Ben Bernanke Gives Himself a Grade

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(photo: Gerald R. Ford School of Public Policy, University of Michigan)

(photo: Gerald R. Ford School of Public Policy, University of Michigan)

Our latest Freakonomics Radio episode is called “Ben Bernanke Gives Himself a Grade” (You can subscribe to the podcast at iTunes or elsewhere, get the RSS feed, or listen via the media player above.)

An interview with the former Fed chairman: He was handed the keys to the global economy just as it started heading off a cliff. Fortunately, he’d seen this movie before.

Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post. And you’ll find credits for the music in the episode noted within the transcript.

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[MUSIC: Kero One, “Bossa Soundcheck” (from Early Believers)]

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ROGER FERGUSON: Raise your right hand,  and repeat after me. I, Ben S. Bernanke …

BEN BERNANKE: I, Ben S. Bernanke …

FERGUSON: Do solemnly swear…

BERNANKE: Do solemnly swear …

On Feb. 1, 2006, the economist Ben Bernanke became the 14th Chairman of the Board of Governors of the Federal Reserve System, a job better known as Fed Chairman. Until just four years earlier, he’d been a longtime creature of academia, primarily at Princeton. But in 2002, he took a job as one of seven Fed Governors, under Chairman Alan Greenspan. He later spent several months as the head of the Council of Economic Advisers in George Bush’s White House. It was President Bush who first named Bernanke the Fed Chairman.

[MUSIC: Kero One, “Princess Diamond”]

BERNANKE: So, I didn’t come from Texas. I wasn’t part of President Bush’s original team; I wasn’t involved in his elections.  He basically, you know, got interested in me based on my professional qualifications, my academic reputation and the like.  

STEPHEN DUBNER: You write that your wife cried when you were offered the Fed Chairmanship. But these were not tears of joy — at least purely not. Why? What did she foresee?

BERNANKE: Well, she understood that it was going to be a tough job and that the public scrutiny was going to be tough. But, I was really interested in the economic part of the job and the policy part of the job. And the personal stresses that came along with it were — you know, it turned out to be much worse than I expected, frankly.  So, that was what she was concerned about.

DUBNER: So, she was right in some large sense, do you —


DUBNER: Do you regret having taken the job?

BERNANKE: Well, at some level. I mean, obviously I got a lot more than I anticipated, you know. But, it was an important time and I feel like I made a contribution. And so I’m happy about that. 

Today on Freakonomics Radio, a conversation about the life story that Bernanke tells in his recent book, The Courage to Act. He explains what FDR got right and wrong during the Great Depression and he assesses another political giant from that era. Also: why an economist in the employ of the Federal Government isn’t always as candid as the facts might demand.

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Today’s episode is brought to you by popular demand, because four out of five podcast listeners surveyed said they cannot get enough of the Federal Reserve.

BERNANKE: My name is Ben Bernanke and I’m now at the Brookings Institution in Washington, and up ‘til February of 2014, I was the Chairman of the Federal Reserve.

DUBNER: You were indeed.  And what shall we call you. Is it Mr. Chairman?  Is that a lifetime honorific?  What do you like to go by?

BERNANKE: I don’t think it is. I don’t honestly know. There’s not enough examples of, you know, emeritus chairmen.  I guess Ben is OK with me.

DUBNER: Ben?  Really, you’re going to let me call you Ben, Mr. Chairman?  

BERNANKE: Absolutely, can I call you Steve?

DUBNER: I’d love it, but I feel like I don’t deserve it. But I’m going to take advantage of it anyway.

BERNANKE: Alright, why not? 


BERNANKE: Yes sir.

DUBNER: You write that, “Toward the end of my tenure as chairman, I was asked what had surprised me the most about the financial crisis. ‘The crisis,’ I said.” Can you unpack that for a moment?

BERNANKE: Sure, I mean, it’s not that we didn’t see many of the elements of it. And I made a presentation to President Bush in 2005 in the White House explaining, you know, what we thought would happen if house prices reversed and came down as they ultimately, in fact, did.  And what I got right was that it would cause a recession. And what I got wrong was that I didn’t appreciate that the decline in house prices and the problems in the mortgage markets would generate this big panic that was, in fact, the reason why the recession was so, so deep. So, we understood about house prices; we understood about subprime mortgages; we understood that there were risks in the financial system. What we didn’t appreciate was the vulnerability of the overall system to a panic. And that panic, once it became evident, then we had to address it very vigorously.

DUBNER: Your personal background — I guess I would call it compelling, if not dramatic. Give us briefly a sense of growing up in Dillon, South Carolina, in a Jewish family, with a kind of typically Jewish diaspora background — before, and then enrolling at Harvard in 1971 as a freshman.

BERNANKE: Well,  I was part of the community and not part of it. Being Jewish — a small minority in an otherwise Christian community — created a certain amount of distance in some respects, a certain amount of being an outsider. On the other hand, I was very much part of the town.  My father and his brother were the town pharmacists and they knew everybody and everybody knew them.  And I worked at the store, and I later would work on the construction of the new hospital, and I would wait on tables at the local tourist place.  So, I learned a lot about how hard it is to make a living and how hard it is to feed your family — especially when you don’t have a lot of education.  

DUBNER: You write that in your academic career you were, “a Great Depression buff in the way that other people are Civil War buffs.” And that “the holy grail of macroeconomics was essentially to understand why the Depression happened and why it was so long and deep.”  OK so, Ben, why was the Depression so long and deep?

BERNANKE: Well, let me first emphasize what a puzzle it is.  I mean, economists are used to thinking about market economies as working pretty well.  You know, invisible hand leads to good outcomes; most of the time people can find work if they want to work.  So here we had a situation where the world economy, from 1929 until about 1941, was deeply depressed with unemployment rates as high as 25% in the United States. It was leading to huge political disruptions including the rise of Hitler and other Fascist leaders; challenges to capitalism in the United States. It was an enormous event. And so it was very puzzling how something like that could happen in a market economy.  And I don’t know if we fully understand it, but there were a couple of things that happened that I take lessons from. One of them was monetary policy — the control of the money supply, its effect on prices. We had, in the United States, a collapse in the money supply, and that led to a deflation of prices of about 10% a year. People didn’t want to buy things because they knew the prices were going to fall further.  Debtors couldn’t pay their debts because the prices of what they sold were falling — like farmers, for example.  Firms didn’t want to invest because they knew they saw the prices of their products were plummeting.  So the deflation of the ’30s was one of the major factors. By the way, the fact that the world was on a gold standard meant that whatever happened in the U.S. on monetary policy essentially happened elsewhere as well, because the gold standard linked the money supplies of different countries together in a very tight way.  So that was one very important factor — the monetary policy, or the lack thereof in the ’30s. The other thing which, actually was something I worked on in my own research, was the collapse of the financial system. In the United States we had, at the time, a remarkable number — something like 24,000 individual banks in the country — about a third of those, something like 8,000 of them, failed during the ‘30s.  And the result was a situation where it was very difficult to obtain credit, a lot of fear.  And that I think also contributed — not only here in the United States, but in other countries as well — to the depth of the Depression.

[MUSIC: Mokhov, “Unfold” (from Perfect Dream)]

DUBNER: Now, knowing what you know and believing what you believe about this monetary tightness and the bank failures, just transport yourself for a moment back to this time.  Pick the year — I don’t know what the proper year would be to forestall this — but let’s say we install you as Fed Chairman then.  What could you have done?

BERNANKE: Well, it might have taken more than just the Fed Chairman, but together I think two things would have been very important, particularly from the Fed’s perspective.  One would have been to prevent the collapse in the money supply, and in doing that, more could have been done even in the context of the gold standard that existed in the early ’30s.  But, getting rid of the gold standard or abrogating the gold standard — which is what the U.K. did in 1931, for example — would have been very helpful. There’s a lot of evidence that countries that stepped away from the gold standard and allowed their money supplies to grow to avoid deflation did much better than countries that accepted deflation.  And indeed, one of the most important things that Franklin Roosevelt did when he became president in 1933 was to take the United States off the gold standard.  So that was a very important thing.  The other thing the Fed could have done more — and why they didn’t actually is a bit of a puzzle — they could’ve done more to prevent the collapse of so many banks.  They could’ve done what we did — what the Federal Reserve did — in 2007-2008, which was to make loans to banks that were suffering from runs by their depositors, taking as collateral their loans and other investments.  And by providing more liquidity to the banking system, they could have likely slowed the panic, slowed the bank runs, and avoided so many failures.  

DUBNER: So FDR is the hero, really, in your telling of the Depression. He tried several what you call experiments, and that “collectively they worked,” you write.  Now, how universally accepted is that argument among economists?  To my understanding it’s not universally accepted, correct?

BERNANKE: Well, I think a couple things he did that were clearly helpful.  The first one was going off the gold standard, allowing the money supply to grow.  The second was putting in deposit insurance which brought the bank runs, the banking panics, to an end. And I think that those two things — I think almost any economist, particularly those who have studied the Depression would agree that those were very important, positive steps to stopping the collapse.  Now, you could argue that more could have been done to help after 1934 when you saw a lot of recovery; the recovery from 1934 to ‘41 was actually somewhat halting and included a new recession in 1937-38.  And critics could argue, for example — just to make two points — one would be that he didn’t do enough with fiscal policy, that he still had a balanced-budget mentality (he campaigned on a balanced-budget platform when he ran for president) — that there wasn’t enough done on the fiscal side.  The other potential concern was that he took some actions that were probably counterproductive.  So, one example would be the National Recovery Act, which actually put floors under prices which was a kind of awkward way to try to stop the deflation. But I think most research today would suggest that that was actually pretty counterproductive.

DUBNER: And what about taxation? What could he have done differently? 

BERNANKE: I suppose he could have cut taxes, but taxes weren’t as high then as they are now. The general recollection people have, or the vision they have of the ‘30s, was that the government employment programs like the WPA and the building of the Hoover Dam and things like that were a big deal.  And they were important, but relative to the size of the problem they were actually quite small.  And as early as the 1950s, economists pointed out that the fiscal programs of the ’30s were actually very modest compared to the size of the problem.  Ironically — and please take this the right way — the person who sort of most understood fiscal policy, in some sense, was Adolf Hitler.  Because the rearming of Germany in the ’30s was so big and so extensive — of course, he had other objectives in mind — but the side effect of that re-arming, together with a big highway building program, was such that Germany, which had a very deep depression, actually came out of it much quicker than other countries, and suggested that a more aggressive fiscal program would have helped the United States as well. And of course, what ultimately brought the United States out of the Great Depression was World War II which was, unintentionally, a huge fiscal program.

DUBNER: Now let’s get into the crisis, which I’m sure is a lot of fun for you to relive. When you came in, what did you know and what did you not know and what was your assessment of the economy at the moment that you assumed the Chairmanship?

BERNANKE: This was uh, February of 2006 when I first became chairman.  At that time—

DUBNER: Things were looking pretty good, huh?

BERNANKE: Things were looking OK, you know. 2005, 2006 were pretty solid years. The housing sector, which had been very hot, of course, was showing signs of cooling.  We also saw some problems in the mortgage markets that would grow over the year, obviously in the so-called subprime mortgage market, which was the mortgages to people with lower credit scores. You know, I had some concern about broader financial stability issues when I first came on.  In fact, even before I was sworn in, I met with staff and I tried to go through what our contingency plans were and what kinds of systems we had for monitoring the financial markets and the like. So I knew, again from history, that one of the things that central banks have to do is pay attention to financial-stability concerns.  So, those were some of the elements, but I certainly did not put a high probability, at least, in 2006 on a crisis of the severity that we would later see, beginning really in the summer of 2007.  That only occurred over time.   

[MUSIC: A New Normal, “Every Time I Close My Eyes”]

DUBNER: Reading your book, I found myself thinking, “Well, this is exactly the kind of person you might like to have in charge if a financial crisis were to arise, right?” Unemotional — well, I don’t mean to — maybe you’re more emotional than you seem, but you seem pretty measured at least.  Highly educated and very much aware of the role that central banks have played throughout history.  But, I could also see how someone reading the same book might also think, “This is exactly the wrong kind of person to have in charge” — who’s been very removed from these kind of issues, a kind of ivory-tower, theoretical background.  In fact, you posit that your predecessor Alan Greenspan perhaps saw you as, “too academic and consequently naive about the practical complexities of central banking.”  And then you write, interestingly, “that opinion was not without merit.”

BERNANKE: So, I was not somebody who had all their lives wanted to be a policy maker, certainly not Fed Chairman.  I had been an academic my whole career. So I had the academic-type of qualifications, you know. I was knowledgeable about my subject but I had a little bit of an ivory-tower aspect, and I tended to work on my own, occasionally with co-authors.  And so, I wasn’t somebody who was heavily engaged in political-type activities. The only political background I had before I went to Washington was two terms as a member of the board of education in my town in New Jersey.

DUBNER: If there was one central difference you could identify between academic economics where you spent the first few decades of your career and then governmental economics where you spent the last couple, what would that biggest difference be?

BERNANKE: Well, there are many differences. I think the biggest one is just the political context.  In academia you’re thinking about economic policies, you know, in terms of what’s the absolute best thing one could imagine doing.  Whereas in Washington or any other political context you have to think about: how can you sell what you want to do to others who are involved in the process. 

DUBNER: Would you say that you adjusted to that difference organically and well? Or was it always a difficulty? 

BERNANKE: Well, I was surprised by how big a share of my time it took to talk to the administration and to Congress, and in general to communicate more broadly to the markets and the public.  But I quickly understood it was a big part of my job, and I think I adapted over time. 

DUBNER: Although, you do write that you never enjoyed giving testimony.  Why was that? 

BERNANKE: Well, first of all it’s a stressful situation.  But also, you know, testimony is typically not about the legislators learning about the situation.  I mean, I think a lot of it is an opportunity for them to express their concerns or their political views or their ideology.



RON PAUL: Mr. Bernanke, if you don’t mind, will you tell me whether or not you do your own shopping at the grocery store?

BERNANKE: Yes, I do.

PAUL: OK, so you’re aware of the prices. But, you know, this argument that prices are going up about two percent, nobody believes it.

BERNIE SANDERS: Do you have to be a large, greedy, reckless financial institution to apply for these monies?


BERNANKE: They were often very tense situations, and sometimes downright unpleasant.  But, that being said, while I didn’t personally enjoy them, I understood they were essential and, you know, I never avoided them.  I did my best. I testified something like 80 times, while I was Chairman.

DUBNER: In early 2004 — so a few years before the crisis; you were still a governor at the Fed, you weren’t chairman yet — you gave a speech at the Eastern Economic Association in D.C. And your speech was titled “The Great Moderation.” And your speech began, “One of the most striking features of the economic landscape over the past 20 years or so has been a substantial decline in macroeconomic volatility.” And you continued, “Three types of explanations have been suggested for this dramatic change.”  You said they were, “structural change,” — that is, in the economy itself — “improved macroeconomic policies”, and “good luck.”  And then, you generally discounted good luck and also structural change, generally, and came down firmly on the side of monetary policy.  Now, maybe we shouldn’t be surprised that a person whose professional activity is monetary policy would vote for monetary policy. But, if that was in your view then, in 2004, a central cause of the Great Moderation that we were all enjoying — and then, the Great Moderation suddenly ended and we entered instead a Great Recession — well, wouldn’t the average person be inclined to think that monetary policy was, to a large degree, to blame for the crisis after all?

BERNANKE: No, that doesn’t follow at all. I think that monetary policy was a lot better in the ’90s and 2000s. I mean, remember, the Great Moderation, so-called, started in the mid-1980s.  And when was that?  That was after the ‘70s when inflation got out of control, and the early ‘80s when Paul Volcker, the Chairman of the Fed at the time, came in and fought inflation and conquered it.  And after he did that in the ‘80s, in the ‘90s and early 2000s, Alan Greenspan basically continued that fight.  And low and stable inflation and stable monetary conditions made the economy more stable.  Now, one could argue that a more stable economy was one of the factors contributing to more risk-taking, which then built up in the financial system.  I don’t think you would want to conclude from that, that monetary policy ought to intentionally destabilize the economy to prevent more risk-taking.

DUBNER: No, of course not. But, like you just said, the incentives become present for more risk-taking. And at the end of the day, everything you’ve described in the conversation today makes it sound as though the crisis kind of snuck up on everybody because there were systemic opportunities for people to take on that risk — to absorb the risk, or really to pass on the risk.  So wasn’t that, in some ways, a product of the Great Moderation and the monetary policy that helped induce the Great Moderation. In other words, so easy for anyone to borrow anything for any purpose, and so on, that really — isn’t that what snowballed to some degree?

BERNANKE: Again, I don’t think that’s the right way to think about it. The way I think about this is, you’ve got two tools: you got monetary policy, and you got bank regulation.  The job of monetary policy is to try to help the economy stable. The job of regulation and supervision is to be the first line of defense against excessive risk-taking and those kinds of problems building up in the financial system.  So you got to use the right tool for the job. You use monetary policy for economic stabilization; and supervision, regulation, and other related policies — more targeted policies — to address financial-stability concerns.  So, what I would argue is that, while it may have been the case that one of the factors that supported more risk-taking was the stability of the economy overall — which, in some sense, ironically was, in fact, a result of successful monetary policy — that the true policy-failing leading up to the great crisis was the regulatory and supervisory side, that we didn’t — and now I’m talking about the regulatory community in general — didn’t fully appreciate the risks that were building up, nor did the banks themselves.  And they weren’t tough enough about preventing them.  And so, I think that today, for example, I think monetary policy is still good and is working to help keep our economy growing and keep inflation low.  But what we’ve done is we’ve greatly strengthened the regulatory system. That’s the right tool.  So if you ask the question, you know, “What should have been done different?”  I don’t think you should’ve had bad monetary policy to keep the situation unstable so that people wouldn’t take risks. I think that’s crazy. I think the right thing to have done would have been to have much stronger regulatory policy, and that’s the right tool to focus on that particular problem.

[MUSIC: Crushed Stars, “Outside The Stars Are Falling” (from Self Navigation)]

DUBNER: Anyone who spends time on YouTube and on, particularly Libertarian or right-wing quadrants of YouTube, will find statements, videos of you, compilations of conversations you had, whether in the media or elsewhere, that as modulated as they may have been in retrospect appear, kind of monstrously wrong.  I’ll read a quick excerpt. From November, 2006, you said, “Consumer spending supported by rising incomes and the recent decline in energy prices will continue to grow near its trend rate.” In February 2007, you said that, “There’s a reasonable possibility that we’ll see some strengthening in the economy sometime during the middle of this year,” which did not happen.  And then, this one goes back to 2005.  This was, I believe, from CNBC.  This was about the lack of a coming housing bubble.  Let me play you this little piece of tape:

BERNANKE on MSNBC: You can see some types of speculation — investors, uh turning over condos quickly.  So, those sorts of things you see in some local areas. I’m hopeful that — and I’m confident in fact —  that the bank regulators will pay close attention to the kinds of loans that are being made, making sure that underwriting is done right.  But I do think that this is mostly a localized problem and not something that’s going to affect the national economy.

DUBNER: What do you think? What do you say when you hear that statement of yours from 2005?

BERNANKE: Well, it was partly the result of the fact that I was representing the administration.  And you don’t really want to go out and say, “Run for the hills,” right? We were paying attention to the housing situation.  But no, I absolutely – first things you said, by the way, when saying in 2005 and 2006 the economy was going to continue to do well, it did do well.  2007 was not a bad year until the end.  So, the economy was doing OK in a broad sense.  What we missed, what we didn’t anticipate, was that the decline in house prices and the problems in mortgages would generate this huge panic. So that — you know, I can’t, I can’t deny that.  I think that I wouldn’t give us a particularly good grade before the fall of 2007.  After that, when we began to see what was going on, there, we were much more aggressive in responding.

DUBNER: Alright, so if you’re going to give yourself a letter grade for before and after, what are your letter grades?

BERNANKE: C- and A-, something like that.  But I don’t — it’s really not up to me.  I think that, you know, others have to make those judgments.  In the end, we did stabilize the system and the economy has recovered.  And the U.S. recovery, while not everything we would like, has been pretty good compared to other industrial countries.

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[MUSIC: NTNT, “The Way Out”]

Today we’re talking with the man who was essentially handed the keys to the global economy just as it started heading off a cliff.

BERNANKE: It began, really, in the summer of 2007.  I need to say first that the crisis wasn’t fundamentally about subprime mortgages and the like. It was really about the fact that those problems in the subprime mortgage market triggered a much broader financial panic, a financial crisis, throughout the whole system.  It’s like you got a nail stuck into you and you got tetanus that’s spread through the whole system, if you will.  And so, we were quite aware, again, of the problems in the subprime mortgages and the like.  But it was only when we began to see that this disease was spreading much more broadly that we began to get really worried.  I remember in August of 2007, having breakfast with Secretary Paulson. The Treasury Secretary Hank Paulson and I would usually have a meal together, breakfast or lunch once a week and we would often meet either at the Fed or the Treasury and have our oatmeal together (we’re both big oatmeal fans), and talk about what was going on.  And that particular morning we were looking at the market developments and we saw that in Europe, there had been a lot of volatility going on in the markets.  And the stock markets had dropped and there seemed to be a lot of fear.  And, as we learned, that particular day a big French bank called BNP Paribas had basically said that there had been no demand for its subprime mortgages.  It couldn’t determine what they were worth, and they were going to stop even valuing their assets because nobody wanted to buy.  And that was spreading fear through the system.  Paulson and I talked about it and I went to the Fed and it became clear that things were starting to get a bit hairy.  And so we took some actions that day to try to put cash into the system to make sure that interest rates didn’t spike too much and try to calm down the markets a little bit. But that was one of the first days.  And by the way, that particular day I had been planning the next week to go on a vacation, a beach vacation with our family and that vacation got cancelled and I really haven’t had a vacation — I didn’t have a vacation over the eight years I was Chairman, basically.

[MUSIC: Jarkko Hietanen, “Darkly” (from Datacube)]

Things were getting hairier and hairier. First came Bear Stearns.

BERNANKE: Bear Stearns was an investment bank that was facing a run; it was losing its funding as people who lent to it short-term were pulling their money out. It was very exposed because it had invested a lot in housing and subprime mortgages.  

With Bear on the verge of collapse, Bernanke helped broker a deal for JP Morgan Chase to buy it, with the Fed providing a $30 billion line of credit.

BERNANKE: We were very concerned about it because it was very interconnected with many other firms.  And we were afraid that if it failed in a conspicuous collapse, that it would trigger fears about other financial institutions.

DUBNER: Were you — I couldn’t really tell from reading your book the degree to which you personally were, I guess, — surprised or caught off-balance by just how over-exposed and over-leveraged the banks were?  If you were taken by surprise, was that a function of your just not having come from that world? Or, was it just the magnitude of the leverage that was really hard to comprehend?

BERNANKE: Well, financial panic is a self-reinforcing thing.  And people get afraid; if they get afraid, they won’t lend; if they won’t lend, then in order to get cash, banks have to sell their assets; that pushes down the prices of their assets; that makes people even more afraid.  So, a financial panic can get its own dynamic going. Now, that having been said, I think that it is true that it wasn’t just me, I think it was true that the banks themselves did not really appreciate fully how exposed they were both directly and indirectly to housing mortgages and related assets.  If you had asked — and this is a failing of both the banks and the regulators, including the Fed — if you had asked a big bank in 2006, you know, “Hypothetically, suppose that house prices were to drop 30%, what would happen to your balance sheet?  How much would you lose?”  They would have had a lot of trouble giving you a plausible answer.  Because they were exposed not just through the mortgages they held but also through various kinds of derivative contracts, through off-balance sheet investments that they had made, through their investments in other companies — very complicated, lots of different businesses.  And they just didn’t have enough of a grip.

[MUSIC: Wounded Buffalo Theory, “Conductr”]

And it was still getting worse. Several months after the Bear Stearns rescue, Lehman Brothers – a huge and historic financial-services firm – went bankrupt. This time there was no Fed rescue. Then came another foundering firm – the massive insurance company AIG.

DUBNER: From your book it sounds like selling the AIG decision — so this was an $85 billion — I don’t know if “bailout”  is technically the word you use or not — sounds like that one, the environment was so intense that the White House and others and Congress — that was a hurried one, but they bought it, you sold it, and then you pulled it off.  Can you just talk about that transaction for a moment?

BERNANKE: Sure. Yeah I’d call it a bailout because the company would have failed if we hadn’t act.  On the other hand I think it’s important to understand that we didn’t give them $85 billion, we lent them a short term — we made them a loan of $85 billion and we got all the money back with interest. I talk in the beginning of the book about how Secretary Paulson and I went to Congress to explain to an ad hoc group of legislators, you know, what we were doing, why we had to stop AIG from failing, how we were going to approach that.  And they took — you know, listened to us and gave us — we took their questions for a while.  At the end of this process, Sen. Harry Reid, who was the Majority Leader of the Senate, basically told us that: appreciate you coming and explaining all this to us, but just so you understand, you don’t have Congress’s approval and this is all on you, basically.  It’s your call, your decision, your responsibility.  And the next day there was a wire story which said you know, Republicans and Democrats bury the hatchet, right into Ben Bernanke. And then, of course, later on there was the big blowup over the bonuses that AIG paid to some of their traders.  So, they were politically just a huge problem for us. And for many people that company symbolized everything that went wrong in the crisis.

DUBNER: But in retrospect — even in retrospect — you sound as though you still believe you had to do what you did, correct?

BERNANKE: Oh, absolutely.  In retrospect, you know, when we were going into these situations with Bear Stearns and Lehman and AIG and so on, there was a lot of debate before the fact about whether or not it was safe to let these companies just fail.  And we, if anything, were — when I say we I mean Geithner, Paulson and I — were very much on the side of, “no it’s not safe to let them fail, it’s just going to make the panic much worse and really have a bad effect on the whole economy.”  And so, in retrospect it’s evidently clear that we had to do something to prevent these companies from failing.  Now, unfortunately we didn’t have a really good set of tools to do that, and I’m happy to say that the regulatory reforms that took place after the crisis have put some tools in place so we won’t ever have to do this kind of weekend ad-hoc intervention again. And so, I think that, substantively, it was clearly right. But politically it was poison.

DUBNER: I can see why you’d say it’s “evidently clear” that letting them fail would have fueled the panic. And I totally understand that you have, kind of, interventionist bona fides from way back, and beliefs from way back. But the fact is we don’t have the counterfactual, we can’t know the counterfactual.  So just persuade me why it is so evidently clear.  In other words, let’s say that Lehman, Bear, and AIG had all been allowed to absolutely disintegrate.  I mean, what economists are always telling us is, “Well, these failures are really necessary to make the market fair, make it work.  And that by bailing out and so on, you create moral hazard by telling these institutions that, you know what, no matter how deep you get, there may be a rescue.”  So persuade me that you’re right, and that we should believe people like you when you say things like this.

BERNANKE: Right. Well, as I say, I was there.  We had an experiment.  The experiment was the collapse of Lehman, which we tried desperately to prevent but were unable to prevent. When it collapsed, the panic — by all kinds of objective indicators in terms of the volatility in markets and the collapse of credit and so on — jumped to a whole new level.  And immediately after that the global economy begin to fall off a cliff.  I mean, almost immediately.  The fourth quarter of 2008, which followed Lehman, was the worst quarter, really, since the early 1930s.  It was a terrible collapse, millions and millions of jobs got lost.  And then the first quarter of 2009 was also very very bad.  We intervened, took various actions including the passage of the TARP bill which, allowed the government to put capital into banks and try to stabilize them. But, you know, and after we intervened and the system began to stabilize in the spring of 2009, then the recession stopped and we began to grow again in the second half of 2009.  So the timing is almost perfect. And recently the Council of Economic Advisers put out a paper which compared the declines of 2008, where the crisis was at its worst, to what happened in the United States in 1929 after the stock market crash, and found 2008 was actually more severe.  So, every indication was that not just the U.S. economy but the global economy was freezing up, activity was falling off a cliff, jobs were collapsing.  And all of that was directly traceable in time — and in terms of everybody’s perception — to the acceleration of the panic.  And the panic in turn was directly to connected to the collapse of those firms. So, look, from a policy point of view, I mean, how big a probability of a second Depression do you need in order to act?  I think 25% would be enough, but in my view it was probably about 90% that if the panic not been arrested that the Depression we had would have been much, much worse.

[MUSIC: Luke Wieting, “Toying With Trouble”]

It might be churlish to say this but, I had to wonder: when a scholar has devoted his entire career to studying the Great Depression, might every bad recession look like the next Great Depression? Bernanke’s interventionist argument is certainly compelling — and who am I to challenge him? Ben Bernanke has forgotten more about depression economics than most of us will ever know. But, was Lehman, for instance, really the “experiment” that proved the need for such a historic Fed response? Would the death of AIG really have been the death of the American economy?

And what about Bernanke’s decision to use quantitative easing? That’s the policy whereby the central bank starts buying up securities by the trillions of dollars in order to stimulate the economy. Quantitative easing was such a strange concept to so many people that it provided the basis for a YouTube sensation called “Quantitative Easing Explained.”

DUBNER: Talk about quantitative easing in a way that all of us can understand and appreciate, and how you feel about the degree to which you embraced it and the method that you used — you and others used — to roll it out, and how you think it’s worked?

BERNANKE: Well, the problem was that, you know, the Fed usually operates by reducing — to ease the monetary policy — it reduces short-term interest rates.  And the trouble was that short-term interest rates fell almost to zero and so you couldn’t really cut ’em much anymore. So what we did was what’s called quantitative easing, which was that the Fed basically bought, on the open market, it bought Treasury securities and some government-guaranteed mortgage-backed securities.  And in doing so, by buying those securities, by increasing the demand for those securities, it pushed down longer-term interest rates. And that led more people to buy houses and helped the economy recover. By the way, this is not government spending because we owned the securities, which pay interest and ultimately can be resold or allowed to run off.  So the Fed actually made huge profits for the taxpayer on this activity. But anyway, it did seem to help. Most of the academic studies and central-bank studies of quantitative easing suggested it was one of the reasons why our economy came back, why we avoided deflation of prices.  And I think the best evidence for that is that other countries, without exception pretty much, have copied what the Fed did.  Most recently in January of this year the European Central Bank, six years after the Fed, actually began doing the same thing for Europe. And Europe has been doing better, you know, since that activity was undertaken.

DUBNER: You’ve said you wished there had been more punishment — I guess prison time, really — for some people who helped create the financial crisis. It sounds as though you can really identify with a kind of general view that people who did things that shouldn’t be rewarded either got rewarded or didn’t get punishment the way they might have. You now, having served in office for a bunch of years, now are a private citizen. You can go on the lecture market, which I know you’ve done. I’ve read that your first talk in Abu Dhabi, you received about $250,000 for that talk — correct me if that, if any of this is incorrect.  And there are those, especially economists, who would say, “well of course, it’s a free market and there’s a demand for Chairman Bernanke’s services and he should be free to go out and earn a living and so on.”  On the other hand, there are those people who say, you know, “he may have done a good job after the crisis hit, but gosh, I sure wish he had done a better job of forestalling it or foreseeing it, and I don’t like the idea that someone like him and then a bunch of other people who actually were more contributory to the crisis itself —  I don’t like to see them rewarded, or at least not suffer.”  What do you say to that general sentiment?

BERNANKE: Well, what I said — and you didn’t quote me right — what I said was that I objected to the way that the Department of Justice went about their investigation. I think if people break the law, whether they’re bankers or pickpockets — whatever they are, I think they should face the consequences.  I think what the Department of Justice did — for reasons which I don’t fully understand — was, at least in some cases, it chose to pursue institutional remedies.  That is, it would say, “Well this bank, you know, there were a lot of bad loans made and a lot of shady practices, and so we’re going to fine the bank” — which means the shareholders – “you know, billions of dollars, instead of investigating individual culpability.” So, I don’t know whether more people would’ve gone to jail. Some people did go to jail — some people who rigged markets and the like, or insider traders, and so on.  But I think that we missed out on an opportunity to find out more about what individuals did and what individuals had responsibilities.  You could have bad things happen — you know, if a plane crashes, it doesn’t mean that somebody necessarily, you know, sabotaged the plane. It could have been a series of mistakes and errors.  And I’m sure that mistakes and errors were very important in the crisis, including on the regulatory side.  But to the extent that there was fraudulent behavior, or market rigging, or whatever, that should be investigated. I’m totally in favor of that.

DUBNER: So, you’re at Brookings now. I read you’re an adviser to a couple of investment firms, Pimco and Citadel. You do public speaking.  I’m curious, will you teach again?  Will you perhaps start a podcast?  What’s in your future?

BERNANKE: Well, I’ve been doing a little blogging as you may know. 

DUBNER: I do. I do enjoy your blog very much, too.

BERNANKE: Thank you. Good. Besides that, you know I just, obviously I just finished this book, The Courage to Act, the book about my experiences and my time in Washington.  So, I think I’m going to take a little bit of time to relax and breathe and think about what’s next.

DUBNER: I thank you so much.  I’ll call you Mr. Chairman even though you’ve given me permission to call you Ben just because it seems more appropriate.  But Mr. Chairman, thank you so much for your time. I appreciate it. 

BERNANKE: Thanks, Steve.

Maybe I’m reading between the lines, but my largest impression from speaking with Ben Bernanke is that he feels that his work during the financial crisis – and the work of many people around him, surely — is wildly underappreciated. That he happened to be on call when a ferocious storm slammed into the global economy, and even though it got very, very ugly for a while, and remains ugly in some places, that it could have easily gone beyond ugly had it not been for some very smart and cool-under-pressure responses. Indeed, some courageous responses, by his reckoning; again, his book is called The Courage to Act. We’ll never know what would have happened if the Fed and Treasury didn’t do what they did. But I will say this: it’s always easier to shout about the things that have gone wrong than to appreciate what hasn’t gone wrong. I’ve been thinking about this a lot lately after the terrorist attacks in Paris and elsewhere. Every attack produces the predictable cycle of shock and then the recrimination and finger-pointing – sometimes as much at law enforcement and intelligence and military officials as at the perpetrators. But what about when those same officials prevent a terrorist attack? Our appreciation is generally muted and short-lived. We forget about the catastrophe that was a hair’s breadth from happening. And we move on. Kind of like we’ve moved on from the financial crisis that Ben Bernanke helped steer us through.

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One more thing before we leave you today. In this season of generosity and giving – and, let’s be honest, year-end tax strategies — we hope you’ll add Freakonomics Radio to your holiday list. Remember: we need 1,000 listeners to donate this month to WNYC, our producing partner. When we get to that number, our loyal sponsor, New York Life, will contribute an extra $30,000. Please help us meet this New York Life listener challenge by donating here. Thanks very much.

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Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Greg Rosalsky. Our staff also includes Arwa GunjaJay CowitMerritt JacobChristopher WerthKasia Mychajlowycz, Alison Hockenberry, and Caroline English If you want more Freakonomics Radio, you can subscribe to our podcast on iTunes or wherever you get your podcasts.


Here’s where you can learn more about the people and ideas behind this episode:


Ben Bernanke, former Chairman of the Federal Reserve


The Courage to Act: A Memoir of a Crisis and Its Aftermath (W.W. Norton & Co., 2015)

The Great Moderation,” speech by Bernanke at the Eastern Economic Association Conference in Washington, D.C., 2004


Bernanke Swearing-In Ceremony, C-Span, Feb. 6, 2006

Quantitative Easing Explained,” YouTube video

Ben Bernanke was Wrong,” YouTube video


Keynesian economics have failed us since 1936. Austrian economics is king.

Ryan Alons

Regarding his comment on Taxes in 1930s:

I'm curious what he means when he says that taxes are higher now than they were then. Mostly I hear that taxes were much much higher on people earning higher incomes in the 1930s. In fact taxes were low in the 1920s for people earning higher incomes - I've heard this as one of the many contributors that lead to the Depression - and might have even contributed to the recent recession.

Maybe it's works out different because there used to be dozens of brackets as opposed to just 5? Would anyone care to give me a quick clarification on his statement about taxes?



Here are the historic tax rates:


"Good job" Hitler for raising the German economy only to ruin it a few years later together with so many lives.

"Good job" Bernanke for "preventing" the crisis and again for embalming ("fixing") the same economy into a nice corpse that almost looks alive. "

Good job" FDR for entering a war for world hegemony and thus increasing the ever-important "aggregate demand".

"Good job" Japan for a 25 year fiscal stimulus to nowhere - you are the pioneer now followed by everyone... to nowhere.


Hi All,

I was bummed to listen to the podcast today. One of the things that I love about this podcast is how it challenges me to see things in a different light but today I was saddened to hear how your guest was handled. It was quite obvious that Stephen disagreed with his positions and it was distracting from the information coming my way. I would appreciate a bit less criticism next time to give the listeners more of a chance to form their own opinion. Give us your take as well because thats what this is all about, but do it on your own time not by poking the guest. I am looking forward to listening next week, thanks!


Haha, I'm guessing Dubner totally agreed with Bernanke but it was nice he tried to play the devil's advocate for once.


Can someone please explain to me how a good like anything else with a useful life is supposed to do anything other than depreciate in value over time? Why are houses not subject to the laws of economics and only ever have upward movement in price?

And then, how is knowing that if housing prices go down and crashing the economy not viewed as a Ponzi Scheme? If there's not constant growth, then the people who borrowed money can't pay it back and it crashes the system. Again, that's a Ponzi Scheme.

Joe D

Not the house, but the land, is expected to be the appreciating asset ("they're not making any more of it," but we still make more people). A well-maintained house is expected to at least not depreciate (much).


Thank you, and that's a very interesting point. As Suburban Sprawl would point out there really isn't a "shortage" of land in America. So that argument would only be places where land is finite. And even then, with commuting the land argument sort of goes out the window.

Even more perverse, if it is indeed the land that has value what are we doing taxing houses to pay for the adjacent land infrastructure.

But holy crap, if the ever growing price for housing price Ponzi Scheme is happening again, then the 2008 Crash was actually a market correct we needed to have happen to get prices back to reflecting reality. All this QE and Zero Percent Interest rates are doing is screwing up the prices of stuff and creating another housing bubble.

Welp...we're doomed.

Keith Wiggans

Excellent interview. This was a tough one for Stephen as it seemed as though Bernanke had a simple rationalization for every one of his actions. It doesn't sound like he possesses the ability for self reflection. The interview was done extremely well even though Bernanke gave frustrating answers at times.

elizabeth hunter

having trouble finding a way to contact freakonomics, so i ask this off-topic question:
where can i find an online version of your report on music in stores/restaurants
which i heard this morning on NPR? many thanks! e. hunter


I wish Bernanke had been asked why no one considered giving a measly $50B to defaulting mortgage holders. Wouldn't this have also slowed a panic based on the collpase of value in MBSs, CDSs & CDOs ?
The financial markets had built a pyramid of debt, with uncapitalized 'insurance'- teetering on subprime mortgages.
Surely the trilliions loaned to AIG et al could have coincided with a broad federal mortgage 'bail out.'
If 50 million homeowners (and sleazy speculators) got even $25,000 each to cover late premiums, the housing market might have stabilized, folks could stay in houses and the nightmare of unraveling all the sliced up mortgages (with no one holding the 'paper' any more) avoided.
This has never been discussed.


I've often wondered why that isn't the measuring stick for a lot of government decisions "Would this project/policy have a greater return on investment than just cutting all the affected people a check?" Seems to me, in the housing market most things are done to ensure bank profits and inflate prices for the realtor/home-building lobby.

Fardosa Yusuf

I'm a listener of your podcasts through long hours of school and work one of your episodes on Should children pay their parents back, reminded me a time when my father told me the reason he still takes care of us not my older brother who is rather a 'loser' to his eyes is because we are a good investment. I didn't understand what he was talking about until I did a speech for one of my classes about this topic after listening it. The fact that my parents still take care of their children for financial purpose is a little chilling but amazing economic strategic. To conclude, your podcast is one of the things that help me and entertains me every day. Your food and science podcast was amazing.