Ben Bernanke On Financial Crisis: Federal Reserve Employed 'The Best Of Bad Options'

Ben Bernanke said the Federal Reserve responded to the financial crisis with "the best of bad options."

WASHINGTON — Chairman Ben Bernanke said Friday that the Federal Reserve was left with few good options when it stepped in to shore up the largest U.S. financial institutions during the 2008 crisis.

Bernanke defended the central bank's actions to support insurance giant American International Group and help with the sale of investment bank Bear Stearns, during a speech to a New York conference examining the crisis.

While there were risks associated with that support, Bernanke said that the billions of dollars in loans the Fed provided were backed by adequate collateral and taxpayers did not lose money. And he noted that the Fed and other U.S. regulators are better positioned to deal with a crisis because Congress passed an overhaul of financial regulations in 2010.

"The Federal Reserve's responses to the failure or near failure of a number of systemically critical firms reflected the best of bad options, given the absence of a legal framework for winding down such firms in an orderly way in the midst of a crisis – a framework we now have," Bernanke said.

Some have criticized the Fed for helping rescuing those institutions rather than letting them fail. They said the Fed sent a message: banks could expect the government to bail them out after taking extraordinary risks that threatened the larger financial system.

In his speech, Bernanke disputed this view. And he said the regulatory overhaul gave the Fed new powers to wind down those institutions without threatening the larger financial system.

Bernanke's speech didn't address the current state of the economy or the Fed's recent policy action to boost growth. But he did emphasize that the Fed's regulatory duties are just as important as that mission.

"Going forward, for the Federal Reserve as well as other central banks, the promotion of financial stability must be on equal footing with the management of monetary policy as the most critical policy priorities," Bernanke said.

After the speech, Bernanke was asked whether the Fed's low benchmark interest rate helped fuel the housing bubble. The question was directed at policies under former Chairman Alan Greenspan., who preceded Bernanke at the Fed.

Bernanke disagreed but said regulators must pay close attention to the financial system when interest rates are low. The comment was Bernanke's only reference to interest rate policies.

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AP Business Writer Christina Rexrode in New York contributed to this report.

Comments

[Jock4uni]

06:50 PM on 04/24/2012

During 2004 and 2005, Alan Greenspan (the then Fed Chairman) was repeatedly arguing with the many of the well-respected economists that the U.S. real estate (RE) price rise was merely a "FROTH" and "NOT a BUBBLE.” To this day, Greenspan has never accepted his responsibility for NOT taking actions on U.S. interest rate that may have significantly affected the RE bubble formation during 2006.

That eventually led to full-fledged RE bubble formation & collapse by late 2006 (during the 1st. year of Fed Chairmanship of Ben Bernanke) and the eventual global financial meltdown and the beginning of U.S. 2nd. Great Depression in October 2008 whose effects are being felt continuously by the middle and lower-income American families to this day! While the super rich and multi-national, global corporations are realizing unprecedented profits and growth.

[wyattc71]

06:02 PM on 04/13/2012

You think!!!

[romus]

06:01 PM on 04/13/2012

U.S. Heading For Financial Trouble

http://www.cbsnews.com/stories/2007/03/01/60minutes/main2528226.shtml?tag=mncol;lst;1

Bernanke's Failed CNBC Predictions

http://dailybail.com/home/a-movement-by-the-people-to-prevent-the-reappointment-of-the.html

Eliot Spitzer: "The Federal Reserve Is A Ponzi Scheme" (Inside The Fed's Secret Pile Of Trash With Ratigan, Spitzer & Toure

http://dailybail.com/home/eliot-spitzer-the-federal-reserve-is-a-ponzi-scheme-inside-t.html

Marvin Barth Says QE2 Won't Fix `Underlying Problems'

http://www.youtube.com/watch?v=NYkvuqHXD-U

9 Reasons Why Quantitative Easing Is Bad For The U.S. Economy

http://theeconomiccollapseblog.com/archives/9-reasons-why-quantitative-easing-is-bad-for-the-u-s-economy

The Hammer Gets Hit By A Tree

http://dailybail.com/home/the-hammer-gets-hit-by-a-tree.html

Quantitative Easing Explained

http://www.youtube.com/watch?v=PTUY16CkS-k

Housing, the most manipulated market in the world

http://www.newworldparty.org/2011/04/housing-most-manipulated-market-in.html

The American Dream By The Provocateur Network

http://www.youtube.com/watch?v=ZPWH5TlbloU

U.S. National Debt Clock

http://www.usdebtclock.org/

Punk Economics: Lesson 3

http://www.youtube.com/watch?v=wDFgtb0by4E&feature=channel

[SeekingClarity]

04:38 PM on 04/13/2012

"The Federal Reserve's responses to the failure or near failure of a number of systemically critical firms reflected the best of bad options..."

Perhaps, but deliberately choosing one bad option after another (when there were better choices) rather forced the government's hand.

It seems strange to me though that too big to fail organizations have grown even bigger, and the partying pilots who steered into the iceberg are still getting bonuses while the passengers are left to the sharks.

[fbros]

04:38 PM on 04/13/2012

The guy is a fraud. No one has been put in jail for this total failure of the U.S. financial system. Which could be the biggest crime of the century. And, the world wonders, where is the "change" Obama? What is that green stuff you are jamming in your pocket. After your presidency, are you going to start a Hedge Fund? Like Bill Clinton?

[Jerry Lammers]

03:32 PM on 04/13/2012

If the Fed. hadn't failed in 2006 and 2007, there would have been no CRISIS in 2008! It's a dreadful case of the arsonist putting out his own fire.

[Janzee12000]

03:00 PM on 04/13/2012

You know Ben, I see that you were pressed at the time and you had no 'good' options. But, to say that the taxpayer did not 'lose' money does not make the taxpayer feel better about your handling of this crisis. The fact that the taxpayer had to be used at all indicates that there are 'fundemental' problems yet to be solved and we the taxpayer want to know what you are doing to PROTECT us from this happening again. We deserve as much protection as do 'profits'...

[fbros]

04:41 PM on 04/13/2012

He is lying when he said the taxpayer did not loose money. We are still looseing money. The bank borrows taxpayer money at zero percent, then buys T-Bills that pay two or three percent. Screwing the taxpayer at this moment.

[SeekingClarity]

04:48 PM on 04/13/2012

The Fed's lost interest payments contribute to the deficit, plus retirees and others who manage to have some savings in the bank (and are trying to make them last) are getting robbed by interest rates that typically lag inflation. Why should banks bother paying you for the use of your money when there is Free Money (for banks) at the Fed?