Federal Reserve Chairman Ben S. Bernanke said officials must act strongly to overcome a financial crisis and that the central bank’s emergency authority helped stem the 2008 banking panic.
“Policy makers must respond forcefully, creatively, and decisively to severe financial crises,” Bernanke said last night in a speech in Washington. While Bernanke didn’t comment on congressional proposals to curtail emergency powers, he said programs created under the authority helped the Fed “restore the flow of credit to American families and businesses.”
The former Princeton University economics professor and Great Depression historian won a second four-year term in a 70-30 Senate vote in January, as supporters who credited his actions to counter the crisis and recession prevailed over opponents saying he failed to prevent them. Bernanke yesterday focused on the Fed’s actions during the crisis.
The notion that “economic prosperity depends on financial stability” was less understood during the Depression, Bernanke, 56, said in at a dinner hosted by the Center for the Study of the Presidency and Congress, which gave him its annual Hamilton Award for government leadership.
The $700 billion Troubled Asset Relief Program, the financial rescue passed by Congress in 2008, “was far from perfect legislation, but it was essential for preventing an imminent financial collapse,” Bernanke said.
Bernanke didn’t comment on the outlook for the economy or interest rates. He is scheduled to testify on April 14 before Congress’s Joint Economic Committee.
The Fed chief spoke after a video featuring interviews with Treasury Secretary Timothy Geithner and Fed Vice Chairman Donald Kohn, who worked closely with Bernanke during the financial crisis. In the video, taped last month, Kohn, who will retire in June after four decades at the Fed, said that while the economy is expanding, “we’re not out of the woods.”
Former Fed Chairman Paul Volcker, who raised interest rates as high as 20 percent in the early 1980s to subdue inflation, went on stage to introduce Bernanke, saying history books will mark his tenure at the Fed a “watershed” in the institution’s history. While “inevitable” questions will be raised about the Fed’s actions, Volcker said the financial system has been “stabilized” and the economy is recovering.
Some of those questions were raised yesterday by a former president of the Federal Reserve Bank of St. Louis, William Poole.
“The Fed did not provide assistance to all on an equal basis but tilted the playing field,” Poole said in remarks prepared for a lecture at the University of Delaware, where he is a scholar in residence. “Why should the Fed have had a program to buy commercial paper from large corporations and no program to help small businesses starved for funds?”
The Fed’s program to purchase $1.25 trillion in mortgage-backed securities issued by government-sponsored enterprises probably contributed to the demise of the market for non-government mortgage-backed securities and will “complicate monetary policy in the years ahead,” Poole said.
“Much more research is necessary to determine whether the Fed made the right choices; clearly, I have my doubts,” said Poole, 72. He was president of the St. Louis Fed from 1998 until retiring from the post in March 2008, the month that Bear Stearns collapsed.