collapse lie with Britain? “In a narrow sense, yes,” replied Bernanke, “because Barclays had expressed an interest in buying Lehman 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.
“However, 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 Lehman’s bad assets essentially on a British balance sheet—which was at least understandable.” He added that the Lehman collapse prompted necessary reforms. “Congress was not going to act until some company failed and the panic got sufficiently bad. At the time we were trying desperately to save the company.”
Bernanke had warm words for Britain’s swift response to the Northern Rock crisis. For this he credits Britain’s parliamentary system. “Britain responded more effectively and quickly in the fall of 2008 than the US did because the government was able to work together, and find an acceptable solution over a weekend. While in the US, it was a long contentious debate.” How will Gordon Brown be judged by history? “From my perspective Brown was very effective. The British were the first to implement a comprehensive response to the fragility of the banking system.”
The economic downturn has seen the rise of populist movements. Was Bernanke worried by such populism? “I am, yes. It was a predictable outcome. Populists have always been distrustful of central banks, particularly in the US. Various populist movements prevented the creation of the central bank in the US until 1913. But while the recession no doubt helped to trigger some of the recent upsurge in populist feelings, they also originate in the longer-term trend towards inequality, frustrations about globalisation and technological change as well as changes in communications media like the internet. And it is not just an American phenomenon.”
Did that cause problems in implementing policy? “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 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.”
Have regulations been strengthened enough? “I think there’s been a great deal of progress. 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, the underlying philosophy of oversight has switched from what we call micro-prudential, which is institution-oriented oversight, to macro-prudential, 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.”
How is the recovery going in the US? “Since 2009 the Fed 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. 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. 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. 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.”
What about Larry Summers’s contention that the US economy is in the grip of secular stagnation. “Secular stagnation is not the same thing as slow long-term growth. There’s a point of view associated with Robert Gordon [who spoke to Prospect last year], 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.
“The secular stagnation thesis is more extreme. 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. 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. 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.”
The Queen famously asked a group of economists in 2009 why they hadn’t seen the crisis coming. What would he have replied? “I would have said that the reason the crisis was so severe was 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. 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.”
