The story of the year was a weak economy that could have been much, much weaker. How the mild-mannered man who runs the Federal Reserve prevented an economic catastrophe.
Person of the Year 2009 'Too big to fail is one of the biggest problems we face in this country.'BACK NEXT View All TIME's Managing Editor Richard Stengel talks with Federal Reserve Chairman Ben Bernanke during an interview in Washington, DC
The Fed chairman sat down with TIME managing editor Richard Stengel, Time Inc. editor-in-chief John Huey, assistant managing editor Michael Duffy and senior correspondent Michael Grunwald on Dec. 8 for a conversation about everything from the state of the economy to the contents of his wallet. Some excerpts:
TIME: Explain for general-interest readers what it is that you've done during the past year that has impinged on their lives, for better or for worse.
Ben Bernanke: Virtually every large financial firm in the world was in significant danger of going bankrupt. And we knew — and I knew — based on my experience as a policymaker, I knew that if the global financial system were to collapse, in the sense that many of the largest firms were to fail, and the financial sector essentially stopped functioning, I knew that the implications of that for the global economy would be catastrophic. We would be facing, potentially, another depression of the severity and length of the Depression in the 1930s. And that this was not at all hypothetical.
(Watch the video "Why TIME Chose Ben Bernanke.")
There is irony here, that here's this man who spends his life distinguishing himself studying economic history — and then one day you wake up and realize that you're at the center of economic history in a really unusual chapter.
Well, I certainly didn't anticipate these events when I came to Washington in 2002. No question about it. And when I became chairman in 2006, I hoped that my main objectives would be improving the management, communication and monitoring policy. We were certainly aware of the risks of financial crisis, but one as large and as dangerous as this one, I certainly did not anticipate. I wish I had, but I didn't.
(See pictures of Ben Bernanke's life from childhood to chairmanship.)
This year, you've stepped out a little more than past Fed chairmen. Are you still convinced that being more communicative about the Fed and the things it does is the right approach?
Yes, I am. In the past, Federal Reserve chairmen have not generally gone directly to the public. But I felt, not only was it an issue of understanding what the Fed was doing, but I believed that a lot of the fear and uncertainty that was apparent in the surveys was the result of the fact that people didn't understand what was happening in the economy or happening to our financial system. And I thought it would be helpful, as the chairman of the Federal Reserve, to go out and talk directly to the public — try to explain what we were doing, why we were doing it, what was likely to happen in the future. And I think it may have helped some. It's true that the Federal Reserve faces a lot of political pressure and is unpopular in many circles. The Federal Reserve's job is to do the right thing, to take the long-run interest of the economy to heart, and that sometimes means being unpopular. But we have to do the right thing.
The money the Federal Government takes in [and] what we spend on entitlements — it's basically the same. Everything else we have to borrow for. There are a lot of people saying that it's not sustainable, that one of the only solutions is some kind of tax — a sales tax, a value-added tax. Would you be in favor of any of those alternatives?
The way I put this before Congress is that the one law I strongly advocate is the law of arithmetic. That law of arithmetic says that if you are a low-tax person, then ... you are responsible for finding ways of saving on expenditure so that you don't have enormous imbalances between revenues and spending. And by the same law of arithmetic, if you are somebody who believes that government spending is important, and you are for bigger and more spending and bigger programs, then it's incumbent upon you to figure out where the revenues are going to come from to meet that spending. So again, I think that's Congress's main responsibility. I have spoken about deficits, and I think deficits are important because they address broad economic and financial stability. We need to talk about that. But in terms of specifics about how to get to fiscal balance, that's the elected officials' responsibility.
(See pictures of the Federal Reserve Bank's history.)
You said that banks were convalescent still. Can you talk to us a little more about what that means?
The banks have been stabilized. They've raised a good deal of capital, so they're in much better shape than they were. They are lending, but they are not lending enough to support a healthy recovery. One important reason for that is that given their losses, given what they've been through, they're being very conservative in the face of what is still a very weak economy. As bank supervisors, we have a difficult challenge. We have told the banks very clearly that we want them to make loans to creditworthy borrowers. It's in the interest of the banks, it's in the interest of the economy, and, of course, it's in the interest of the borrowers for those loans to get made. But the problem is that we got into trouble in the first place by banks making loans that couldn't be repaid, so we don't want banks to make bad loans. Therefore, we are trying to work with banks to make sure that they are able to make as many good loans as possible, that they have enough capital, that they have enough short-term funding and that the examiners and the regulators who work with the banks are not unduly restricting the loans that they make. We want to work with the banks to make sure that they balance the appropriate prudence and caution against the need to make good loans for the economy and for their own profits.
Do bankers make too much money?
I think that bankers ought to recognize that the government and the taxpayer saved the financial system from utter collapse last year. And in recognizing that, I would think that bankers ought to look in the mirror and decide that perhaps there should be some more restraint in how much they pay themselves, given what the government and the taxpayer did to protect the system.
(See pictures of Ben Bernanke's office.)
Goldman Sachs and Morgan Stanley paid the money back, but they became bank holding companies, so they are regulated in some way by the Fed. Right?
Yes. So in the longer term, I think, if we had these tools, [we could] get rid of too big to fail, which I think is an enormous problem. I want to be very, very clear: too big to fail is one of the biggest problems we face in this country, and we must take action to eliminate too big to fail.
Were there days where you woke up and you thought, What am I not thinking of that we could be doing?
I think one of the lessons of the Depression — and this is something that Franklin Roosevelt demonstrated — was that when orthodoxy fails, then you need to try new things. And he was very willing to try unorthodox approaches when the orthodox approach had shown that it was not adequate.
Person of the Year 2009 'Too big to fail is one of the biggest problems we face in this country.'BACK NEXT View All TIME's Managing Editor Richard Stengel talks with Federal Reserve Chairman Ben Bernanke during an interview in Washington, DC
The Fed chairman sat down with TIME managing editor Richard Stengel, Time Inc. editor-in-chief John Huey, assistant managing editor Michael Duffy and senior correspondent Michael Grunwald on Dec. 8 for a conversation about everything from the state of the economy to the contents of his wallet. Some excerpts:
TIME: Explain for general-interest readers what it is that you've done during the past year that has impinged on their lives, for better or for worse.
Ben Bernanke: Virtually every large financial firm in the world was in significant danger of going bankrupt. And we knew — and I knew — based on my experience as a policymaker, I knew that if the global financial system were to collapse, in the sense that many of the largest firms were to fail, and the financial sector essentially stopped functioning, I knew that the implications of that for the global economy would be catastrophic. We would be facing, potentially, another depression of the severity and length of the Depression in the 1930s. And that this was not at all hypothetical.
(Watch the video "Why TIME Chose Ben Bernanke.")
There is irony here, that here's this man who spends his life distinguishing himself studying economic history — and then one day you wake up and realize that you're at the center of economic history in a really unusual chapter.
Well, I certainly didn't anticipate these events when I came to Washington in 2002. No question about it. And when I became chairman in 2006, I hoped that my main objectives would be improving the management, communication and monitoring policy. We were certainly aware of the risks of financial crisis, but one as large and as dangerous as this one, I certainly did not anticipate. I wish I had, but I didn't.
(See pictures of Ben Bernanke's life from childhood to chairmanship.)
This year, you've stepped out a little more than past Fed chairmen. Are you still convinced that being more communicative about the Fed and the things it does is the right approach?
Yes, I am. In the past, Federal Reserve chairmen have not generally gone directly to the public. But I felt, not only was it an issue of understanding what the Fed was doing, but I believed that a lot of the fear and uncertainty that was apparent in the surveys was the result of the fact that people didn't understand what was happening in the economy or happening to our financial system. And I thought it would be helpful, as the chairman of the Federal Reserve, to go out and talk directly to the public — try to explain what we were doing, why we were doing it, what was likely to happen in the future. And I think it may have helped some. It's true that the Federal Reserve faces a lot of political pressure and is unpopular in many circles. The Federal Reserve's job is to do the right thing, to take the long-run interest of the economy to heart, and that sometimes means being unpopular. But we have to do the right thing.
The money the Federal Government takes in [and] what we spend on entitlements — it's basically the same. Everything else we have to borrow for. There are a lot of people saying that it's not sustainable, that one of the only solutions is some kind of tax — a sales tax, a value-added tax. Would you be in favor of any of those alternatives?
The way I put this before Congress is that the one law I strongly advocate is the law of arithmetic. That law of arithmetic says that if you are a low-tax person, then ... you are responsible for finding ways of saving on expenditure so that you don't have enormous imbalances between revenues and spending. And by the same law of arithmetic, if you are somebody who believes that government spending is important, and you are for bigger and more spending and bigger programs, then it's incumbent upon you to figure out where the revenues are going to come from to meet that spending. So again, I think that's Congress's main responsibility. I have spoken about deficits, and I think deficits are important because they address broad economic and financial stability. We need to talk about that. But in terms of specifics about how to get to fiscal balance, that's the elected officials' responsibility.
(See pictures of the Federal Reserve Bank's history.)
You said that banks were convalescent still. Can you talk to us a little more about what that means?
The banks have been stabilized. They've raised a good deal of capital, so they're in much better shape than they were. They are lending, but they are not lending enough to support a healthy recovery. One important reason for that is that given their losses, given what they've been through, they're being very conservative in the face of what is still a very weak economy. As bank supervisors, we have a difficult challenge. We have told the banks very clearly that we want them to make loans to creditworthy borrowers. It's in the interest of the banks, it's in the interest of the economy, and, of course, it's in the interest of the borrowers for those loans to get made. But the problem is that we got into trouble in the first place by banks making loans that couldn't be repaid, so we don't want banks to make bad loans. Therefore, we are trying to work with banks to make sure that they are able to make as many good loans as possible, that they have enough capital, that they have enough short-term funding and that the examiners and the regulators who work with the banks are not unduly restricting the loans that they make. We want to work with the banks to make sure that they balance the appropriate prudence and caution against the need to make good loans for the economy and for their own profits.
Do bankers make too much money?
I think that bankers ought to recognize that the government and the taxpayer saved the financial system from utter collapse last year. And in recognizing that, I would think that bankers ought to look in the mirror and decide that perhaps there should be some more restraint in how much they pay themselves, given what the government and the taxpayer did to protect the system.
(See pictures of Ben Bernanke's office.)
Goldman Sachs and Morgan Stanley paid the money back, but they became bank holding companies, so they are regulated in some way by the Fed. Right?
Yes. So in the longer term, I think, if we had these tools, [we could] get rid of too big to fail, which I think is an enormous problem. I want to be very, very clear: too big to fail is one of the biggest problems we face in this country, and we must take action to eliminate too big to fail.
Were there days where you woke up and you thought, What am I not thinking of that we could be doing?
I think one of the lessons of the Depression — and this is something that Franklin Roosevelt demonstrated — was that when orthodoxy fails, then you need to try new things. And he was very willing to try unorthodox approaches when the orthodox approach had shown that it was not adequate.