Federal Reserve documents 41 page

IN EARLY 2015, the reforms begun with the 2010 Dodd-Frank law and the international Basel III negotiations were well on their way toward full implementation. Taken together, the new rules should create a financial system that is significantly safer. Nevertheless, future financial shocks are inevitable—unless we are prepared to regulate risk taking out of existence and suffer the consequent decline in economic dynamism and growth. The most important post-crisis reforms seek not to eliminate shocks entirely but to increase the financial system’s ability to withstand them. These reforms include increased capital and liquidity requirements, especially at the largest banks; elimination of regulatory gaps that left major institutions like AIG effectively unsupervised; more transparent and safer derivatives trading; improved consumer protection; and new authorities that will allow the government to close failing financial firms with less risk to the financial system.

Still, as of early 2015, much remained to be done on the regulatory front. The FDIC, working with the Fed, had made substantial progress in implementing its authority to safely wind down failing, systemically important financial firms. The largest firms have submitted living wills, describing how they could be dismantled if they reached the brink of failure. However, closing a large international financial institution without significant disruption will be a hugely complex task. More work is needed to improve firms’ living wills and to coordinate with foreign officials on plans for winding down multinational financial companies.

Runs on short-term funding were a major contributor to the severity of the crisis. Regulators have reduced the risk of runs by requiring banks to hold considerably higher levels of easily sold (liquid) assets. Additionally, bank regulators are considering imposing higher capital requirements on large banks that rely more than their peers on short-term funding. Still, the risk of short-term funding runs has not been eliminated, particularly the risk of runs on nonbank institutions not subject to the new liquidity rules. The Fed and other regulators in early 2015 were considering requiring higher collateral levels for all short-term loans made through the repo market. That would make borrowing in repo markets more costly, but it could also make the loans safer and reduce the risk of runs, no matter who the borrower.

What about the too-big-to-fail problem? Regulators are implementing the basic approach adopted in Dodd-Frank. Large financial firms now face higher capital requirements and more stringent supervision. As a result, managers and shareholders of large firms must decide whether the economic benefits of their size compensate for the extra regulatory burden. General Electric, in April 2015, announced plans to sell off most of its financial division over the next several years. If realized, the restructuring would represent a successful example of tougher regulation encouraging a systemically important firm to break itself up.

Additionally, the very existence of the orderly liquidation authority puts the creditors of big financial

institutions on notice that they could lose money. That should reduce the ability of supposedly too-big-to-fail institutions to borrow more cheaply than their not-too-big-to-fail rivals. Over time, Congress and regulators should become increasingly comfortable that the largest firms can operate safely, and, if they do fail, that they can be shut down without destabilizing the financial system. If regulators cannot attain that assurance, they should use their authority under existing law to break up or simplify the largest firms.

Although thoroughgoing reform of financial regulation was essential, experience will surely show that not all the new rules offer enough benefits to justify their added regulatory burden. Congress and the regulatory agencies must protect the core reforms. Nevertheless, both should be willing, over time, to modify laws and rules that have proven to be unworkable or that impose heavy burdens with little or no benefit. Regulators will also need to watch for instances of tighter bank regulation driving risky activities into less regulated parts of the financial system.

WE CAN’T SAY exactly when, but eventually the U.S. economy will be growing more normally, with unemployment at its sustainable level and inflation near the Fed’s target. Taking into account yet another of Yogi Berra’s insights—it’s tough to make predictions, especially about the future—what can be said about our country’s long-term economic prospects?

Doubtless the U.S. economy faces major challenges. We pay a lot more for education and for health care than most other industrial countries, with results that are not meaningfully better and are often worse. The average age of our population is increasing, which means the proportion of retirees to working people is growing. That increases fiscal pressure on the federal government, which provides Social Security and Medicare to the retired. Political gridlock and dysfunction in turn block sensible spending and tax measures as well as other steps to strengthen growth, such as regulatory reforms, improved education and training, and productivity-improving public investment in infrastructure and technology.

We are not living up to our cherished vision of the United States as a land of opportunity. In part because of deficiencies in education for kindergarten through high school, many Americans lack the skills they need to succeed in a globalized, high-tech economy. Inadequate education and skills are certainly one of the principal reasons for the long-term trends of increasing inequality and the “hollowing out” of our middle class. These trends help explain why many Americans believed, years into the recovery, that the economy remained in recession. Whatever the data said, it still felt like a recession to those unable to benefit from the expanding economy. The Fed can support overall job growth during an economic recovery, but it has no power to address the quality of education, the pace of technological innovation, and other factors that determine if the jobs being created are good jobs with high wages. That’s why I often said that monetary policy was not a panacea—we needed Congress to do its part. After the crisis calmed, that help was not forthcoming. When the recovery predictably failed to lift all boats, the Fed often, I believe unfairly, took the criticism.

Despite undeniable problems, I see the United States as one of the most attractive places to live,

work, and invest over the next few decades. I’ll mention three, of many, reasons for my optimism.

First, our aging society notwithstanding, U.S. demographics look significantly better than in most other industrial countries and even many emerging markets (such as China, which is feeling the effects of its decades-long one-child policy). Our fertility rates are relatively high and, importantly, we welcome more immigrants than other countries. A younger, growing population fuels a more rapid expansion of our workforce and increases economic dynamism, for example, by creating a larger market for high-tech products. I would also guess that the United States, with its relatively flexible labor markets, will prove more successful than many other countries in accommodating older people who want to continue to work.

Second, the United States has maintained its lead in technological innovation, which has become ever more important for economic growth. Most of the world’s best research universities are in the United States, and we have become much more adept at commercializing technological advances. Other countries must envy the many high-tech companies that have sprung up near leading universities in areas like Silicon Valley, Kendall Square in Cambridge, Massachusetts, and the Research Triangle in North Carolina. Innovation is not limited to web companies, software apps, and electronic devices like smartphones. For example, new drilling technologies created an oil and gas boom that propelled the United States to the top ranks of energy producers.

Finally, our tradition of entrepreneurship and the dynamism of our markets have proved consistently successful in creating new industries and new products, a pattern that is likely to continue. The size and diversity of the United States leave room for upstarts to challenge existing businesses that have become complacent. Indeed, areas of the country that once lagged economically—my native South, for example— have become vibrant in recent decades, even as some older Rust Belt cities have found ways to revitalize.

These three factors and others make me optimistic. Success is hardly inevitable, however. Good policies are essential. We need, for example, rational immigration policies that are open-handed but also do not discriminate against the most skilled workers, as we do now. Governments must continue to invest —in basic technology, in education, and in infrastructure. Critically, we need to be more flexible in how we help people acquire job skills. Improving education from kindergarten through high school is important, but it is hardly the only way to raise skill levels. We should take a closer look at early childhood education, technical schools, apprenticeship programs, community colleges, adult retraining, and other ways to foster lifelong education. For example, as chairman, I visited an innovative retraining program in Richmond. It was cosponsored by private employers, the state of Virginia, and two community colleges. The colleges trained workers for specific job openings at participating employers, with the employers paying part of the cost. We also must ensure that the decade-old slowdown in the growth of health-care costs continues. And the federal tax code has not been thoroughly overhauled since 1986, and it shows.

REALIZING OUR POTENTIAL as a nation will require a new approach to leadership. Our politicians, and

even some of our technocrats, it seems to me, focus too much on defeating ideological opponents and scoring debating points. They focus too little on forging consensus and finding ways for everyone to win by making progress, even imperfect progress, toward shared goals.

I arrived in Washington as a quiet, reserved professor—with a research background that proved to be quite useful in the financial crisis. But I quickly learned that, in both the public and private spheres, how you lead is as important as what you know. I tried to lead in a way that was consistent with my personality and strengths but also appropriate for the situation. As a former academic, I valued collegiality, creativity, and cooperation. I emphasized that policy decisions should be based on open-minded discussion, not the views of only one individual. I tried to foster debate in our meetings and I encouraged creativity—blue-sky thinking. Despite complaints of cacophony, I did not try to prevent Fed policymakers from expressing dissenting views publicly.

The collegial approach had many advantages. Blue-sky thinking led to new ideas; careful discussion winnowed and tested those ideas. Involving everyone from FOMC policymakers to staff members in blue-sky thinking gave each person a stake in making the resulting policies work. Encouraging public debate reassured people outside the Fed that we were considering a wide range of views. The collegial approach built goodwill and trust, which proved vital when events forced me to take action without much or any consultation.

Those times, though, were exceptions rather than the rule. At central banks, credibility—confidence that policymakers will back up their words with deeds—is crucial to effective policymaking. A strong consensus, carefully constructed and patiently sustained, helps build credibility. It usually results in better decisions, based on an assessment of fact that is as objective as possible. That’s what I learned about leadership during my time at the Federal Reserve.

These principles should be more broadly applied in Washington. Not all progress is based on collegiality and compromise, of course. Sometimes it’s necessary to stand on principle. But it’s hard to avoid the conclusion that today we need more cooperation and less confrontation in Washington. If government is to play its vital role in creating a successful economy, we must restore comity, compromise, and openness to evidence. Without that, the American economy will fall tragically short of its extraordinary potential.

ILLUSTRATIONS

In the Roosevelt Room of the White House, October 14, 2008. On the far side of the table, left to right, comptroller of the currency John Dugan, SEC chairman Christopher Cox, Treasury secretary Hank Paulson, me, FDIC chairman Sheila Bair, and New York Federal Reserve president Tim Geithner. (Official White House photograph by Eric Draper)

Marriner S. Eccles Building, the headquarters of the Board of Governors of the Federal Reserve System in Washington,

D.C. Construction was completed in 1937. (Federal Reserve Photograph, Britt Leckman)

The two-story atrium of the Eccles Building. Marriner Eccles served as Federal Reserve chairman from 1934 to 1948.

(Federal Reserve Photograph, Britt Leckman)

President Bush and Anna look on as Board vice chairman Roger Ferguson swears me in as Alan Greenspan’s successor as chairman, February 6, 2006, in the Eccles Building atrium. (Official White House photograph by KimberleeHewitt)

A week after the White House announced my nomination to be Federal Reserve chairman, former chairman Paul Volcker, six foot seven, embraces me and the then-current chairman, Alan Greenspan, October 31, 2005, in a dining room at the Federal Reserve. (FederalReserve Photograph, Britt Leckman)

The Federal Open Market Committee (FOMC) confers around the Board’s twenty-seven-by-eleven-foot mahogany and black granite table, March 2009. At far side of table, left to right: Bill Dudley, deputy FOMC secretary Debbie Danker, me, Don Kohn, Kevin Warsh, Betsy Duke, Dan Tarullo, Richard Fisher, Jim Bullard. With back to camera, left to right, staff economists Brian Madigan, Nathan Sheets, Michael Leahy, Dave Stockton, Dave Reifschneider, Joe Gagnon, and Bill Nelson. (Federal Reserve Photograph, Britt Leckman)

In my office, with the Board’s communications director, Michelle Smith, in May 2010. (Mary F. Calvert / ZUMA Press /

Newscom)

Working at my desk, February 2013. (Federal Reserve Photograph, Britt Leckman)

On the steps outside the U.S. Treasury, April, 11, 2008, with, left to right, Masaaki Shirakawa of the Bank of Japan, Jean-Claude Trichet of the European Central Bank, Mario Draghi of the Bank of Italy, and Mervyn King of the Bank of England. (Brendan Smialowski / Getty Images)

Chatting with Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee,

July 21, 2009. (Andrew Harrer / Bloomberg via Getty Images)

Meeting with Senator Chris Dodd of Connecticut, chairman of the Senate Banking Committee, in his office, February 6,

2008. (Alex Wong / Getty Images)

With Treasury secretary Tim Geithner, lunching in his dining room, November 2009. (Photograph by Dan Winters)

Walking to a press conference in the Rose Garden, September 19, 2008, with, left to right, President Bush, Christopher Cox, and Hank Paulson to announce the administration’s request for taxpayer funds to fight the financial crisis. (Win McNamee / Getty Images)

With Board member Kevin Warsh (center) and Board vice chairman Don Kohn, on the balcony overlooking the veranda of Jackson Lake Lodge, Wyoming, August 2008, at the Federal Reserve Bank of Kansas City’s Economic Symposium.

(Andrew Harrer / Bloomberg via Getty Images)

With Stan Fischer, governor of the Bank of Israel, at Jackson Lake Lodge, August 2012. Stan was my thesis adviser at

MIT. (AP Photo / Ted S. Warren)

With Hank Paulson before the House Financial Services Committee at the height of the crisis, September 24, 2008. (AP

Photo / Charles Dharapak)

Explaining the Federal Reserve’s strategy for eventually shrinking its balance sheet, before the House Financial Services Committee, March 25, 2010. Communications director Michelle Smith in background, right, and media relations officer Dave Skidmore, left. (AP Photo / Manuel Balce Ceneta)

The FOMC, March 2009. Reserve Bank presidents standing, left to right: Bill Dudley, Eric Rosengren, Jim Bullard, Charlie Evans, Tom Hoenig, Richard Fisher, Gary Stern, Sandy Pianalto, Dennis P. Lockhart, Charlie Plosser, Jeff Lacker, and Janet Yellen. Board of Governors members seated, left to right: Elizabeth Duke, Kevin Warsh, me, Don Kohn, and Dan Tarullo. (Federal Reserve Photograph, Britt Leckman)

Chatting with President Obama before his announcement of my nomination to a second term as Fed chairman at Oak Bluffs Elementary School, Martha’s Vineyard, Massachusetts, August, 25, 2009. (Official White House photograph byPete Souza)

When interest rates are rising, cartoonists often depict the Fed chairman as the Grinch. This one, from the IndianapolisStar, in 2008, takes the opposite approach. We struggled to explain the logic behind our extraordinary efforts to support the economy. (Gary Varvel Editorial Cartoon used with the permission of Gary Varvel and Creators Syndicate. Allrights reserved)

Cartoon lampooning Texas governor Rick Perry’s remarks at a Republican presidential primary event in Iowa, August 2011. Perry said he would “treat me pretty ugly down in Texas” if the Fed continued to support the economy with forceful monetary policy. (Nate Beeler, courtesy of Cagle Cartoons)

A cartoon from The New Yorker magazine, October 7, 2013. In reality, Anna strove to make our home an oasis from the pressures of the Fed, where a slip of the tongue could send financial markets gyrating. (David Sipress, The New Yorker Collection / The Cartoon Bank)

A cartoon from October 2008 underscores the deep public and political skepticism about the ultimate effects of the Federal Reserve’s unorthodox efforts to calm the financial crisis and revive the economy. (Dave Granlund ©www.davegranlund.com)

Cartoon accompanying Paul Krugman’s New York Times Magazine column headlined,

“Earth to Ben Bernanke,” April 24, 2012. (Kelsey Dake)

Time magazine Person of the Year cover, December 28, 2009. (From Time, December 28, 2009 /

January 4, 2010 © 2009 Time Inc. All rights reserved. Used by permission and protected by the Copyright Laws of the United States. The printing, copying, redistribution, or retransmission of this Content without express written permission is prohibited.)

Walking with students after a speech at Princeton University, September 24, 2010. Security agent Lou Harris, with lapel pin, far left, and agent-in-charge Bob Agnew, with lapel pin, to the immediate right of me. (AP Photo / The Times of Trenton, Martin Griff)

Delivering the first of four lectures on the Federal Reserve and the financial crisis at George Washington University,

March 20, 2012. (AP Photo / Manuel Balce Ceneta)

Fielding a question from a reporter at my first quarterly press conference, April 27, 2011. (Federal Reserve Photograph,

Britt Leckman)

With Maria Bartiromo of CNBC and Roger Ferguson, after a speech to the Economic Club of New York, November 20,

2012. Roger was the club’s chairman. (The Economic Club of New York: photograph by Brian Stanton)

With Representative Ron Paul of Texas, after breakfast at the Federal Reserve Board, May 9, 2012.

Protesters from Code Pink stand behind the witness table as I prepare to testify on the rescue of AIG, before the House

Financial Services Committee, March 24, 2009. (Reuters / Kevin Lamarque)

CBS News correspondent Scott Pelley interviews me on bench outside the building that once housed my family’s pharmacy on Main Street in Dillon, South Carolina, March 7, 2009. (CBS News / 60 Minutes)

My grandfather Jonas Bernanke, right, at the entrance to Jay Bee Drugs with a neighboring

shopkeeper, Main Street, Dillon, South Carolina, early 1940s.

Jonas Bernanke, seated, second from right, with other Austro-Hungarian soldiers captured by the Russian Army, at the

Rasdolnoe prisoner-of-war camp near Vladyvostok, Siberia, 1916.

My grandmother Pauline (nйe Heiden) Bernanke at the microscope at the Franz Josef Hospital in Vienna, Austria,

1918. She was a medical student at the University of Vienna.

Home of my grandmother Friedman’s family, the Rozas, in Lithuania.

My mother’s parents, Herschel and Masia (nйe Roz) Friedman (Harold and Marcia), likely

in the early 1920s.

My parents, Philip and Edna (nйe Friedman) Bernanke on their wedding day, June 15, 1952,

in Charlotte, North Carolina.

As Fed chair, for security reasons, I was not allowed to drive. I missed it.

From the 1975 Harvard-Radcliffe yearbook. (Reproduced from the collections of the

Harvard University Archives. Copyright 1975 Harvard Yearbook Publications)

Anna and I, shortly after our wedding. We were married on May 29, 1978, at Temple Israel in Boston.

Visiting my parents’ home in Dillon, South Carolina, as a young professor.

In front of Princeton University’s Woodrow Wilson School of Public and International Affairs. I chaired the economics

department from 1996 to 2002. (Denise J. Applewhite, Courtesy of Princeton University)

Shaking hands with Washington Nationals third baseman Ryan Zimmerman, before the game, September 7, 2012. First

baseman Adam LaRoche looks on. (AP Photo / Alex Brandon)

Mock baseball card prepared by the Board staff for my baseball-themed farewell reception, January 30, 2014. (Federal

Reserve Photograph, Britt Leckman)

Posing with my guests before a farewell dinner for Treasury secretary Tim Geithner, January 17, 2013, at the Federal Reserve Board. Left to right, Alan Greenspan, Bob Rubin, Tim, Paul Volcker, me, Hank Paulson, Don Kohn, and Larry Summers. (Federal Reserve Photograph, Britt Leckman)

Janet Yellen, Paul Volcker, Alan Greenspan, and me at a ceremony commemorating the centennial of the Federal

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