Federal Reserve documents 30 page

At the next FOMC meeting, on March 18, 2009, the hawks and doves alike exuded pessimism. “I’m not sure what’s going on. It looks pretty bleak,” said Charlie Plosser. “The economic and financial news has been grim,” agreed Janet Yellen. Fear about the stability of the banking system pervaded markets; the stock prices of even the stronger banks had declined sharply since the beginning of the year. Indeed, the Dow had fallen by almost half in less than eighteen months. The market losses not only destroyed enormous amounts of purchasing power, they stood as a constant reminder of the economy’s terrifying descent into the unknown. Payrolls had plummeted by 650,000 jobs in February as fearful employers laid off workers at an ever-faster pace. International trade was collapsing as more countries around the world fell into recession. We had to do more.

The most powerful step we could take would be to expand our securities purchases. I did not have a clear preference between buying more mortgage-backed securities and beginning purchases of Treasury securities. (Presumably, buying MBS would have relatively more effect on housing, while the effect of Treasury purchases would be more broad-based.) The policy alternatives I put on the table included both options. The discussion at the meeting—including the Reserve Bank presidents’ reports from their deeply pessimistic business contacts—revealed even more alarm about the economy than I had expected. “One actually called me and said, ‘Do you want some good news?’” Richard Fisher of Dallas reported. “And I said, ‘Please.’ He said, ‘Call somebody else.’” The Committee’s appetite for action was strong. “I think it’s important that we do something big,” said Charlie Evans. In the end, we agreed both to buy more MBS and to begin Treasury purchases. We were now fully committed to aggressive securities purchases —a program that would later become known as QE1.

The overall package was designed to get markets’ attention, and it did. We announced that we planned to increase our 2009 purchases of mortgage-backed securities guaranteed by Fannie, Freddie, and Ginnie Mae to $1.25 trillion, an increase of $750 billion. We also doubled, from $100 billion to $200 billion, our planned purchases of the debt issued by Fannie and Freddie to finance their own holdings. We would also buy $300 billion of Treasuries over the next six months, our first foray into Treasury purchases. Finally, we strengthened our guidance about our plans for our benchmark interest rate, the federal funds rate. In January, we had said that we expected the funds rate to be at exceptionally low levels “for some time.” In March, “for some time” became “for an extended period.” We hoped that this new signal on short-term rates would help bring down long-term rates. The Committee approved the package unanimously. Even Jeff Lacker supported it, despite his concerns that purchasing mortgage-backed securities might channel credit away from worthy borrowers outside of housing.

A new era of monetary policy activism had arrived, and our announcement had powerful effects. Between the day before the meeting and the end of the year, the Dow would rise more than 3,000 points— more than 40 percent—to 10,428. Longer-term interest rates fell on our announcement, with the yield on ten-year Treasury securities dropping from about 3 percent to about 2.5 percent in one day, a very large move. Over the summer, longer-term yields would reverse and rise to above 4 percent. We would see that

increase as a sign of success. Higher yields suggested that investors were expecting both more growth and higher inflation, consistent with our goal of economic revival. Indeed, after four quarters of contraction, revised data would show that the economy would grow at a 1.3 percent rate in the third quarter and a 3.9 percent rate in the fourth.

Other central banks would also adopt quantitative easing. The Bank of England started purchasing government bonds at about the same time that we announced the expansion of our QE program in March 2009. Ultimately, its program looked similar to ours, both in its emphasis on government bond purchases and in its size relative to the economy. The Bank of Japan, which had pioneered quantitative easing earlier in the decade, would both increase its purchases of government bonds and undertake a range of other programs to promote the flow of credit. However, during this period the European Central Bank would undertake only limited asset purchases, focusing instead on increasing its longer-term lending to banks.

MEANWHILE, SIX MONTHS after the original $85 billion bailout of AIG, the far-flung insurance behemoth staggered yet again. We had supplemented the first rescue with an additional $38 billion loan in early October 2008. In November of that year, working with the Treasury, we had restructured the bailout to include a $40 billion capital investment from TARP. But instead of stabilizing, the company lost an astonishing $62 billion in the fourth quarter, bringing its losses for 2008 to $99 billion, roughly equal to the annual economic output of Mississippi. To avoid a downgrade in AIG’s credit rating, which would have triggered a new—likely bankruptcy-inducing—outflow of cash, the Fed and Treasury restructured the bailout once again in March 2009. We completed the new arrangements on a Sunday, one day before the company’s announcement on March 2 of its huge fourth-quarter loss. The new deal included an additional $30 billion in TARP capital, bringing the total TARP investment to $70 billion, or 10 percent of the total congressional appropriation. And that figure didn’t include the Fed’s lending support.

The more than $180 billion that the U.S. government had committed through various programs to stabilizing AIG stirred public discontent, but a figure about one-thousandth as large ignited a much bigger firestorm. Newspapers on Sunday, March 15, quoting an unnamed senior administration official, reported that AIG would pay $165 million in bonuses to executives and specialists in the infamous Financial Products division, which had brought AIG to the brink of collapse. Outrage ensued. Republican senator Chuck Grassley of Iowa suggested that the AIG employees follow the “Japanese example” by apologizing, then resigning or committing suicide. Democratic representative Paul Hodes of New Hampshire said, “I think AIG now stands for arrogance, incompetence, and greed.” Syndicated columnist Charles Krauthammer called for “an exemplary hanging or two.” Violence indeed seemed possible. Death threats led the company to increase security around the suburban Connecticut offices of its Financial Products division and in neighborhoods where AIG executives lived. The House, in a measure of dubious constitutionality, voted to levy a confiscatory 90 percent tax on bonuses paid by companies receiving

more than $5 billion in TARP funds. (The bill died in the Senate.)

The news of the planned bonuses accelerated the decline in our political standing. Barney Frank’s House Financial Services Committee had not held a hearing on AIG in the six months since the bailout, but the bonuses prompted him to summon Tim Geithner, Bill Dudley, and me to a hearing on March 24. Members of Code Pink (a women’s group formed originally to protest the Iraq War) sat behind us, dressed in pink shirts and life jackets. When TV cameras turned toward us, the protesters held up signs reading, “WHERE’S MY JOB?” and “BAIL ME OUT.” Barney banged his gavel to begin and declared, “This is a very important public hearing. It will not be disrupted. There will be no distractions.” A short while later, as Tim read his statement, Barney interrupted to admonish a protester: “Will you please act your age back there and stop playing with that sign?”

As I would explain at the hearing, I had only learned of the bonuses on March 10, when Board general counsel Scott Alvarez brought me the news. I knew immediately that AIG had presented us with yet another political and public relations disaster. I had tried to stop the payments, only to be told by the Fed’s lawyers that the payments had been legally contracted and could not arbitrarily be rescinded. Our lawyers also cautioned against suing to block the payments, since AIG (and thus the taxpayers) would be subject under Connecticut law to punitive damages if we lost, as we probably would. In the end I had to settle for urging AIG CEO Ed Liddy to find a way to reduce the bonuses, and I encouraged Bill Dudley to send a letter making the same request.

As was so often the case during the financial crisis, the facts behind the AIG bonuses would turn out to be less clear-cut than they first appeared. The bonuses had been promised, before the bailout, to retain key employees, most of whom had nothing to do with the controversial actions that brought the company to the brink. Many had specialized expertise that was needed to safely unwind AIG’s complex positions and, thus, to protect the taxpayers’ investment in the company. That said, I certainly understood why an unemployed worker or a homeowner facing foreclosure would be outraged. Paying bonuses to employees of a company that had been bailed out by the taxpayers was an injustice that anybody could understand. No wonder people were angry. Practically, the episode provided one more reason that we needed better legal authority for winding down failing financial firms, including the ability to abrogate existing contracts.

Ultimately, some recipients voluntarily returned all or part of the bonuses, and Treasury appointed a lawyer, Ken Feinberg, to oversee compensation policies at firms that took TARP funds. Public anger eventually ebbed. But the political damage to the Fed from this and similar controversies lasted. In July 2009, a Gallup poll found that only 30 percent of those polled thought the Fed was doing an excellent or good job. We ranked last among nine federal agencies, behind even the IRS, which drew a 40 percent approval rating.

I often reminded myself that we weren’t appointed to be popular. We were appointed, to the best of our abilities, to develop and implement policies that were in the long-run interest of the American people.

Through the spring and summer, we continued working to support the economy and stabilize the financial system. I continued to come into the office seven days a week, using weekends to write and edit speeches or testimony or simply to reflect on recent developments.

However, I did take the first weekend of August off for the wedding of our son, Joel. (In setting the date, Joel and his fiancйe, Elise Kent, had made sure that it wouldn’t conflict with the Fed’s Jackson Hole conference later in August.) Joel and Elise chose a hotel in sunny San Juan, Puerto Rico, for the wedding. It was a wonderful event and a welcome diversion. Among the many who attended were friends Joel had known since elementary school in New Jersey. A week later the newlyweds threw a party in Great Barrington, Massachusetts, the location of Simon’s Rock College, where Joel and Elise had met. Among the guests was Ken Manning, now an MIT professor, who had persuaded me to leave Dillon for Harvard thirty-eight years before. Our daughter, Alyssa, then pursuing a postbaccalaureate program in Southern California that would lead her to medical school, attended both events. Anna and I were pleased that our kids were thriving, building their own lives far removed from the events that consumed the attention of politicians and policymakers in Washington.

EARLIER IN 2009, as I looked forward, I had considered how much longer I would serve as chairman. My term would end in January 2010, and I presumed that the president would decide over the summer whether to nominate me for another four years. I weighed whether I even wanted a second term. I had gotten more than I had bargained for when I signed up for the job—a global financial crisis and a deep recession. I was a lightning rod for critics, and their barbs were sometimes quite personal. I understood that criticism was part of the job, but it bothered me nonetheless. And maybe the critics were right. Despite all our efforts, we had avoided neither the crisis nor the recession. On darker days I wondered whether I was the right person for the job, and if remaining in the post was the right thing for the country and for the Federal Reserve.

On those days, I would sometimes find solace reading a quote attributed to Abraham Lincoln. Steve Bezman, the manager of the Board’s parking garage, had given it to me on a 3 x 5 card. I kept it next to my computer. “If I were to try to read, much less answer, all the attacks made on me, this shop might as well be closed for any other business,” Lincoln was quoted as saying, amid congressional criticism for military blunders in the Civil War. “I do the very best I know how—the very best I can; and I mean to keep doing so until the end. If the end brings me out all right, what is said against me won’t amount to anything. If the end brings me out wrong, ten angels swearing I was right would make no difference.”

Whether or not I wanted to continue, it wasn’t clear that I would be offered reappointment. Media stories speculated that Larry Summers, denied the nomination to be Treasury secretary but named a top adviser to Obama, had been promised, or virtually promised, the Fed chairmanship. Board member Dan Tarullo, who had extensive connections within the administration, told Don Kohn that no promises had been made to his knowledge, but rumors persisted. I also heard secondhand that Larry had not been shy

about criticizing our handling of the crisis, an indication to me that he was campaigning for the job. As I deliberated, friends and colleagues offered support. Michelle Smith, Don Kohn, and others

dismissed the notion that my leaving could be good for the Fed. Kevin Warsh, who had superb political judgment and particularly good connections among Republican lawmakers, told me that despite my battles with Congress, I was well regarded on the Hill. He was confident I could be confirmed, and in later months he would work to secure Republican support in the Senate. I appeared to have outside supporters as well. In November 2008, not long after the height of the crisis, the Wall Street Journal had reported that three-quarters of fifty-four private-sector economists polled supported my renomination. Subsequent surveys by the Journal gave even more encouraging results, although I knew full well that many considerations other than the views of economists would enter into the president’s deliberations. Reappointment was certainly not assured, but neither did it seem impossible.

As I turned the question over in my mind during the spring of 2009, I concluded that I would be leaving critical tasks unfinished if I left. Although the worst of the financial crisis appeared to be over, much more remained to be done to restore normal conditions. The economy was still descending into the deepest recession since the Depression, and monetary policy would be critical to the recovery. The essential task of reforming the financial regulatory system was only beginning. And, importantly to me, the Federal Reserve—an institution for which I had the greatest respect—was at the nadir of its popularity, ripe for attack from the extremes of both the left and the right.

I certainly was not the only person equipped to tackle these problems, but it felt like desertion to leave. The searing experience of the past few years also had given me both the knowledge and the personal relationships to maintain the continuity required in a crisis. And, frankly, I wanted my efforts to be affirmed in the strongest conceivable way: through reappointment by a new president, one whose political allegiances were different from those of the president who had originally appointed me. Anna and I discussed the various considerations and my concerns at length. Despite her reluctance that I accept the chairmanship in the first place, she agreed that I needed to see through what I had started. I decided that I should try for another term.

As a close adviser to President Obama, Tim would certainly play a critical role in the decision. I didn’t envy him. Tim and I had worked together in some of the darkest moments of the crisis, and I believed that he appreciated what we had accomplished and would support me. But Larry was Tim’s mentor and now his colleague in the administration. And, although I got along well with the president, Larry certainly had a much closer relationship with him than I did—not unlike the relationship I had built with President Bush during my brief time in the White House in 2005.

In June, Tim asked about my plans and I told him I wanted to be reappointed. I also made clear that my second term, if I got one, would be my last. Two terms was about right for a Fed chairman, I thought, and in any case I doubted that I could tolerate the stress of the job for more than eight years. It is possible this declaration influenced Tim, because if I were to leave in January 2014, the president would still have

the opportunity to appoint Larry if he chose—assuming, of course, that the president was reelected.

In the end, I don’t know how the decision was made. In his own memoir, Stress Test, Tim writes that continuity in the middle of a crisis was an important consideration. President Obama certainly knew of my resolve to do whatever was necessary to help the economy recover. I had developed a good relationship with Rahm Emanuel, then the president’s chief of staff; he undoubtedly would have counted Senate votes and reported that I was confirmable. My relative lack of political experience—other than my time on the school board and a brief stint at the Council of Economic Advisers—probably helped me. I was seen as having little partisan baggage. Keeping me at the Fed would also let Larry remain as Obama’s close adviser. In any case, the decision soon came down: Tim told me the job was mine if I still wanted to stay on.

On Wednesday, August 19, in the early evening, Tim and I met with President Obama in the Oval Office. The chosen hour was after the press corps had left for the day and at a time when few staff were in the building. The meeting was brief. As always, the president was friendly and respectful. He praised the work that I had done and confirmed that he intended to renominate me. I told him what I had told Tim— that I wanted more time to complete unfinished business but that four more years would absolutely be my limit. He said he understood, then told me the decision would be announced soon. Half an hour later I emailed Michelle: “Saw BO. Thumbs up.” Anna didn’t cry this time when I relayed the news. She had known what was coming.

The next day, I flew to Jackson Hole for the annual Fed conference. As usual, I would give the keynote speech Friday morning. In it, I reflected on the year of crisis, an annus horribilis if there ever had been one. It was hard to believe that, less than twelve months earlier, we had not yet seen the takeover of Fannie and Freddie, the collapse of Lehman, the multiple bailouts of AIG, runs on the money market funds, the stabilization of Citi and Bank of America, the passage of the TARP, the introduction of quantitative easing, and so much more. We had come so close to the abyss. “Although we have avoided the worst, difficult challenges still lie ahead,” I said. “We must work together to build on the gains already made to secure a sustained economic recovery.”

Although the presentations at the conference focused on the crisis and economic outlook, much of the discussion during the meals and receptions was about who would lead the Fed for the next four years. I deflected questions. Many colleagues publicly expressed support for me, among them Marty Feldstein, my old professor at Harvard who had been a contender for the job when I was originally appointed. Intrade, the online gambling site, put my odds of reappointment at 79 percent.

Stan Fischer, my thesis adviser at MIT and, at the time, governor of the Bank of Israel, delivered the luncheon remarks on Friday. As he spoke, my security team called me out of the room. Curious looks followed my exit. Cell phone reception in the Wyoming mountains was spotty and the call that arrived had failed. Eventually I was able to return it. A White House aide let me know that the official announcement of my renomination would take place on Tuesday, at Martha’s Vineyard, where the president and his

family would be vacationing.

I broke the news to the senior Board staff attending the conference—including Dave Stockton, Brian Madigan, and Nathan Sheets, the director of the Board’s international division—in the break room for employees of the Jackson Hole Airport. It had been set aside for us while we waited for the flight out. When I returned to Washington, I also called each member of the FOMC. At least for a few days, I felt that I had made the right decision.

Early Tuesday morning, August 25, accompanied by Michelle Smith and security agents Bob Agnew and Ed Macomber, I was driven to Andrews Air Force Base. A small, sleek jet owned by the air force brought us to Martha’s Vineyard Airport. From there we proceeded to the Oak Bluffs School, where the announcement would take place. As instructed, I was wearing a blue blazer, slacks, and no tie. At 9:00 a.m. the president’s convoy arrived, bristling with security and communications technology. Obama emerged from a black SUV, quickly threw on a blue blazer of his own, and offered me private congratulations. We stepped in front of the cameras. The president thanked me for helping bring the country and the world through one of the worst financial crises in history. He credited my background as a scholar of the Depression, my temperament, my courage, and my creativity. I thanked the president for his support, both for me personally and for a “strong and independent Federal Reserve.” Then back to the airport. I was in my office in Washington in time for lunch.

I got another morale boost a few months later, on December 16, when I was named Time magazine’s 2009 Person of the Year. Michelle had told me about the possibility several months earlier, and we had cooperated with Time reporter Michael Grunwald. I hoped that, like the 60 Minutes episode, the story would humanize me and help people better understand the Federal Reserve and our actions. I think it did. Grunwald called me “the most important player guiding the world’s most important economy” and credited the Fed with averting a second Depression. The magazine cover depicted my face on a stylized dollar bill.

BUT, ALONG WITH the praise, Time also observed that the Fed’s actions had triggered a powerful political backlash. I had felt that backlash on December 3, when I went before the Senate Banking Committee for a grueling hearing on my nomination that ran from 10:00 a.m. until past 3:00 p.m. I had slept poorly and hoped that I would be able to maintain both my concentration and my cool. Chris Dodd, the chairman, supported my renomination. He praised the Fed’s extraordinary actions under my leadership, although he also questioned whether the Fed should continue to have a central role in financial regulation. I was always puzzled by the combination of Dodd’s apparently high personal regard for me and his willingness to blast the Federal Reserve, as if I had had nothing to do with the Fed’s decisions and policies.

Richard Shelby, the senior Republican, was wholly critical. He complained about the bailouts, which he believed had done little more than increase moral hazard, and the size and riskiness of the Fed’s balance sheet. “For many years I held the Federal Reserve in very high regard,” he said in his soft

Alabama drawl. “I had a great deal of respect for not only its critical role in the U.S. monetary policy, but also its role as a prudential regulator. . . . I fear now, however, that our trust and confidence were misplaced in a lot of instances.” He then outlined the considerable challenges the economy still faced. “The question before us,” he said, “is whether Chairman Bernanke is the person best suited to lead us out and keep us out of trouble.” Despite his sometimes harsh words in public, Shelby, like Dodd, seemed to value his personal relationship with me. He often invited me to his office to chat with him alone or sometimes with a small group of Republican senators. His good-old-boy mannerisms belied a shrewd intelligence and cosmopolitan tastes. I once invited him to dinner and he chose one of the finest Italian restaurants in Washington. During our conversation, I was surprised to learn of his affinity for Wagnerian opera.

The Fed’s (and my) nemesis, Senator Bunning, pounded on what he saw as our failures not only under me but also under Alan Green-span, whose policies I had never sufficiently repudiated, in his view. Two weeks after the hearing, at a public discussion of my renomination among the Senate Banking Committee members, Bunning would deride the Time announcement: “Chairman Bernanke may wonder if he really wants to be honored by an organization that has previously named people like Joseph Stalin twice, Yasser Arafat, Adolf Hitler, the Ayatollah Khomeini, Vladimir Putin, Richard Nixon twice, as their person of the year,” he said. “But I congratulate him and hope he at least turns out better than most of those people.”

At my hearing I defended my record. I credited the Fed, in partnership with the Treasury, the FDIC, and the Congress, with averting financial and economic collapse. I pushed back against hyperbolic claims that the Fed and the Fed alone was responsible for the crisis, and that we should have both seen it coming and averted it completely. I pointed out the many steps we had taken to increase our transparency and explained why our monetary actions (slashing interest rates and buying securities) were both necessary and responsible. I conceded regulatory and supervisory failures by the Fed (we were hardly alone) but argued that we needed to retain our supervisory powers if we were to play our essential part in preserving financial stability. It was a tough day but I believed I had made my case.

Two months later, the committee voted, 16–7, to send my nomination to the full Senate. My support on the committee, as in the Senate as a whole, came mostly from Democrats, with the exception of Oregon’s Jeff Merkley. Merkley told me in a phone call that he believed that I was too implicated in the origins of the crisis to deserve his vote. I wondered whether anyone involved in federal economic policy before 2007 could entirely escape that charge. Four Republicans supported me: Bob Bennett of Utah, Bob Corker of Tennessee, Judd Gregg of New Hampshire, and Mike Johanns of Nebraska.

I admired each of these four and worked with them constructively throughout my tenure. Bennett, a senator with a patrician air, thoughtful and moderate, had voted for TARP and later lost in the Republican primary in part because of that vote. Gregg, a highly capable legislator, often stood up for the Fed in debates among Republicans, with important additional support coming from fellow Republican Lamar Alexander of Tennessee. Johanns, with whom I had worked during my time in the White House when he

was secretary of agriculture, was reasonable and low-key and always gave me a fair hearing. My relationship with Corker was complicated by frequent policy disagreements. He was particularly unhappy with our quantitative easing, and he would later advocate the elimination of the employment side of the Fed’s mandate. But he was one of the most economically literate members of the Senate, as well as one of those most willing to work across the aisle. He sought my views on a range of topics and would organize private meetings with other Senate Republicans so I could explain our actions.

These and a few other exceptions notwithstanding, the increasing hostility of Republicans to the Fed and to me personally troubled me, particularly since I had been appointed by a Republican president who had supported our actions during the crisis. I tried to listen carefully and accept thoughtful criticisms. But it seemed to me that the crisis had helped to radicalize large parts of the Republican Party. The late Senator Daniel Patrick Moynihan of New York once said that everyone is entitled to his own opinion but not his own facts. Some Republicans, particularly on the far right, increasingly did not draw the distinction. They blamed the crisis on the Fed and on Fannie and Freddie, with little regard for the manifest failings of the private sector, other regulators, or, most especially, of Congress itself. They condemned bailouts as giveaways of taxpayer money without considering the broader economic consequences of the collapse of systemically important firms. They saw inflation where it did not exist and, when the official data did not bear out their predictions, invoked conspiracy theories. They denied that monetary or fiscal policy could support job growth, while still working to direct federal spending to their own districts. They advocated discredited monetary systems, like the gold standard.

Date: 2016-04-22; view: 595