bernanke lecture four
TRANSCRIPT
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Lecture4:
TheAftermathoftheCrisis
2
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TheFedsEffortsto
RestoreFinancial
Stability
Afinancialpanicinfall2008threatenedthe
stabilityoftheglobalfinancialsystem.
Initslenderoflastresortrole,theFederal
Reserveprovidedliquidity(shortterm
collateralized
loans)
to
help
stabilize
key
financial
institutionsandmarkets.
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TheFedsEffortsto
RestoreFinancial
Stability
TheFedworkedcloselywiththeTreasury,other
regulatoryagencies(suchastheFDICandSEC).
Coordinationwith
foreign
central
banks
included
thecreationofforeigncurrencyswaps.
TheFedprovideddollarstoothercentralbanksin
exchangefor
foreign
currencies.
Theswapsenabledforeigncentralbankstomeetthe
dollarfundingneedsoftheirownfinancial
institutions.
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TheFedsContinuingEffortsto
Strengthenthe
Banking
System
TheFedledstresstestsofthe19largestU.S.
banksinthespringof2009,whichhelpedrestore
investorconfidenceandallowedbankstoraiseabout$140billioninprivatecapital.
RecentstresstestsconductedbytheFedshowed
substantialfurtherimprovementsinbankcapital
andbanks
resilience
to
shocks.
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EvaluationoftheSpecial
Lenderof
Last
Resort
Programs
Results: Theprograms
arrestedrunsonvarioustypesoffinancial
institutions
restoredfinancialmarketfunctioning,restarted
flow
of
credit,
and
supported
resumption
of
economicgrowth
ProgramswerelargelyphasedoutbyMarch
2010.
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EvaluationoftheSpecial
Lenderof
Last
Resort
Programs
FinancialriskstotheFederalReservewere
minimal:
Lendingwasmostlyshorttermandbackedby
collateral;thousandsofloansweremade,none
defaulted.
Althoughtheobjectiveoftheseprogramswas
stabilization,notprofit,taxpayerscameout
ahead.
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MonetaryPolicyduringtheCrisis
TheFedusedlenderoflastresortpolicytohelp
stabilizethefinancialsystem. Tostabilizethe
economy
and
promote
economic
recovery,
the
Fedturnedtomonetarypolicy.
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MonetaryPolicyduringtheCrisis
Conventionalmonetarypolicyinvolves
managementofatargetshortterminterestrate
(the
federal
funds
rate).
Because
longer
term
ratestendtofallwhentheFedlowerstheshort
termrate,andbecauselowerlongertermrates
tend
to
encourage
purchases
of
long
lasting
consumergoods,houses,andcapitalgoods,
cuttingthefederalfundsratehelpsstimulatethe
economy.
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MonetaryPolicyduringtheCrisis
MonetarypolicyisconductedbytheFederalOpen
MarketCommittee(FOMC).
TheFOMCmeetsinWashington,D.C.eighttimesa
year. Duringthecrisis,itsometimesalsoheld
unscheduledvideoconferences.
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MonetaryPolicyduringtheCrisis
TheFOMCconsistsof12members:
the7membersoftheBoardofGovernorsofthe
Federal
Reserve
System thepresidentoftheNewYorkFederalReserveBank
4oftheremaining11ReserveBankpresidents,who
serveone
year
terms
on
arotating
basis
OtherReserveBankpresidentsparticipatein
deliberationsbutdonotvote.
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Federal Funds Rate
Federal
Funds
Rate
Tosupportthe
recovery,theFed
reducedthefederal
fundsratefrom
5 percentin
September2007to
nearly zeroin
December
2008,
whereithas
remainedsince.
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LargeScaleAssetPurchases
Withthefederalfundsratenearzero,thescope
forconventionalmonetarypolicywasexhausted.
Buttheeconomyremainedweakandsome
worriedabouttheriskofdeflation(fallingwages
andprices).
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LargeScaleAssetPurchases
Toinfluencelongertermratesdirectly,theFed
undertooklargescalepurchasesofTreasuryand
governmentsponsoredenterprise(GSE)
mortgagerelatedsecurities.
Largepurchaseprogramswereannouncedin
March2009
and
November
2010.
TheseactionsboostedtheFedsbalancesheetby
morethan$2trillion.
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Federal Funds Rate
Large
Scale
Asset
Purchases
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LargeScaleAssetPurchases
WiththeavailablesupplyofTreasuryandGSE
securitiesreducedbyFedpurchases,investors
werewillingtoacceptloweryields. Lower
longertermrateshelpedstimulatetheeconomy,
justastheydounderconventionalpolicies.
Reducedavailability
of
Treasury
and
GSE
securitiesledinvestorstopurchaseotherassets,
suchascorporatebonds,loweringtheyieldson
thoseassets
as
well.
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LargeScaleAssetPurchases
Thesesecuritiespurchaseswerefinancedby
addingtothereservesheldbybanksattheFed;
theydidnotsignificantlyaffecttheamountof
moneyincirculation. TheFedhasmultipleways
tounwindthelargescaleassetpurchases
(LSAPs),includingsellingthesecuritiesbackinto
themarket.
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Federal Funds Rate
Large
Scale
Asset
Purchases
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EffectsofLargeScaleAssetPurchases
LSAPs(alsoknownasquantitativeeasing)loweredlongerterminterestrates.
30yearmortgageratesfellbelow4percent.
Corporatecreditbecamemoreavailable,andstock
pricesrose.
Lower
longer
term
interest
rates
helped
promote
recovery,thoughtheeffectonhousingwas
weakerthanhoped.
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EffectsofLargeScaleAssetPurchases
TheFedscredibilityandlongstandingcommitmenttopricestabilityhashelpedanchor
inflationandinflationexpectations,whichhave
remainedlow.
Atthe
same
time,
LSAPs
guarded
against
the
risk
ofdeflation(fallingwagesandprices).
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EffectsofLargeScaleAssetPurchases
TheFedsassetpurchasesarenotgovernmentspending,becausetheassetstheFedacquired
willultimatelybesoldbackintothemarket.
Indeed,theFedhasmademoneyonitspurchasessofar,transferringabout$200billion
totheTreasuryfrom2009through2011,money
thatbenefitedtaxpayersbyreducingthefederaldeficit.
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MonetaryPolicyCommunication
Clearcommunicationfromthecentralbankcanhelpmakemonetarypolicymoreeffectiveby
helpinginvestorsbetterunderstandpolicygoals
andbetteranticipatefuturepolicyactions.
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MonetaryPolicyCommunication
TheFedhasbecomemore
transparentabout
monetarypolicy.Forexample,the
Chairmanbegan
holdingnewsconferencesin
2011.
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MonetaryPolicyCommunication
TheFedalsohasrecentlyprovidedmoreinformationaboutitsgoalsandpolicyapproach
(forexample,bydefiningpricestabilityas
inflationof2percentinthemediumterm).
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MonetaryPolicyCommunication
TheFedhasalsobegunprovidingguidancetoinvestorsandthepublicabouthowitexpectsto
adjustthefederalfundsrateinthefuture,given
currentinformationabouttheeconomicoutlook.
This
guidance
helps
the
public
better
understand
theFOMCsviewsandpolicy.
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EconomicRecovery
Aidedbytheeffectsofmonetaryandfiscalpolicyaswellastheeconomysnaturalrecuperative
powers,economicactivitybegantorecoverin
mid2009.
Since
then,
real
GDP
has
increased
at
an
average
annualrateofabout2percent.
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Federal Funds Rate
SluggishEconomicRecovery
27
Butthepaceof
recoveryhas
been
extremelysluggish
comparedwith
previouspost
WorldWarIIcyclical
recoveries.
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Federal Funds Rate
SluggishEconomicRecovery
28
Asaresult,job
prospectshave
improvedonly
graduallyandthe
unemploymentrate
remainspainfully
high.
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Federal Funds Rate
SlowingtheRecovery: Housing
29
Whyhastherecovery
beenslowerthan
hoped?
Aresurgenthousing
market
normally
helps
powereconomic
recoveries,butnot
this
time.
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Federal Funds Rate
SlowingtheRecovery: Housing
30
Factorsweighingon
thehousingmarket
include
acontinuinghigh
foreclosurerate
anoverhangof
unsoldhomes
falling
house
prices
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Federal Funds Rate
SlowingtheRecovery: Housing
31
Verytightlending
standardson
mortgageshave
bluntedsomeofthe
effectsoflow
mortgagerates.
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Federal Funds Rate
SlowingtheRecovery: Housing
32
Declininghouseprices
discouragenew
construction.
Moregenerally,sharp
declinesinhouse
pricesmakeconsumersfeelpoorer,
andthuslesswillingto
spend.
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SlowingtheRecovery:
Financialand
Credit
Markets
TheU.S.bankingsystemissignificantlystronger
thanitwasthreeyearsago,andcreditismore
availableto
households
and
businesses.
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SlowingtheRecovery:
Financialand
Credit
Markets
However,difficultiesremainforsomeborrowers:
Forhouseholds,mortgagesaredifficulttoobtain
forborrowers
with
less
than
pristine
credit
scores.
Forsmallbusinesses,creditmarketconditions
remaintightbutappeartohavebegunto
improve.
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SlowingtheRecovery:
Financialand
Credit
Markets
ConcernsaboutEuropeanfiscalandbanking
conditionshavealsostressedfinancialmarkets
andled
to
more
conservative
lending
and
diminishedconfidence.
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LongTermEconomicGrowth
inthe
United
States
Thefinancialcrisisandrecessionwereamajor
trauma. Manypeoplewhohavebeen
unemployedfor
along
time
have
seen
their
skills
erode. Andlongertermproblems,likerising
federaldeficits,havenotgoneaway.
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LongTermEconomicGrowth
inthe
United
States
Ontheupside,however:
TheU.S.economyremainsthelargestinthe
world,with
ahighly
diverse
mix
of
industries.
Oureconomyhasarobustentrepreneurial
culture,withflexiblecapitalandlabormarkets.
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LongTermEconomicGrowth
inthe
United
States
Ontheupside,however:
Weremainatechnologicalleader,withmanyof
theworld's
top
research
universities
and
the
highestspendingonresearchanddevelopmentof
anynation.
And,in
the
aftermath
of
the
crisis,
we
have
strengthenedourfinancialregulatorysystem.
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Federal Funds Rate
LongTermEconomicGrowth
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PostcrisisRegulatoryChanges
Thecrisis
revealed
many
important
regulatory
gaps
andweaknesses.
LehmanBrothersandAIGendangeredthefinancial
systemandhighlightedtheneedfornewtoolsto
addressproblemsatsystemicallyimportant
financialinstitutions.
Moreoversightofthesystemasawholewas
needed.
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Federal Funds Rate
PostcrisisRegulatoryChanges
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TheDoddFrank
WallStreetReform
andConsumer
ProtectionActof
2010instituted
wideranging
reformsoffinancial
regulationinthe
UnitedStates.
Rep.BarneyFrank Sen.ChristopherDodd
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KeyProvisionsoftheDoddFrankAct:
Supervisionand
Regulation
Theactexpandedthefinancialstabilitydutiesof
financialregulators,includingtheFed:
Itcreated
the
Financial
Stability
Oversight
Council
(FSOC)tohelpregulatorscoordinatetheirefforts.
Itgaveallregulatorstheresponsibilitytotrackand
respondto
possible
risks
to
the
financial
system
as
awhole.
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KeyProvisionsoftheDoddFrankAct:
Supervisionand
Regulation
Itclosedgapsintheoversightofthefinancial
system:
TheFSOC
can
designate
systemically
important
nonbankinstitutionstobesupervisedbytheFed.
TheFSOCcanalsodesignatekeyfinancialmarket
utilities(for
example,
stock
exchanges)
for
enhancedsupervision.
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KeyProvisionsoftheDoddFrankAct:
SystemicallyImportant
Institutions
Theactsubjectedsystemicallyimportantfinancial
institutionstotoughersupervisionand
regulation: Highercapitalrequirementswereestablishedfor
mostsystemicfirms.
Bankaffiliates
are
prohibited
from
trading
on
their
ownaccount(Volckerrule).
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KeyProvisionsoftheDoddFrankAct:
SystemicallyImportant
Institutions
Theactmadesystemicallyimportantfinancial
institutionssubjecttotoughersupervisionand
regulation: Regularstresstestsarebeingconductedto
ensurethatfirmswillhaveadequatecapitaleven
inbad
economic
scenarios.
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KeyProvisionsoftheDoddFrankAct:
SystemicallyImportant
Institutions
Italsotackledtheproblemoftoobigtofail
financialfirms:
Neworderly
liquidation
authority
allows
the
FederalDepositInsuranceCorporation(FDIC)to
closefailingsystemicfirmsinawaythatcauses
lessdamage
to
the
financial
system.
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KeyProvisionsoftheDoddFrankAct:
OtherFeatures
Theacttookstepstomakethefinancialsystem
moreresilient:
Itrequired
more
transparency
and
standardization
ofderivativetransactions.
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KeyProvisionsoftheDoddFrankAct:
OtherFeatures
Itcreatedanewagency(theConsumerFinancial
ProtectionBureau)withbroadpowerstoprotect
consumersin
their
financial
dealings.
Financialregulatorsareimplementingtheseand
otherprovisions,inconsultationwithforeign
regulators.
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TheEffectsoftheCrisison
CentralBank
Practice
Inthedecadesbeforethecrisis,centralbanks
oftenviewedfinancialstabilitypolicyasthe
juniorpartner
to
monetary
policy.
Thecrisisunderscoredthatmaintainingfinancial
stabilityisanequallycriticalresponsibility.
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TheEffectsoftheCrisison
CentralBank
Practice
Financialcriseswillalwaysbewithus. Butas
muchaspossible,centralbanksandother
regulatorsshould
try
to
anticipate
and
defuse
threatstofinancialstabilityandmitigatethe
effectswhenacrisisoccurs.
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Conclusion
Webegan
by
noting
the
two
principal
tools
and
responsibilitiesofcentralbanks
servingaslenderoflastresorttopreventor
mitigatefinancial
crises
usingmonetarypolicytoenhanceeconomic
stability
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Conclusion
TheFed
and
other
central
banks
used
both
tools
extensivelyinthecrisisanditsaftermath. These
toolshelpedpreventarepeatoftheGreat
Depressionof
the
1930s
and
set
the
stage
for
a
slowbutcontinuingeconomicrecovery.
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Conclusion
Anew
regulatory
framework
will
reduce,
but
not
eliminate,theriskoffinancialcrisesinthefuture.
Greatermonitoringofpotentialsystemicrisks
shouldhelp.
However,
the
recent
financial
crisis
shows
both
thatacrisiscanbehardtoanticipateandthatit
cancausemajordamagetotheeconomy.
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