ben s bernanke : the crisis as a classic financial panic speech by mr ben s bernanke, chairman of the board of governors of the us federal reserve system, at the fourteenth jacques polak annual research conference, washington dc, 8 november 2013. * * * i am very pleased to participate in this event in honor of stanley fischer. stan was my teacher in graduate school, and he has been both a role model and a frequent adviser ever since. an expert on financial crises, stan has written prolifically on the subject and has also served on the front lines, so to speak – notably, in his role as the first deputy managing director of the international monetary fund during the emerging market crises of the 1990s. stan also helped to fight hyperinflation in israel in the 1980s and, as the governor of that nation ’ s central bank, deftly managed monetary policy to mitigate the effects of the recent crisis on the israeli economy. subsequently, as israeli housing prices ran upward, stan became an advocate and early adopter of macroprudential policies to preserve financial stability. stan frequently counseled his students to take a historical perspective, which is good advice in general, but particularly helpful for understanding financial crises, which have been around a very long time. indeed, as i have noted elsewhere, i think the recent global crisis is best understood as a classic financial panic transposed into the novel institutional context of the 21st century financial system. 1 an appreciation of the parallels between recent and historical events greatly influenced how i and many of my colleagues around the world responded to the crisis. besides being the fifth anniversary of the most intense phase of the recent crisis, this year also marks the centennial of the founding of the federal reserve. 2 it ’ s particularly appropriate to recall, therefore, that the federal reserve was itself created in response to a severe financial panic, the panic of 1907. this panic led to the creation of the national monetary commission, whose 1911 report was a major impetus to the federal reserve act, signed into law by president woodrow wilson on december 23, 1913. because the panic of 1907 fit the archetype of a classic financial panic in many ways, it ’ s worth discussing its similarities and differences with the recent crisis. 3 like many other financial panics, including the most recent one, the panic of 1907 took place while the economy was weakening ; according to the national bureau of economic research, a recession had begun in may 1907. 4 also, as was characteristic of

the towel and drop out. extended periods of weak demand appear to cause companies to invest less in plant and technology, which slows the growth of the productivity of the workforce. the number of new business formations declines sharply, perhaps because of reduced credit availability, which may depress hiring, productivity, business innovation, and hence trend output. 8 corporate spending on research and development has also been strongly procyclical, which may have similar effects. 9 turning to the recent u. s. experience, many economists now estimate that substantially more than half of the shortfall in gross domestic product relative to its pre - crisis trend represents a reduction of potential output and not just a shortfall in demand. 10 u. s. labor force damage likely accounts for some part of the shortfall. 11 the greater part appears to christina d. romer and david h. romer ( 2015 ), “ new evidence on the impact of financial crises in advanced countries, ” nber working paper series 21021 ( cambridge, mass. : national bureau of economic research, march ). for example, martin, munyan, and wilson show that estimates of potential output generated by common filtering techniques tend to revise down following recessions as actual output grows slower than its prerecession trend ; see martin, munyan, and wilson, “ potential output and recessions, ” in note 5. in other words, looking backward with many years of hindsight at the evolution of output following a financial crisis, the negative effect on potential output is clearer than it is when estimating the level of potential output in real time immediately following the crises. as an example of this type of exercise, see furceri and mourougane, “ effect of financial crises on potential output, ” in note 5. see congressional budget office ( 2014 ), revisions to cbo ’ s projection of potential output since 2007 ( pdf ) ( washington : cbo, february ). see dave reifschneider, william wascher, and david wilcox ( 2013 ), “ aggregate supply in the united states : recent developments and implications for the conduct of monetary policy, ” finance and economics discussion series 2013 – 77 ( washington : board of governors of the federal reserve system, november ) ; and hall, “ quantifying the lasting harm to the u. s. economy, ” in note 4. for evidence regarding the link between fewer start - ups and lower job growth, see ryan decker, john halti