Former Federal Reserve Chairs Ben Bernanke and Janet Yellen made the argument in an essay last week that the Fed has to reduce the long-term effects of the COVID-19 pandemic.
“[The Fed] must ensure that the economic damage from the pandemic is not long-lasting,” they wrote. “Ideally, when the effects of the virus pass, people will go back to work, to school, to the shops, and the economy will return to normal. In that scenario, the recession may be deep, but at least it will have been short.”
To ensure this, the Fed must make credit readily available, Bernanke and Yellen said. And that’s exactly what the Fed announced it will do Monday morning.
Bernanke, who studied the Great Depression in-depth, said in an interview with Marketplace’s Kai Ryssdal that this is “a different problem with different solutions.”
The current downturn is different in two ways from the Great Recession as well, he said. First, it’s starting outside the economy with the COVID-19 pandemic. Second, the economy entered this downturn in a strong position.
“After the 2008 crisis, we did a lot of work to try to strengthen the financial system. And our banks have a lot more capital, they have a lot more liquidity, they’ve been stress tested,” Bernanke said. “As of now — while obviously there’s a lot of financial pain out there — the financial system is holding together. With help from the Federal Reserve and from the Treasury, I’m not really expecting a major financial crisis.”
The important thing, Bernanke said, is that while the economy is effectively shut down, “we don’t lose a lot of our small businesses and we don’t lose a lot of our employment relationships.”
Click the audio player above to hear the interview. A transcript of the full interview follows.
Kai Ryssdal: So you are, as I noted, in the introduction, a scholar of the Great Depression, and I have to ask you, as you sit there now, what are you seeing?
Ben Bernanke: Well, the current situation has a few superficial similarities to the Depression: A very sharp decline in output, more unemployment, stock market coming down. But, basically, it’s a very, very different kind of animal. The depression lasted for 12 years, from 1929 to 1941. We’d have no anticipation that this is going to last anything like that, of course. And the causes of the Great Depression were very different, basically monetary and financial causes and the current situation is due to a pandemic, to a force of nature. So it’s a different problem with different solutions. And, except for the fact that it’s going to cause a lot of pain for a lot of people, it’s a very different kind of phenomenon.
Ryssdal: One of the things you pointed out in a piece you wrote with your successor, Janet Yellen, in the Financial Times a week or so ago, is that this was not yet a financial crisis. The way things are moving, and the actions that the Federal Reserve has taken this morning and in the past — a lot of which you and Dr. Yellen suggested — are you a little more concerned now that the financial system is a little stuck?
Bernanke: Well, there’s certainly some financial stress. This is different from 2008. In 2008, the problems started in the financial system with the bad mortgages, with the loss of confidence in the banking system and other lenders. And then the panic on the financial system then hit the real economy, because there was no credit. Now this situation is quite different in two ways. First of all, the problem is starting outside the financial system — it’s starting, of course, with the pandemic. Most of the problems are in businesses, in restaurants, in dry cleaners and gas stations, small businesses, large businesses, airlines, and that’s where the problem is coming from. Now, of course, to the extent that those businesses are borrowers, if they can’t pay back their loans, that’s going to hurt the financial system. We’re seeing equity prices come down. So it does cause financial stress. The second thing, though, which is the good news, is that after the 2008 crisis, we did a lot of work to try to strengthen the financial system. And our banks have a lot more capital, they have a lot more liquidity, they’ve been stress tested. So, as of now, while obviously there’s a lot of financial pain out there, the financial system is holding together and with help from the Federal Reserve and from the Treasury, I’m not really expecting a major financial crisis. That’s not to say it’s not a serious problem that we need to address.
Ryssdal: Yeah, because nobody needs a minor financial crisis right now, either. There is a story often told: During the financial crisis, you and then Secretary of the Treasury [Henry] Paulson going up to Capitol Hill and, in essence, begging Congress to get its act together to save the American economy. And you talked a lot in your congressional testimony, when you were Chair, of the necessity of fiscal policy makers to step up. How confident are you that Congress figures this out and does something?
Bernanke: Well, I’m pretty confident. I mean, in 2008, what we were asking for was very unpopular, because everybody was mad at the banks, and nobody wanted to help them, even though we felt that preventing the banking system from collapsing was pretty critical for the whole economy. In this case, we’re facing in some sense, an outside enemy — the virus. And although there’s a lot of disagreement on the Hill, I think fundamentally people understand that fiscal policy is going to have to get its act together, or else a lot of people are going to suffer and the economy is going to suffer as well. So, there there have been some hitches. They’ve not yet come to agreement. But I am hopeful, you know, that there will soon be a plan in place that will have many dimensions, including improvement of public health. We really have to make sure that the hospitals have enough beds and enough equipment. If we can’t deal with people who are sick, then that’s the first criterion for getting out of this problem.
Ryssdal: You know, one of the things that you and Secretary [Timothy] Geithner and Secretary Paulson and I talked about a year and a half or so ago, maybe two years, I guess, now, when we did that long interview on the financial crisis was your biggest regret. And what you said to me was, “I regret that we were not able to make people understand how serious things are.” How do you how do you think we’re doing, making people understand how serious this is? We’re fundamentally shutting down large parts of this economy.
Bernanke: Well, I don’t think people are for the most part unaware of what’s going on. A lot of people are staying home, a lot of people are losing their jobs. Some people are teleworking, if they’re lucky still have a job and the ability to do that. In this case, it might be a little easier to explain that strong action is necessary. I think there’s probably still a few skeptics out there. But for the most part, I think people understand that this is a very serious situation. And one we can solve, but we need early action and strong action. I’m hoping to get congressional action soon. And the Fed has been very aggressive, which is good. And if we can get help on the public health side, and tackle this problem, I think we’ll be much better off.
Ryssdal: Does Jay Powell ever call you and say, “Ben, give me your advice”?
Bernanke: He does, once in awhile. Maybe he’s just being nice. I don’t know. He has done me the honor, or the whatever, of resurrecting a lot of the programs that we put together for the financial crisis of 2008. They just announced a whole new set of programs this morning. Many of the things that they put in place are emergency lending programs that were essentially designed during the financial crisis. And as I said, we’re not yet in a financial crisis. But we are in a situation where it’s important to make the credit markets work as well as possible, because we don’t want this period of shutdown to do permanent damage. We need to keep businesses alive, including small businesses. And that means they’ve got to have access to credit or other kinds of assistance so they can make it through this period, come out the other side, and be functioning again. The Fed is all about trying to make the credit markets work well. And again, they’re using many of the same tools that we developed in the in the financial crisis 12 years ago.
Ryssdal: Last thing, then I’ll let you go. Compare and contrast right now versus after Lehman Brothers collapsed. What’s your personal anxiety level?
Bernanke: Well, there’s a very big difference, which is I’m not in charge anymore. I have a lot of confidence in Jay Powell and his colleagues there at the Fed. This problem will eventually resolve. But it is so important that during the time that we’re shut down because of health concerns, that we don’t lose a lot of our small businesses, and we don’t lose a lot of our employment relationships. That the economy stays in a good enough shape that when the all-clear sign comes, that we can go back to work and the economy can go back to where it was. It’s a shame because as we came into this pandemic, the U.S. economy was in the longest expansion in its history and was just doing great. The labor market was in a very strong condition. So I guess it’s good that we come into this in a strong condition. But it’s really a shame that this sudden shock has derailed what was otherwise such a really good period in the U.S. economy.
Ryssdal: Does that strength help us? Does it help that we were doing so well before we went in?
Bernanke: Yeah, I think it does. It means that people are in better shape. Households, for example, are in better shape financially, certainly, than they were before the Great Recession — much less leveraged. A lot of businesses have done better because of the good economy. On the other hand, you have a lot of buildup of corporate debt. So there are some businesses and corporations that are going to be under stress in this environment. So everything is not perfect, by any means, but it does help that we came into this with more people employed, more people having some savings. And that will give us a little bit of extra leeway as we try to make it through this very tough period.