ben s bernanke : american international group testimony by mr ben s bernanke, chairman of the board of governors of the us federal reserve system, before the committee on financial services, us house of representatives, washington dc, 24 march 2009. * * * chairman frank, ranking member bachus, and other members of the committee, i appreciate having this opportunity to discuss the federal reserve's involvement with american international group, inc. ( aig ). in my testimony, i will describe why supporting aig was a difficult but necessary step to protect our economy and stabilize our financial system. i will also discuss issues related to compensation and note two matters raised by this experience that merit congressional attention. reasons for our original lending decision we at the federal reserve, working closely with the treasury, made our decision to lend to aig on september 16 of last year. it was an extraordinary time. global financial markets were experiencing unprecedented strains and a worldwide loss of confidence. fannie mae and freddie mac had been placed into conservatorship only two weeks earlier, and lehman brothers had filed for bankruptcy the day before. we were very concerned about a number of other major firms that were under intense stress. aig's financial condition had been deteriorating for some time, caused by actual and expected losses on subprime mortgage - backed securities and on credit default swaps that aig's financial products unit, aig - fp, had written on mortgage - related securities. as confidence in the firm declined, and with efforts to find a private - sector solution unsuccessful, aig faced severe liquidity pressures that threatened to force it imminently into bankruptcy. the federal reserve and the treasury agreed that aig's failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for our economy. some of aig's insurance subsidiaries, which are among the largest in the united states and the world, would have likely been put into rehabilitation by their regulators, leaving policyholders facing considerable uncertainty about the status of their claims. state and local government entities that had lent more than $ 10 billion to aig would have suffered losses. workers whose 401 ( k ) plans had purchased $ 40 billion of insurance from aig against the risk that their stable value funds would decline in value would have seen that insurance disappear. global banks and investment banks would have suffered losses on loans and lines of credit to aig, and on derivatives with aig - fp. the

2023 ) present analyses emphasizing that disinflation would require economic slack. public reversal has been a key part of the story of its decline. the unwinding of these factors took much longer than expected but ultimately played a large role in the subsequent disinflation. our restrictive monetary policy contributed to a moderation in aggregate demand, which combined with improvements in aggregate supply to reduce inflationary pressures while allowing growth to continue at a healthy pace. as labor demand also moderated, the historically high level of vacancies relative to unemployment has normalized primarily through a decline in vacancies, without sizable and disruptive layoffs, bringing the labor market to a state where it is no longer a source of inflationary pressures. a word on the critical importance of inflation expectations. standard economic models have long reflected the view that inflation will return to its objective when product and labor markets are balanced — without the need for economic slack — so long as inflation expectations are anchored at our objective. that ’ s what the models said, but the stability of longer - run inflation expectations since the 2000s had not been tested by a persistent burst of high inflation. it was far from assured that the inflation anchor would hold. concerns over de - anchoring contributed to the view that disinflation would require slack in the economy and specifically in the labor market. an important takeaway from recent experience is that anchored inflation expectations, reinforced by vigorous central bank actions, can facilitate disinflation without the need for slack. this narrative attributes much of the increase in inflation to an extraordinary collision between overheated and temporarily distorted demand and constrained supply. while researchers differ in their approaches and, to some extent, in their conclusions, a consensus seems to be emerging, which i see as attributing most of the rise in inflation to public this collision. 15 all told, the healing from pandemic distortions, our efforts to moderate aggregate demand, and the anchoring of expectations have worked together to put inflation on what increasingly appears to be a sustainable path to our 2 percent objective. disinflation while preserving labor market strength is only possible with anchored inflation expectations, which reflect the public ’ s confidence that the central bank will bring about 2 percent inflation over time. that confidence has been built over decades and reinforced by our actions. that is my assessment of events. your mileage may vary. conclusion let me wrap up by emphasizing that the pandemic economy has proved to be unlike any other