Ben S Bernanke: Emerging from the crisis - where do we stand?
Speech by Mr Ben S Bernanke, Chairman of the Board of Governors of the Federal Reserve
System, at the 6th ECB Central Banking Conference, Frankfurt am Main, 19 November 2010.
* * *
The last time I was here at the European Central Bank (ECB), almost exactly two years ago,
I sat on a distinguished panel much like this one to help mark the 10th anniversary of the
euro. Even as we celebrated the remarkable achievements of the founders of the common
currency, however, the global economy stood near the precipice. Financial markets were
volatile and illiquid, and the viability of some of the world's leading financial institutions had
been called into question. With asset prices falling and the flow of credit to the nonfinancial
sector constricted, most of the world's economies had entered what would prove to be a
sharp and protracted economic downturn.
By the time of that meeting, the world's central banks had already taken significant steps to
stabilize financial markets and to mitigate the worst effects of the recession, and they would
go on to do much more. Very broadly, the responses of central banks to the crisis fell into
two classes. First, central banks undertook a range of initiatives to restore normal functioning
to financial markets and to strengthen the banking system. They expanded existing lending
facilities and created new facilities to provide liquidity to the financial sector. Key examples
include the ECB's one-year long-term refinancing operations, the Federal Reserve's auctions
of discount window credit (via the Term Auction Facility), and the Bank of Japan's more
recent extension of its liquidity supply operations. To help satisfy banks' funding needs in
multiple currencies, central banks established liquidity swap lines that allowed them to draw
each other's currencies and lend those funds to financial institutions in their jurisdictions; the
Federal Reserve ultimately established swap lines with 14 other central banks. Central banks
also worked to stabilize financial markets that were important conduits of credit to the
nonfinancial sector. For example, the Federal Reserve launched facilities to help stabilize the
commercial paper market and the market for asset-backed securities, through which flow
much of the funding for student, auto, credit card, and small business loans as well as for
commercial mortgages. In addition, the Federal Reserve, the ECB, the Bank of England, the
Swiss National Bank, and other central banks played important roles in stabilizing and
strengthening their respective banking systems. In particular, central banks helped develop
and oversee stress tests that assessed banks' vulnerabilities and capital needs. These tests
proved instrumental in reducing investors' uncertainty about banks' assets and prospective
losses, bolstering confidence in the banking system, and facilitating banks' raising of private
capital. Central banks are also playing an important ongoing role in the development of new
international capital and liquidity standards for the banking system that will help protect
against future crises.
Second, beyond necessary measures to stabilize financial markets and banking systems,
central banks moved proactively to ease monetary policy to help support their economies.
Initially, monetary policy was eased through the conventional means of cuts in short-term
policy rates, including a coordinated rate cut in October 2008 by the Federal Reserve, the
ECB, and other leading central banks. However, as policy rates approached the zero lower
bound, central banks eased policy by additional means. For example, some central banks,
including the Federal Reserve, sought to reduce longer-term interest rates by communicating
that policy rates were likely to remain low for some time. A prominent example of the use of
central bank communication to further ease policy was the Bank of Canada's conditional
commitment to keep rates near zero until the end of the second quarter of 2010.1 To provide
additional monetary accommodation, several central banks - among them the Federal
Reserve, the Bank of England, the ECB, and the Bank of Japan - purchased significant
quantities of financial assets, including government debt, mortgage-backed securities, or
covered bonds, depending on the central bank. Asset purchases seem to have been
effective in easing financial conditions; for example, the evidence suggests that such
purchases significantly lowered longer-term interest rates in both the United States and the
United Kingdom.2
Although the efforts of central banks to stabilize the financial system and provide monetary
accommodation helped set the stage for recovery, economic growth rates in the advanced
economies have been relatively weak. Of course, the economic outlook varies importantly by
country and region, and the policy responses to these developments among central banks
have differed accordingly. In the United States, we have seen a slowing of the pace of
expansion since earlier this year. The unemployment rate has remained close to 10 percent
since mid-2009, with a substantial fraction of the unemployed out of work for six months or
longer. Moreover, inflation has been declining and is currently quite low, with measures of
underlying inflation running close to 1 percent. Although we project that economic growth will
pick up and unemployment decline somewhat in the coming year, progress thus far has been
disappointingly slow.
In this environment, the Federal Open Market Committee (FOMC) judged that additional
monetary policy accommodation was needed to support the economic recovery and help
ensure that inflation, over time, is at desired levels. Accordingly, the FOMC announced
earlier this month its intention to purchase an additional $600 billion of longer-term Treasury
securities by the end of the second quarter of 2011, a pace of about $75 billion per month.
The Committee also will maintain its current policy of reinvesting principal payments from its
securities holdings in longer-term Treasury securities. Financial conditions eased notably in
anticipation of the Committee's announcement, suggesting that this policy will be effective in
promoting recovery. As has been the case with more conventional monetary policy in the
past, this policy action will be regularly reviewed in light of the evolving economic outlook and
the Committee's assessment of the effects of its policies on the economy.
I draw several lessons from our collective experience in dealing with the crisis. (My list is by
no means exhaustive.) The first lesson is that, in a world in which the consequences of
financial crises can be devastating, fostering financial stability is a critical part of overall
macroeconomic management. Accordingly, central banks and other financial regulators must
be vigilant in monitoring financial markets and institutions for threats to systemic stability and
diligent in taking steps to address such threats. Supervision of individual financial institutions,
macroprudential monitoring, and monetary policy are mutually reinforcing undertakings, with
active involvement in one sphere providing crucial information and expertise for the others.
Indeed, at the Federal Reserve, we have restructured our financial supervisory functions so
that staff members with expertise in a range of areas - including economics, financial
markets, and supervision - work closely together in evaluating potential risks.
Second, the past two years have demonstrated the value of policy flexibility and openness to
new approaches. During the crisis, central banks were creative and innovative, developing
programs that played a significant role in easing financial stress and supporting economic
activity. As the global financial system and national economies become increasingly complex
and interdependent, novel policy challenges will continue to require innovative policy
responses.
Third, as was the focus of my remarks two years ago, in addressing financial crises,
international cooperation can be very helpful; indeed, given the global integration of financial
markets, such cooperation is essential. Central bankers worked closely together throughout
the crisis and continue to do so. Our frequent contact, whether in bilateral discussions or in
international meetings, permits us to share our thinking, compare analyses, and stay
informed of developments around the world. It also enables us to move quickly when shared
problems call for swift joint responses, such as the coordinated rate cuts and the creation of
liquidity swap lines during the crisis. These actions and others we've taken over the past few
years underscore our resolve to work together to address our common economic challenges.
References
Chehal, Puneet, and Bharat Trehan (2009). "Talking about Tomorrow's Monetary Policy
Today," FRBSF Economic Letter 2009-35. San Francisco: Federal Reserve Bank of San
Francisco, November 9.
D'Amico, Stefania, and Thomas B. King (2010). "Flow and Stock Effects of Large-Scale
Treasury Purchases," Finance and Economics Discussion Series 2010-52. Washington:
Board of Governors of the Federal Reserve System, September.
Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack (2010). "Large-Scale
Asset Purchases by the Federal Reserve: Did They Work?" Federal Reserve Bank of New
York Staff Reports 441. New York: Federal Reserve Bank of New York, March.
Hamilton, James D., and Jing (Cynthia) Wu (2010). "The Effectiveness of Alternative
Monetary Policy Tools in a Zero Lower Bound Environment," working paper. San Diego:
University of California, San Diego, August (revised November).
He, Zhongfang (2010). "Evaluating the Effect of the Bank of Canada's Conditional
Commitment Policy,"
Bank of Canada Discussion Paper 2010-11. Ottawa: Bank of Canada,
August.
Joyce, Michael, Ana Lasaosa, Ibrahim Stevens, and Matthew Tong (2010). "The Financial
Market Impact of Quantitative Easing,"
Working Paper 393. London: Bank of England, July
(revised August).