News Column

Ex-Fed Chief Tells Of Crisis: Bernanke Speaks At Chamber Dinner

May 29, 2014

By P.J. Reilly, Intelligencer Journal/Lancaster New Era, Pa.

May 29--This is the best advice Ben Bernanke ever got:

"Don't ever do anything that you can't explain to your worst critic," he told a crowd of nearly 2,500 Wednesday night at the Lancaster Chamber of Commerce & Industry's 142nd annual dinner in the Lancaster County Convention Center.

The keynote speaker said he kept that sentiment in his mind at all times during his two terms as chairman of the Board of Governors of the Federal Reserve System from 2006-2014.

"Whatever we did, I knew I was going to have to explain it to people who were not sympathetic to our cause," he said.

While at the helm of the Federal Reserve, Bernanke had to cope with the economic recession, bank bailouts, problems in the housing and mortgage markets and other crises.

A student of the Great Depression, Bernanke called the financial troubles of 2007-08, which predicated the great recession of 2009, "the worst financial crisis in American history."

During his 13-minute speech, he talked about the Fed's motivations in letting giant investment bank Lehman Brothers fail, but stepping in to bail out insurance company AIG.

Bernanke said many people have accused the Fed of favoritism in its actions.

In reality, he said, it came down to basic economics.

In fact, he said the Fed in September 2008 tried to save Lehman Brothers out of fear the company's collapse would create financial instability - which it did.

"Our concern was not about Lehman Brothers, it was not about the employees of Lehman Brothers or the shareholders," he said. "Our concern was, our fear was, that the collapse of this firm would help create so much panic in the market that it would spread into the broad economy. So we tried very, very hard to find a solution for Lehman."

In the end, however, there was no solution.

Lehman had too much debt and no collateral. So it went bankrupt.

"The consequences were as we expected," he said. "The market seized up, there was a tremendous panic."

Before the year was out, the Fed then used $85 billion in government funds to bail out AIG, which also was on the verge of collapse, due to a mountain of debt backed by subprime loans.

"The two situations were fundamentally different," Bernanke said. "Lehman was insolvent. It didn't have enough assets to collateralize a loan ....

"AIG, on the other hand, was a big insurance company that had strong insurance subsidiaries that were worth something on the market."

Once again, he said, the fear was that if AIG collapsed, the ripple effect on the economy would be devastating.

That was the message Bernanke took to President George W. Bush and Congress to get government funds for the bailout.

It took time for the plan to work, Bernanke said.

"The fourth quarter of 2008 and the first quarter of 2009 were extremely bad recessionary quarters," he said. "But after that, the Fed, the Treasury, we all worked together and the economy began to recover, and it's been a slow, steady recovery over the last five years."

Looking forward, Bernanke feels optimistic about the future, so long as the country doesn't become complacent and believe that another financial meltdown can't happen here.

"As we've seen, it can," he said.

Following his 13-minute speech, Bernanke then sat down with Tom Baldrige, president and CEO of the Lancaster chamber, for a free-flowing, 45-minute round of questions and answers that covered a broad range of subjects, including Bernanke's advice for Lancaster County.

Bernanke said he sees a diverse business community in the county, which is a good thing.

"Health, education, manufacturing, construction - you want to have a diversified portfolio," he said. "If you have a city that's based on one industry, you're very vulnerable because you can lose it or jobs can be lost."

He also urged the county to develop a solid education system that teaches worthwhile skills needed in the marketplace.

Maintaining the rich cultural heritage that's already here is an imperative, he said.

"Culture is an economic thing," he said. "It affects the economic success of a location.

"So that triumvirate there - skills and education, diversified portfolio in industries, amenities and quality of life - it feels like you're doing a lot of that."


(c)2014 Intelligencer Journal/Lancaster New Era (Lancaster, Pa.)

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Source: Intelligencer Journal/Lancaster New Era (PA)

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