: in the united states, guarantees included the federal deposit insurance corporation ’ s ( fdic ) guarantees of bank debt, the treasury department ’ s guarantee of money market funds, and the private guarantees offered by stronger firms that acquired weaker ones. public and private capital injections strengthened bank balance sheets. finally, the bank stress tests that the federal reserve led in the spring of 2009 and the publication of the stress - test findings helped restore confidence in the u. s. banking system. collectively, these measures helped end the acute phase of the financial crisis, although, five years later, the economic consequences are still with us. once the fire is out, public attention turns to the question of how to better fireproof the system. here, the context and the responses differed between 1907 and the recent crisis. as i mentioned, following the 1907 crisis, reform efforts led to the founding of the federal reserve, which was charged both with helping to prevent panics and, by providing an “ elastic currency, ” with smoothing seasonal interest rate fluctuations. in contrast, reforms since 2008 have focused on critical regulatory gaps revealed by the crisis. notably, oversight of the shadow banking system is being strengthened through the designation, by the new financial stability oversight council, of nonbank systemically important financial institutions ( sifis ) for consolidated supervision by the federal reserve, and measures are being undertaken to address the potential instability of wholesale funding, including reforms to money market funds and the triparty repo market. 7 as we try to make the financial system safer, we must inevitably confront the problem of moral hazard. the actions taken by central banks and other authorities to stabilize a panic in the short run can work against stability in the long run, if investors and firms infer from those actions that they will never bear the full consequences of excessive risk - taking. as stan fischer reminded us following the international crises of the late 1990s, the problem of moral hazard has no perfect solution, but steps can be taken to limit it. 8 first, regulatory and supervisory reforms, such as higher capital and liquidity standards or restriction on certain functions – but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. examples of important components of the shadow banking system include securitization vehicles, asset - backed commercial paper conduits, money market funds, markets for repurchase agreements, investment banks, and mortgage companies. see bagehot, lombard street, in note 1. for a

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