Regional President Speech

Ben Bernanke: Solving a Crisis, Changing the Fed Mary C. Daly, President and Chief Executive Officer Federal Reserve Bank of San Francisco Panel Honoring Ben Bernanke’s Contributions to Economics San Francisco, California January 5, 2025 10:15 a.m. PT Remarks as prepared for delivery. INTRODUCTION Good morning. It’s an honor to be part of this esteemed panel celebrating Ben Bernanke’s contributions to economics. I will discuss Ben’s time as Chair of the Federal Reserve.1 Let me begin by taking you back to March 2009. We were deep into a financial crisis that many feared would turn into another Great Depression. Jobs were vanishing by the millions, foreclosures were devastating neighborhoods, and the country was teetering, consumed by uncertainty and fear. Trust in institutions was fragile. Hope felt distant. And then something remarkable happened. Ben Bernanke, Chair of the Federal Reserve, stepped away from policy meetings, discussions with financial markets, CEOs, and global leaders, and sat for an interview with 60 Minutes. The interview was double-length, largely unscripted, and reached 13 million viewers.2 For many watching, it was their first encounter with the person at the center of the Federal Reserve’s response to the crisis. The Chair explained the actions the Fed had taken and why they were critical for preserving jobs, homes, businesses, and communities. Why they mattered for Main Street, not just Wall Street. What people saw that evening, was a calm, competent, and steady voice working to restore economic stability and prosperity for the nation. They saw Ben Bernanke: a real person working for real people. 1 These views are my own and do not necessarily reflect those of the Federal Reserve Board or the Federal Open Market Committee. 2 Bauder (2009). 1 EARLY DAYS Now, the thing that we know as economists and students of the Fed, is that the words Ben spoke that evening to inform a frightened nation, flowed from a foundation of research he had been doing for years. As Mark discussed, Ben had long been a student of the Great Depression and how the Fed could use its tools more effectively to ensure economic and financial stability. He had also been a prominent proponent of greater openness from the Federal Open Market Committee (FOMC), arguing that more direct and transparent Fed communication would improve policy effectiveness, and be more consistent with the democratic principles of our nation. So, when he became chair in February 2006, he immediately put some of these ideas into practice. One of the first changes he made was in the speaking order at the FOMC meetings. Chairman Greenspan used to begin the FOMC policy discussion by telling participants what he was thinking. Committee members would then follow and share their views. Ben flipped the script. He asked participants to go first, and then he shared his views, generally preceded by a summary of what he had just heard from his colleagues.3,4 Now this may sound insignificant, but for an organization steeped in hierarchy it was a sea change. It invited more interactive discussions, laid the groundwork for competing ideas, and fostered more vigorous debate. Most importantly, it built a practice, a commitment to collaboration and reasoned disagreement. It changed the culture. By his second meeting, Ben had momentum, and he made another change. He announced that Governor Don Kohn would lead the Federal Reserve’s first subcommittee on FOMC communications. The committee would be tasked with considering ways to increase the transparency and clarity of FOMC decisions and intentions. As the now published transcripts reveal, under Ben’s leadership this committee discussed adopting an explicit inflation target,5 improving FOMC post-meeting statements, and putting out more regular participant forecasts. Each of these ideas, raised in the early months of Ben’s tenure, was eventually adopted and continue to serve us well. 3 FOMC Meeting Transcript, March 27-28, 2006. 4 Bernanke (2016). 5 See FOMC Meeting Transcript, March 20-21, 2007. Bernanke had worked through the potential consequences of inflation targeting (see, for example, Bernanke and Mishkin (1997). 2 Thinking back on those early days when Chairman Bernanke first took office, what I remember most is a new sense of camaraderie. That everyone could offer their best thinking and ideas, debate them to the fullest, and find a solution that served the nation and our mission. In other words, long before we had a financial crisis, Ben was changing the Fed. CRISIS MANAGEMENT We all know what happened next. By Ben’s second year as Chairman, cracks in the subprime mortgage market started to emerge and spill over to the broader economy. In the summer of 2007, several investment firms suspended withdrawals from their subprime mortgage funds, noting that the assets could no longer be valued. Markets panicked. Ben called two emergency meetings of the FOMC. The committee first pledged liquidity to facilitate the orderly functioning of financial markets.6 They then issued a statement noting that the financial and economic situation had worsened and began lowering the federal funds rate at the next meeting. By the end of the year the Fed had opened the first of many lending facilities, and a currency swap line with other central banks.7 The actions taken in 2007 were well within the normal course of business for the Fed. Providing liquidity to depository institutions with good collateral, facilitating dollar liquidity internationally, and easing monetary policy to support the economy. But as the crisis unfolded, it wasn’t enough. And Ben knew it. Years of research helped him recognize the risks to the financial system and the economy. He could see the perilous situation we were in. So he did more. NO HOLDS BARRED Ben took extraordinary actions to prevent the crisis from turning into another Great Depression. He took these actions against intense public scrutiny and no shortage of critics. It was not the world where he was celebrated. It was the world where he was questioned. He took them while angry at the firms that had irresponsibly dragged the nation into the crisis.8 And he took them knowing that they were largely untested. 6 Board of Governors (2007b, c). 7 Board of Governors (2007a). 8 AIG for example, which Bernanke specifically discusses in Bernanke (2015). 3 But he took them anyway, recognizing that the cost of doing nothing far outweighed the cost of trying. The actions fell into three categories: extensive use of the Fed’s emergency lending authority, asset purchases or quantitative easing, and forward guidance, a specific type of Fed communication. I will touch on each. Facilities Let me start with the emergency facilities. Counterparty risk had spread throughout the economy and paralyzed the financial system, and banks alone were not able to fully facilitate liquidity provision. So, the Fed invoked a rarely used power—Section 13(3) of the Federal Reserve Act—to serve as the lender of last resort to nonbank institutions and nonfinancial borrowers in unusual and exigent circumstances.9 Over the crisis, the Fed opened six of these facilities supporting funding needs for primary securities dealers, money market mutual funds, commercial paper markets, and purchasers of securitized loans.10 These facilities were lifelines. They provided relief to disrupted markets and ensured that financial frictions didn’t spiral into a full-blown collapse. But some damage had already occurred, and that is where unconventional policies came in. Quantitative Easing By December 2008, the federal-funds rate was essentially at zero. There was no more room for conventional policy easing. But the economy was in great need. Job loss and unemployment were rising and businesses were closing.11 So, the Fed began Large-Scale Asset Purchases or Quantitative Easing (QE). QE allowed the Fed to use its balance sheet as a policy tool. Although new to the Fed’s tool kit, it was not a new concept to Ben. Ben had studied the theoretical and empirical underpinnings of QE as a method of supporting the economy when the policy rate reached its effective lower bound, as in Japan.12 He recognized its theoretical limitations, but believed it could be effective in practice. During the course of the financial crisis and its aftermath, the Federal Reserve completed three rounds of QE. 9 For the current version of Section 13(3) of the Federal Reserve Act along with a list of previous amendments, see Federal Reserve Board - Section 13. Powers of Federal Reserve Banks. 10 The Federal Reserve provided short-term liquidity to banks and other depository institutions and other financial institutions through the Term Auction Facility, Primary Dealer Credit Facility, and Term Securities Lending Facility. It further provided liquidities to borrowers via the Commercial Paper Funding Facility, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Money Market Investor Funding Facility, and the Term Asset-Backed Securities Loan Facility. See Federal Reserve Board - Crisis response. 11 The Bureau of Labor Statistics (2008) reported net job losses of 533,000 in November 2008, the most since 1974. 12 Bernanke, Reinhart, and Sack (2004). 4 People have different views on how well it worked, but for the millions of Americans who needed the economy to get better, QE was successful. But as we all know, the job still wasn’t done. Forward Guidance Fully recovering from a financial crisis is challenging and takes a protracted period of monetary policy support. Holding rates lower for longer. The question was how to ensure that markets and the broader public understood this and set their expectations accordingly. After all, as Ben had long known, expectations play an important role in determining financial conditions and behavior.13 The FOMC had already released forward guidance in its December 2008 FOMC statement.14 In 2009, policymakers strengthened that language and added long-run forecasts for economic growth, inflation, and the unemployment rate to their public projections. 15,16 In 2012, the FOMC became even bolder. The committee provided very specific conditions under which it would first consider raising the policy rate. This state-based guidance was very effective in lowering long-term interest rates and easing financial conditions.17 But it was not easy to do. Policymakers do not like having their hands tied. And many worried that this would undermine credibility and even risk accelerating inflation. But Ben worked with his FOMC colleagues and fashioned a plan that ultimately did its job. Coming out of the recession, the U.S. economy grew significantly faster than its peers in the eurozone, the U.K. or Japan. The expansion that began during Ben’s term as Fed Chairman turned into the longest in U.S. history. GROUNDWORK FOR A BETTER FUTURE As the crisis abated and the recovery began, Ben continued to lay the groundwork for a better and more transparent Fed. 13 Bernanke (2004). 14 Board of Governors (2008). 15 Board of Governors (2009a). 16 Board of Governors (2009b). 17 A prior example of “date-based forward guidance” was introduced in August 2011, which explicitly stated how long the policy rate was likely to remain at the zero lower bound. 5 In April 2011, he conducted the Fed’s first ever post-FOMC press conference. In January 2012, the Fed formalized its 2 percent inflation goal. It also released its first annual Statement on Longer-Run Goals and Monetary Policy Strategy.18 And it added the now famous “dot plot” to the Summary of Economic Projections (SEP). Individually, these were groundbreaking changes. Together, the new policies and approaches to policymaking that began in 2006 constituted a major shift for a century-old institution. To the outside world, Ben’s legacy is built on financial rescue and the tools that made it possible: Fed facilities, QE, forward guidance, an inflation target, better communication...I could go on. Ben rightfully gets credit for saving the world. There’s another part of his legacy that is worth celebrating. It is his imprint on the Federal Reserve. The practice of good-faith debate. The commitment to transparency. The idea that trust is our most important tool, and integrity our most important value. And more than any one program or policy, Ben imbued the Fed with a sense of dynamism. Of innovation, of agility, of the ability to meet what is in front of us with our best thinking. He changed our institutional DNA, allowing us to move slowly, gradually when it’s appropriate. To move swiftly and take smart risks when needed. In the end, during his tenure as Chair, he solved a financial crisis, he put us on a path toward the longest expansion in our history, and, maybe as importantly, he changed a culture. That is his legacy. So, Ben, departing from the normal rules of Fed engagement, I will say on behalf of all of us at the Federal Reserve, current and former, thank you. 18 Federal Open Market Committee (2024). 6 REFERENCES Bauder, David. 2009. “60 Minutes Gains Viewers with Key Stories.” Associated Press (March 24), accessed via The (Spokane) Spokesman Review. Bernanke, Ben S. 2004. “Gradualism.” Speech presented at economics luncheon cosponsored by the Federal Reserve Bank of San Francisco (Seattle Branch) and the University of Washington, Seattle, May 20. Bernanke, Ben S., 2015. The Courage to Act: A Memoir of a Crisis and Its Aftermath. New York, NY: W.W. Norton & Company. Bernanke, Ben S. 2016. “Former Fed Chairman Ben Bernanke Reflects on his Career, the Economy, and the Way Forward.” The Economic Club of Washington, DC, February 10 interview with David Rubenstein. Bernanke, Ben S., and Frederic S. Mishkin. 1997. “Inflation Targeting: A New Framework for Monetary Policy?” Journal of Economic Perspectives 11(2), pp. 97–116. Bernanke, Ben S., Vincent R. Reinhart, and Brian P. Sack. 2004. “Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment.” Brookings Papers on Economic Activity 2004(2), pp. 1–78. Board of Governors of the Federal Reserve System. 2007a. “Federal Reserve and Other Central Banks Announce Measures Designed to Address Elevated Pressures in Short-term Funding Markets.” Press release, December 12. Board of Governors of the Federal Reserve System. 2007b. “FOMC Statement.” Press release, August 17. Board of Governors of the Federal Reserve System. 2007c. “FOMC Statement: The Federal Reserve Is Providing Liquidity to Facilitate the Orderly Functioning of Financial Markets.” Press release, August 10. Board of Governors of the Federal Reserve System. 2008. “FOMC Statement.” Press release, December 16. Board of Governors of the Federal Reserve System. 2009a. “FOMC Statement.” Press release, March 18. Board of Governors of the Federal Reserve System. 2009b. “Summary of Economic Projections.” January 27-28. Board of Governors of the Federal Reserve System. 2011. “FOMC Statement.” Press release, August 9. 7 Bureau of Labor Statistics. 2008. “The Employment Situation: November 2008.” Data release, December 5. Federal Open Market Committee. 2024. “Statement on Longer-Run Goals and Monetary Policy Strategy.” Adopted effective January 24, 2012; as reaffirmed effective January 30, 2024. 8

Mary C. Daly (2025, January 4). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20250105_mary_c_daly

@misc{wtfs_regional_speeche_20250105_mary_c_daly,
  author = {Mary C. Daly},
  title = {Regional President Speech},
  year = {2025},
  month = {Jan},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20250105_mary_c_daly},
  note = {Retrieved via When the Fed Speaks corpus}
}