Two errors that fanned flames of crisis
Former US Fed chief says policymakers didn’t see it coming and were clueless about its extent
Former Federal Reserve chairman Ben Bernanke acknowledged that policymakers made two critical errors fighting the financial crisis a decade ago: They failed to see it coming with such force, then underestimated how much economic damage it would cause later.
“Nobody saw how widespread and devastating the crisis itself would be,” he said in a short video, discussing a 90page paper on the subject.
Bernanke, who was the Fed chief from 2006 until 2014, singled out the panic that engulfed the financial system with the 2008 collapse of Lehman Brothers Holdings Inc as the key reason for the depth of the recession back then.
The failure to foresee the severity of that downturn “demands a more thorough inclusion of credit-market factors in models and forecasts of the economy” in the future, he wrote in a separate blog post.
Bernanke is the second Fed policymaker to issue a public mea culpa this week. Former vice-chairman Donald Kohn agreed that the central bank made forecasting errors during the crisis and its aftermath. The Fed also over-estimated the potential costs of its controversial quantitative-easing programme and so was more timid than needed in carrying it out, he said. “We were behind the curve,” Kohn said.
Bernanke took issue with economists who contend that the housing price bust was the main driver of the deep downturn. While that undoubtedly played a role, Bernanke said the recession wouldn’t have been nearly as bad as it was if investors hadn’t yanked money out of banks and other financial institutions. “There was a run, but in an electronic form rather than people lining up in the street,” he said in the video. “The availability of credit plummeted.”
In an effort to prevent future government bailouts, US Congress curbed the ability of the Fed, the Federal Deposit Insurance Corp and the Treasury Department to provide emergency support to the financial system.
While it had significantly improved the system’s resilience to shocks by boosting bank capital and other measures, “policymakers need to have the appropriate tools to fight the next crisis,” Bernanke wrote. “On this count, I am somewhat less sanguine,” he said.