TOPICS > Economy

In Forum, Bernanke Says Fed Was Late Addressing Subprime Crisis

July 29, 2009 at 6:30 PM EDT
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The third and final installment of a special forum with Federal Reserve chief Ben Bernanke, moderated by Jim Lehrer in Kansas City, Mo.


GWEN IFILL: Now, part three of our NewsHour forum with Federal Reserve Chairman Ben Bernanke. Jim Lehrer moderated the conversation Sunday night with a group of citizens from in and around Kansas City, Missouri. We broadcast the first two sections, taped at the Federal Reserve Bank of Kansas City, on Monday and Tuesday.

And now, the third and final installment of “Bernanke On the Record,” beginning where the discussion left off last night, talking about home foreclosures.

JIM LEHRER: You’ve already touched on a lot of this already, some of the things that are in the works or are being debated about how we move from here to there, some reorganization, new legislation, et cetera.

And let’s start first with Elma Warrick, because it relates exactly to what we’ve been just talking about in terms of foreclosures and housing.

ELMA WARRICK: Good afternoon, Chairman Bernanke. I’m Elma Warrick. I’m the executive director for Home for USA, which is a housing counseling organization HUD-approved.

You know, I’ve heard your responses, and I think they’re wonderfully clear and lucid. But my question has to do with how do we, having been through this in the midst of this perfect storm, how do we protect the consumers going forward and make sure the consumer is served as they ought to be?

BEN BERNANKE: Good question. As I mentioned earlier, the Federal Reserve’s — one of the Federal Reserve’s functions is consumer protection. And we have addressed a number of issues in mortgage area, credit card areas, a bunch of other areas.

As I’ve said before, we were late in addressing the subprime lending problem. There were a lot of loans made that were done without documentation, for example, that were done without clarity about prepayment penalties, that were done without clarity about escrow accounts.

The Federal Reserve a few years ago addressed those issues, and we put together a set of rules which now apply to all lenders, not just banks, but all lenders, that will, I hope, solve those problems going forward. But they weren’t in place early enough, and that is a — I think we have to take some heat for that. And I think that’s appropriate.

But going forward, we have set some rules. The administration, of course, as you may know, has yet a more ambitious plan. They want to create a separate consumer financial protection agency that will have its only mission protecting consumers.

So whether the Federal Reserve does it or another agency does it, I hope that we’ll learn some lessons from this episode and make sure the consumers can make good choices, but that the choices they have are clear, transparent, so that they can shop and not be fooled or deceived in terms of the kinds of financial products that they use.

ELMA WARRICK: Thank you.

JIM LEHRER: Erica Shackelford has a related question.

ERICA SHACKELFORD: Good afternoon, Mr. Chairman. Erica Shackelford. I’m affiliated with the Urban League of Greater Kansas City, and I’m also a full-time student.

Thinking about the mortgage crisis, predatory lenders allowed people to get themselves into loans that they could not afford. What does the Federal Reserve plan to do to educate the public in the future so that this type of crisis does not reoccur? And also, would you support a mandatory education component as part of the mortgage-lending process?

BEN BERNANKE: Well, you know, first, as I mentioned, we have done the regulations, but we also are very much in favor of financial education, financial literacy.

The Federal Reserve, including the Kansas City Federal Reserve, have numerous financial literacy programs. We provide — on our Web sites we provide courses. We work with all kinds of groups that provide financial training.

I think it’s very, very important that people have that kind of experience now, because everybody has to deal with complicated financial products in their everyday life.

You mentioned predatory lending. We’ve also gotten to public education. We put out, for example, a public service announcement that’s playing in movie houses. I don’t know if you saw it or not.

But there are a lot of scams out there now. There are people who are taking advantage of people who are afraid of losing their homes. And it’s very important that if you are afraid of losing your home, if you have gotten a foreclosure notice and you’re working with a bank, it’s very careful — it’s very important to be sure that if you have been approached by some counselor or someone who says they’re going to help you, to make sure they’re legitimate, because there are scams out there, and we have been working on those and trying to keep people alert to those.

ERICA SHACKELFORD: Thank you, Mr. Chairman.

Drawbacks to new consumer agency

JIM LEHRER: Rob Givens, you have a question on the consumer-protection issue that has come into public...

ROB GIVENS: Thank you, Mr. Chairman. Rob Givens, president of Mazuma Credit Union here in -- locally.

A lot of financial institutions have been under compliance and regulatory control for a long time. There's some concern that creating a new federal agency, separating some of those responsibilities and then adding perhaps some additional responsibilities from the Fed for consumer regulation, would, in fact, put an additional burden on small institutions, which would then cause them to fail and leave more too-big-to-fail people out there.

What's your sense of how that -- that new agency and where it's funded and -- I mean, there's a lot of issues with that, and how that plays with the Fed's responsibility?

BEN BERNANKE: Right. So this is the proposal by the administration to create a consumer financial protection agency.

And, you know, I can understand the motivation for creating such an agency. It would be an agency that would be focused on consumer issues. But there are some drawbacks, and you mentioned one, which is that, if the consumer protection agency has its own examination force, its own going out -- examiners going out to banks, and then the banks will have to see both the safety and soundness examiners from the Fed or from the Office of the Comptroller of the Currency, as well as the consumer protection agency's examiner.

So there would be a duplication of effort to some extent. And some of the knowledge and information that one group gathers would not necessarily go to the other group.

Another possibility, which has been discussed, would be to leave the examination authorities with the banking agencies themselves where they are now and just move the rule-writing authority to the consumer protection agency, which is another possibility.

That also has some issues, because then the rule-writers would not be together with the examiners. They wouldn't get the feedback, they wouldn't get the knowledge that the examiners get every day on the ground, in banks. So it's a tough issue, and I know Congress is going to be wrestling this for some time.

JIM LEHRER: But you're opposed to it, right?

BEN BERNANKE: I'm neither opposed to it or in favor of it. I just want to make the point -- I think there's an important point to be made, which is I acknowledge that the Fed was late on subprime lending regulations. I acknowledge that.

But for the last two-and-a-half, three-years, the Fed has been very, very active in mortgage areas, in credit cards, in student loans, in all kinds of areas, and we've been very effective. And so I'm just saying that we've done a good job, and we're an alternative if this agency doesn't work out. But, again, I understand why people would say you need an agency that's focused on this area.

JIM LEHRER: I've got an online question from Robert Dietrich in Towson, Maryland. "What do you see is the most significant current or potential threat to the Federal Reserve's independence?"

BEN BERNANKE: Well, again, the independence of the Fed is extraordinarily important. If the Congress or the administration were to begin to interfere with our monetary policy decisions, then the markets would say, "Well, wait a minute, is there going to be more inflation because of political reasons? Is there going to be more inflation because the government wants to the Fed to print money in order to pay for the deficit?"

So it's incredibly important that the Fed maintain its independence. I think we will. I think we need just to be very vigilant and make sure that there isn't any bill or any other effort made by anyone to take away that independence. And we're going to do our best to maintain it, because it's so critical for the stability of our economy.

JIM LEHRER: As you know, there's an effort in Congress now, in the House in particular, to audit what the Federal Reserve does, particularly a monetary policy. How do you feel about that?

Auditing the Federal Reserve

BEN BERNANKE: So that bill -- people don't fully understand what that bill is about. It sounds like audit the Fed. It sounds like let's look at the books. It's not what it sounds like. The Congress already looks at our books.

We have many different layers of auditors. The GAO, the General Accountability Office, which is supposed to be doing this audit, already looks at virtually all of our activities, and the ones it doesn't -- our financial books and our financial loans and so on, and the ones it's not looking at and where the taxpayer needs some assurance is we're willing to work with Congress to make sure that the GAO gets the information it needs.

What people don't understand is that this bill would give the GAO the authority to audit monetary policy. And what does that mean? That means that, if the Federal Reserve decided a year from now that because of incipient inflation it was time to raise interest rates, that the Congress would say, "Oh, the GAO's going to audit that decision. It's going to subpoena your materials. It's going to demand information from the members of the FOMC. It's going to evaluate your decision and report to Congress."

I don't think that's consistent with independence. So we are completely open to providing any information that Congress wants to make sure we're using taxpayer money safely and soundly, that we are meeting all our responsibilities. I don't think the American people want Congress running monetary policy, and I think that's very, very critical for people to understand.

JIM LEHRER: And do you think that's what -- would end up doing...

BEN BERNANKE: Exactly. Exactly what it would do. There's a provision in that law which currently, current law, which carves out monetary policy, and it doesn't give Congress authority or GAO authority to audit it. That was put in, in 1978, at a time where we had a lot of inflation, as you may remember.

After that, the Fed became more independent, brought inflation down, but now that's exactly what it would do. If that carve-out is eliminated, the Congress would have the authority any time to ask the GAO to come in and audit and look at and evaluate the monetary policy decisions made by the Fed. That's not consistent with independence.

JIM LEHRER: Crosby Kemper has a question about regulating.

CROSBY KEMPER: Crosby Kemper, Mr. Chairman. I'm the director of the Kansas City Public Library and an amateur historian. And I've read your book, "Essays on the Great Depression." Wonderful book.

And you talk about two causes for the Great Depression. One is the failure of the Federal Reserve to provide an adequate monetary policy. It tightened too much during the days after the stock market crash. And you talked about the non-monetary problems, part of which was the failure, despite great liquidity of the banking system, to respond to the problems of production and unemployment.

And I wonder if there isn't a similar problem going on today in regulation, where you're going exactly the other direction, with too much monetary policy, I mean, too much money creation in your monetary policy?

BEN BERNANKE: Well, thank you for reading my book. I'd be glad to autograph it if you have it with you.

I learned -- I did spend a lot of my career studying the Great Depression and other financial crises. And I didn't expect it would be so helpful, so useful, as it has been.

But I learned three lessons from my work on the Great Depression, and you identified two of them. The first one was, monetary policy has to be supportive, not restrictive. In the 1930s, the Federal Reserve allowed the money supply to collapse, allowed prices to fall, and that was a major force -- a major factor in the Depression.

So this time, the Fed was aggressive in cutting interest rates, providing supportive monetary policy, and getting, you know, that part going.

The second thing I learned from looking at the Depression was, as I mentioned before, that allowing the financial system to collapse -- and we had several thousand bank failures here in the United States in the 1930s which the Fed could have stopped, or at least most of them. Letting the financial system collapse is also a very, very bad thing to do, and it contributed very considerably to the collapse in the credit markets and, again, to the Great Depression.

And for that reason, I have taken the approach that we want to make sure that the financial markets are as stabilized as possible, that we don't have a financial collapse, because we know what the consequences of that can be for the broad economy.

But the third thing I learned was this, that the Federal Reserve in the 1930s was completely orthodox. It did things today we think are wrong, but it was doing it based on what at the time were the standard policies, the standard approaches. They didn't use anything unusual.

And I think what I learned from that is that when you're in a situation like this, a perfect storm, sometimes you've got to do something a little bit outside the box, a little bit more aggressive. And so when the Federal Reserve got interest rates down to zero, we couldn't cut it any more, and so we had tried to address a lot of the other problems, like fixing the credit markets in the ways that you described.

Navigating a tough job market

JIM LEHRER: And, Manuel Abarca, you have a question?

MANUEL ABARCA: My name is Manny Abarca, and I'm a current student in the University of Central Missouri. My question is, as a student and future professional, what would you recommend to my generation to handle this current situation, financial crisis, and prevent future crises from happening?

BEN BERNANKE: Well, I've some kids out of college, and we've had some discussions about this. I think this affects you both on a personal basis and on a broad national policy basis.

Personally, I just want to say that we recognize that there are a lot of people graduating from college or graduate school right now and see a very tough job market, and we know that, and it's not your fault. And it's part of the reason that we're so aggressive trying to get this economy moving again.

But I would urge you in looking for jobs to not give up, because the way the job market works is -- job markets just don't -- jobs just don't disappear. What happens is that some jobs are created and others disappear. So, for example, right here in Kansas City, there've been some pretty significant layoffs, but then also in the last year there's been some pretty big hires, as well -- not enough to offset the layoffs, but still some hires.

So the labor market is always churning. There's new jobs being created, other jobs being destroyed.

On keeping this from happening again, you know, we've had financial crises since the 1300 and 1400s. They happen all the time. This is a particularly bad one. So I don't think we're ever going to completely eliminate financial crises, but there's a lot we can do to make sure that one this severe and this damaging doesn't occur again in the United States.

And there I haven't had much chance to talk about it, but the Federal Reserve and the administration have made proposals about how to change our financial regulatory system. And let me just mention two parts of it.

One part is we need to have a more system-wide approach. Instead of just looking at a silo at each individual institution, each individual market, we need to have a council or a group of regulators that looks at the financial system as a whole and looks for gaps and problems that can cause trouble. So that's one important element.

The other important element -- and let me just reiterate this again -- too big to fail has got to go, and to get rid of too big to fail, we need a way to let big companies fail safely. And to do that, we need a new kind of bankruptcy process that's similar to what the FDIC already has for banks that will allow the government to come in and to take a failing company and to unwind it, sell it off, let it fail, but do it in a way that doesn't bring the whole financial system down.

And so those two things I think would be a tremendous help in both stopping future financial crises, but if one occurs, making sure it doesn't have as negative and adverse effect on the economy as this one has had.

JIM LEHRER: Peter Cabell has a question about the stock market.

PETER CABELL: Chairman Bernanke, my name is Pete Cabell. And as was mentioned, my question is about investing.

As we go forward, is there a good engine to invest in as an alternative to the stock market that would be reasonable to look at?

BEN BERNANKE: So I can't practice financial advising without a license over here.

I think the answer to your question, and it would depend very much on your individual circumstances -- you're a young man, you're not about to retire -- is diversification. The stock market is very volatile. It's risky, and we've seen how it's gone up and down twice now in the last 10 years, but over long periods of time it tends to do somewhat better than bonds, for example.

And so, generally speaking, unless you're very close to retirement, you probably ought to have some stocks and equities in your portfolio, but you can diversify through a whole range of different things, including bonds or CDs, including even perhaps commodities and other types of investments.

So that's about as far as I can go, otherwise I think I would get malpractice suits going on.

JIM LEHRER: A question from Alicia Falcone.

ALICIA FALCONE: Mr. Bernanke, I am a marketing consultant here in Kansas City. And my question for you is, you've had a chance to oversee the Fed during a historic time in our country's history. What keeps you up at night relative to being the Fed chairman and looking at our economy over the near and medium term?

Depersonalizing the Fed

BEN BERNANKE: Well, first, let me say that the Federal Reserve does not equal the chairman. One of the things I wanted to do when I became chairman was to try to sort of depersonalize the Federal Reserve to some extent.

The Federal Reserve is an outstanding organization. We have terrific staff, terrific presidents around the country, reserve banks and governors, so it's not all on my shoulders. I know there's a lot of people there who are watching 24/7. We have people who worked 100 hours a week through the financial crisis, for week after week, so it's not just me.

You know, there's plenty of people there who are doing good work, and I can sleep at night knowing that they're on the job.

More generally, you know, I worry about the same stuff that you would think I worry about. I worry about the economy and the financial markets. I get reports and data and survey materials and everything all through the day. My inbox is always full.

JIM LEHRER: But like on what is -- like what? I mean, like on housing, on...

BEN BERNANKE: On housing, on the job market, on industrial production, on what's happening in the financial markets. One thing is, people sometimes ask me, do you have like a single indicator or a single variable?

The answer is no, because it's a big, complicated economy and it's kind of like the elephant in the Indian folktale, where everybody sees a different part of it.

It's got lots of different parts. You've got to look at everything. There's not a single one variable or another that is critical. There are a lot that are very interesting. We pay a lot of attention, for example, to unemployment insurance claims, which is a weekly indicator what the legal market is doing, lot of other variables.

But, generally speaking, we put them all together and try to get a sort of a holistic picture out of all the data and information that we get, including information, by the way, that comes from the Federal Reserve banks, because each of the Federal Reserve banks has got a board and it's got advisory councils.

And the president of the Federal Reserve banks, when they come to Washington for Federal Open Market Committee monetary policy meetings, they bring anecdotes, information about what people are seeing, kind of like this meeting here.

And that's very helpful, because the data we get is backward looking. You know, we're going to get data this week on the second quarter GDP. Well, the second quarter is over already.

If we want to know what's going to happen in the third quarter and the fourth quarter, it helps to know what business people are saying, what bankers are saying, and we get that information from all our reserve banks around the country. And so not just numbers, but also anecdotes, personal information can be very helpful in forecasting the economy.

JIM LEHRER: So to answer Ms. Falcone's question then, what you put in all that together on this particular Sunday night, you're going to sleep well?

BEN BERNANKE: I'm pretty tired.

JIM LEHRER: Thank you very much, Mr. Chairman, for doing this.

BEN BERNANKE: Thank you.

GWEN IFILL: You can watch Jim's entire forum with Chairman Bernanke on our Web site at And a one-hour version, "Bernanke On the Record," will air on most PBS stations. Check your local listings for the time.