ben s bernanke : monetary policy and the global economy speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the department of economics and sticerd ( suntory and toyota international centres for economics and related disciplines ) public discussion in association with the bank of england, london school of economics, london, 25 march 2013. * * * i ’ m very pleased to participate in this conference honoring my good friend mervyn king. as mervyn noted in a recent speech in new york, we had adjoining offices at mit as young academics and never imagined that 30 years later we still would be colleagues – as central bankers. 1 now, as then, i value his advice and insight. the topic of this session is lessons learned from the financial crisis. for me, perhaps the central insight is that the recent crisis, despite its many exotic features, was in fact a classic financial panic – a systemwide run of “ hot money ” away from assets whose values suddenly became uncertain. in that respect, the crisis was akin to many other financial crises faced by governments and central banks – including that most venerable of central banks, the bank of england – over the centuries. the response to the crisis likewise followed the classic prescriptions of liquidity provision, liability guarantees, asset evaluation and disposition, and recapitalization where necessary. although the crisis had classic features, to a significant extent it took place in a novel institutional context, making diagnosis and response more challenging : for example, in the united states, collateralized wholesale funding rather than conventional bank deposits constituted the hot money, and run pressure was experienced not only by banks but by diverse other institutions, such as structured investment vehicles. in addition, the scale and complexity of globalized financial institutions and markets made it difficult to predict how the crisis might spread or to coordinate the response. one of the few positive aspects of this episode was the extraordinary degree of international cooperation achieved among policymakers, including the bank of england and the federal reserve, in responding to the crisis. because i have developed these themes in some detail elsewhere, i thought today i would tackle a different and more recent issue that has arisen in the aftermath of the crisis – the issue of whether, in the widespread easing of monetary policies, we are seeing a competitive depreciation of exchange rates. 2 like other aspects of the crisis, the notion of competitive depreciation has strong classical antecedents, particularly in relation to the global great

depression of the 1930s. so let me start by briefly revisiting the older discussion and its evolution. as my audience knows, on the eve of the great depression the exchange rates of most industrial countries were determined by the rules of the international gold standard – or, more technically, by the gold - exchange standard, as foreign exchange ( primarily dollars and pounds sterling ) was used along with gold as a form of international reserves. the gold standard, which had been suspended during world war i, was painstakingly rebuilt in the 1920s. unfortunately, the reconstructed gold standard had a number of serious problems. see mervyn a. king ( 2012 ), “ talk to the economic club of new york, ” speech delivered at the economic club of new york, december 10, http : / / econclubny. com / events / transcript _ mervynking2012. pdf. see, for example, ben s. bernanke ( 2009 ), “ reflections on a year of crisis, ” speech delivered at “ financial stability and macroeconomic policy, ” a symposium sponsored by the federal reserve bank of kansas city, held in jackson hole, wyo., august 20 - 22 ; and ben s. bernanke ( 2012 ), “ some reflections on the crisis and the policy response, ” speech delivered at “ rethinking finance : perspectives on the crisis, ” a conference sponsored by the russell sage foundation and the century foundation, new york, april 13. see also ben s. bernanke ( 2010 ), “ causes of the recent financial and economic crisis, ” statement before the financial crisis inquiry commission, september 2. bis central bankers ’ speeches for one, the exchange rates implied by the gold valuations that countries chose for their currencies following world war i were in some cases far from the levels consistent with balanced flows in trade and payments. notably, as john maynard keynes pointed out in his famous pamphlet, the economic consequences of mr. churchill, the british pound was overvalued under the new gold standard, which disadvantaged british exports and contributed to weak economic conditions in the united kingdom in the late 1920s. 3 one of mervyn king ’ s predecessors as governor of the bank of england, montagu norman, who presided over both britain ’ s return to the gold standard and its subsequent exit, said of the illfated choice of parity for the pound : “ only god could tell whether it [ the value in gold chosen for the pound sterling ]