Bernanke Explains It All To The IMF - Live Webcast

Tyler Durden's picture


Ben Bernanke is participating in an IMF panel with Larry Summers, Ken Rogoff, and former Bank of Israel chief Stan Fischer... full speech below...


Live stream via BBG (if embed not working clck here)

Full Speech below:


The Crisis as a Classic Financial Panic

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 pre-Federal Reserve panics, money markets were tight when the panic struck in October, reflecting the strong seasonal demand for credit associated with the harvesting and shipment of crops. The immediate trigger of the panic was a failed effort by a group of speculators to corner the stock of the United Copper Company. The main perpetrators of the failed scheme, F. Augustus Heinze and C.F. Morse, had extensive connections with a number of leading financial institutions in New York City. When the news of the failed speculation broke, depositor fears about the health of those institutions led to a series of runs on banks, including a bank at which Heinze served as president. To try to restore confidence, the New York Clearinghouse, a private consortium of banks, reviewed the books of the banks under pressure, declared them solvent, and offered conditional support--one of the conditions being that Heinze and his board step down. These steps were largely successful in stopping runs on the New York banks.

But even as the banks stabilized, concerns intensified about the financial health of a number of so-called trust companies--financial institutions that were less heavily regulated than national or state banks and which were not members of the Clearinghouse. As the runs on the trust companies worsened, the companies needed cash to meet the demand for withdrawals. In the absence of a central bank, New York's leading financiers, led by J.P. Morgan, considered providing liquidity. However, Morgan and his colleagues decided that they did not have sufficient information to judge the solvency of the affected institutions, so they declined to lend. Overwhelmed by a run, the Knickerbocker Trust Company failed on October 22, undermining public confidence in the remaining trust companies.

To satisfy their depositors' demands for cash, the trust companies began to sell or liquidate assets, including loans made to finance stock purchases. The selloff of shares and other assets, in what today we would call a fire sale, precipitated a sharp decline in the stock market and widespread disruptions in other financial markets. Increasingly concerned, Morgan and other financiers (including the future governor of the Federal Reserve Bank of New York, Benjamin Strong) led a coordinated response that included the provision of liquidity through the Clearinghouse and the imposition of temporary limits on depositor withdrawals, including withdrawals by correspondent banks in the interior of the country. These efforts eventually calmed the panic. By then, however, the U.S. financial system had been severely disrupted, and the economy contracted through the middle of 1908.

The recent crisis echoed many aspects of the 1907 panic. Like most crises, the recent episode had an identifiable trigger--in this case, the growing realization by market participants that subprime mortgages and certain other credits were seriously deficient in their underwriting and disclosures. As the economy slowed and housing prices declined, diverse financial institutions, including many of the largest and most internationally active firms, suffered credit losses that were clearly large but also hard for outsiders to assess. Pervasive uncertainty about the size and incidence of losses in turn led to sharp withdrawals of short-term funding from a wide range of institutions; these funding pressures precipitated fire sales, which contributed to sharp declines in asset prices and further losses. Institutional changes over the past century were reflected in differences in the types of funding that ran: In 1907, in the absence of deposit insurance, retail deposits were much more prone to run, whereas in 2008, most withdrawals were of uninsured wholesale funding, in the form of commercial paper, repurchase agreements, and securities lending. Interestingly, a steep decline in interbank lending, a form of wholesale funding, was important in both episodes. Also interesting is that the 1907 panic involved institutions--the trust companies--that faced relatively less regulation, which probably contributed to their rapid growth in the years leading up to the panic. In analogous fashion, in the recent crisis, much of the panic occurred outside the perimeter of traditional bank regulation, in the so-called shadow banking sector.5 

The responses to the panics of 1907 and 2008 also provide instructive comparisons. In both cases, the provision of liquidity in the early stages was crucial. In 1907 the United States had no central bank, so the availability of liquidity depended on the discretion of firms and private individuals, like Morgan. In the more recent crisis, the Federal Reserve fulfilled the role of liquidity provider, consistent with the classic prescriptions of Walter Bagehot.6 The Fed lent not only to banks, but, seeking to stem the panic in wholesale funding markets, it also extended its lender-of-last-resort facilities to support nonbank institutions, such as investment banks and money market funds, and key financial markets, such as those for commercial paper and asset-backed securities.

In both episodes, though, liquidity provision was only the first step. Full stabilization requires the restoration of public confidence. Three basic tools for restoring confidence are temporary public or private guarantees, measures to strengthen financial institutions' balance sheets, and public disclosure of the conditions of financial firms. At least to some extent, Morgan and the New York Clearinghouse used these tools in 1907, giving assistance to troubled firms and providing assurances to the public about the conditions of individual banks. All three tools were used extensively in the recent crisis: 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 activities, can directly limit risk-taking. Second, through the use of appropriate carrots and sticks, regulators can enlist the private sector in monitoring risk-taking. For example, the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) process, the descendant of the bank stress tests of 2009, requires not only that large financial institutions have sufficient capital to weather extreme shocks, but also that they demonstrate that their internal risk-management systems are effective.9 In addition, the results of the stress-test portion of CCAR are publicly disclosed, providing investors and analysts information they need to assess banks' financial strength.

Of course, market discipline can only limit moral hazard to the extent that debt and equity holders believe that, in the event of distress, they will bear costs. In the crisis, the absence of an adequate resolution process for dealing with a failing SIFI left policymakers with only the terrible choices of a bailout or allowing a potentially destabilizing collapse. The Dodd-Frank Act, under the orderly liquidation authority in Title II, created an alternative resolution mechanism for SIFIs that takes into account both the need, for moral hazard reasons, to impose costs on the creditors of failing firms and the need to protect financial stability; the FDIC, with the cooperation of the Federal Reserve, has been hard at work fleshing out this authority.10 A credible resolution mechanism for systemically important firms will be important for reducing uncertainty, enhancing market discipline, and reducing moral hazard.

Our continuing challenge is to make financial crises far less likely and, if they happen, far less costly. The task is complicated by the reality that every financial panic has its own unique features that depend on a particular historical context and the details of the institutional setting. But, as Stan Fischer has done with unusual skill throughout his career, one can, by stripping away the idiosyncratic aspects of individual crises, hope to reveal the common elements. In 1907, no one had ever heard of an asset-backed security, and a single private individual could command the resources needed to bail out the banking system; and yet, fundamentally, the Panic of 1907 and the Panic of 2008 were instances of the same phenomenon, as I have discussed today. The challenge for policymakers is to identify and isolate the common factors of crises, thereby allowing us to prevent crises when possible and to respond effectively when not.


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Fri, 11/08/2013 - 16:31 | 4136555 HedgeAccordingly
HedgeAccordingly's picture

The man the myth the legend He saved us all! !!  -

oh and $JPM 

Fri, 11/08/2013 - 16:32 | 4136556 Zer0head
Zer0head's picture

is $TWTR about to enter bear territory?

trading almost 20% off of its intraday highs

Fri, 11/08/2013 - 16:35 | 4136567 Black Forest
Black Forest's picture

What's $TWTR? A thorium explorer?

Fri, 11/08/2013 - 16:39 | 4136580 LetThemEatRand
LetThemEatRand's picture

A money disposal device.

Fri, 11/08/2013 - 16:42 | 4136593 fonzannoon
fonzannoon's picture

The next BTFD class schedule will be announced shortly

Fri, 11/08/2013 - 16:34 | 4136564 ziggy59
ziggy59's picture

Can we get a drone and some coordinates?

Fri, 11/08/2013 - 16:44 | 4136598 eclectic syncretist
eclectic syncretist's picture

Bernanke is worse than a shizophrenic pedophile, and should be force fed his nuts wrapped in $100 notes. 

"And you rage and fume at the godless ones
Cause they don't understand how the company runs
And they think it's the money that you care about
You pretend to be offended when they figure it out
Tell me what kind of heaven do you think awaits
When your ass is too fat to fit the pearly gates?
It's like the eye of a needle and a limosine
Paradise is set aside for the less obscene
You only care for the power that the lucre brings
And you have no love for any living thing, save Mammon

And you'd like to rub our face in it"

Fri, 11/08/2013 - 16:43 | 4136599 Divided States ...
Divided States of America's picture

good fuckin idea, we can get rid of three of the biggest zionist financial terrorists in one fell swoop...

Fri, 11/08/2013 - 16:45 | 4136603 alphamentalist
alphamentalist's picture

"Of course, market discipline can only limit moral hazard to the extent that debt and equity holders believe that, in the event of distress, they will bear costs." <snort>

Fri, 11/08/2013 - 16:34 | 4136565 Billy Sol Estes
Billy Sol Estes's picture

Heart throb

Fri, 11/08/2013 - 16:38 | 4136574 monad
monad's picture

the Panic of 1907 and the Panic of 2008 were instances of the same phenomenon

The criminal is admitting, leering, bragging, jeering that Rothschild minions did 2008.  FU Bernanke

Fri, 11/08/2013 - 16:41 | 4136585 NOTaREALmerican
NOTaREALmerican's picture

Re:  The challenge for policymakers is to identify and isolate the common factors of crises, thereby allowing us to prevent crises when possible and to respond effectively when not.

But NOT the common factor of centralized control and TBTF banks.   That's gotta stay.

Fri, 11/08/2013 - 16:41 | 4136586 101 years and c...
101 years and counting's picture

let me summarize...."we are clueless apes with a printer"

Fri, 11/08/2013 - 16:57 | 4136646 Honey Badger
Honey Badger's picture

They are not clueless, they are criminal and they know exactly what they are doing.  

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.

Of course, market discipline can only limit moral hazard to the extent that debt and equity holders believe that, in the event of distress, they will bear costs.

First, regulatory and supervisory reforms, such as higher capital and liquidity standards or restriction on certain activities, can directly limit risk-taking.

Second, through the use of appropriate carrots and sticks, regulators can enlist the private sector in monitoring risk-taking.

A credible resolution mechanism for systemically important firms will be important for reducing uncertainty, enhancing market discipline, and reducing moral hazard.

To summarize, investors must accept the consequences of bad choices, so the Fed will take action to limit how much risk an investor can take, monitor how much risk an investor will take, and save investors from their mistakes if they are deemed too big to fail i.e. investors that are part of the club.

Bernanke is a  criminal.  I sincerely hope he gets what he deserves.

Fri, 11/08/2013 - 23:27 | 4137703 Radical Marijuana
Radical Marijuana's picture

Yesh, Honey Badger, that meeting is like an open air convention of some of the current representatives of the best organized crime gang in the world, the one that has been systematically able to apply the methods of organized crime to take over governments.

Fri, 11/08/2013 - 16:41 | 4136590 GolfHatesMe
GolfHatesMe's picture

Yes, yes, the two week liquldity problem is totally solved.  Thank you for 4 years of solution. 

Fri, 11/08/2013 - 16:46 | 4136605 q99x2
q99x2's picture

Arrest them while they are all in one place. Don't let them get away.

Fri, 11/08/2013 - 23:30 | 4137709 Radical Marijuana
Radical Marijuana's picture

Nice suggstion, q99x2, but that does NOT address the paradox of enforcement, that only those who are the best at being dishonest, and backing that up with violence, can actually enforce their "rule of law."

Fri, 11/08/2013 - 16:47 | 4136608 alien-IQ
alien-IQ's picture

Where the fuck are the drones when you really need em?

Fri, 11/08/2013 - 16:48 | 4136613 thismarketisrigged
thismarketisrigged's picture

lol, this shitfest is going to erase all losses from yesterday, and maybe even gain some .


its so fucking criminal and they do not fucking prosecute these fuckers responsible.


im nauseous

Fri, 11/08/2013 - 16:54 | 4136631 thismarketisrigged
thismarketisrigged's picture

can we add this fucking asshole david darst from morgan stanley to the hitlist?


this guy is such a fucking asshole, every friday he comes on cnbc and spews the same fucking bullshit,'' china is recovering, europe is great, jobs r great in the u.s, yet this asshole does not fucking mention that nearly 1,000,000 people withdrew from the labor force,


fuck u david, u fucking jackass

Fri, 11/08/2013 - 16:54 | 4136633 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

I thought he was trying to avert the crisis of 1929? Now it is 1907?

Fri, 11/08/2013 - 16:55 | 4136637 khakuda
khakuda's picture

Hi Everyone,

We make Bubbles!

Thank you.  Any questions?

Fri, 11/08/2013 - 17:01 | 4136660 Bay of Pigs
Bay of Pigs's picture

Fischer: "The system proved the stress tests were successful". 

Ummmm.....what about FASB 157 asshole? Pretty easy to make balance sheets look great when you have everything "marked to unicorn".

This guy makes no sense at all. Blah, fucking blah.

Fri, 11/08/2013 - 17:02 | 4136664 halfawake
halfawake's picture

i could only read four sentences before i barfed.

Fri, 11/08/2013 - 17:09 | 4136681 ebworthen
ebworthen's picture


"It's nice to be here and celebrate the establishment of an illegal banking cabal that creates and promotes the crises it was supposedly instituted to prevent or solve - and to celebrate the line of economic alchemists who help to perpetuate the great lie and indoctrinate new acolytes into the fold of dark necromancers who punish savers while rewarding graft, debt spending, profligate government, crony capitalism, and a parasitic financial system - while providing us fat salaries and benefits along with Nobel Prizes.  A toast, Ladies and Gentleman, to circular reasoning and the confounding of common sense with nebulous theory and econometric modeling!"

Fri, 11/08/2013 - 17:06 | 4136683 Bay of Pigs
Bay of Pigs's picture

Rogoff kissing everyones ass now. Nice work Ken you cocksucker.

Fri, 11/08/2013 - 17:08 | 4136692 Westcoastliberal
Westcoastliberal's picture

There is more truth here than any article I've recently read:

Fri, 11/08/2013 - 17:11 | 4136705 Duc888
Duc888's picture

The whole system is fueled by bullshit.  What did you expect from Thebernanke, the truth?


Fri, 11/08/2013 - 17:18 | 4136731 rp1
Fri, 11/08/2013 - 17:20 | 4136747 Atomizer
Atomizer's picture

What a spineless piece of shit, Mr. Bernanke. Why didn’t you talk with Chairman Christian Noyer? The Bank of International Settlements creates new bubbles & shell games for the IMF. Do you think they won’t catch onto your double talk?


The BIS Board of Directors:

  • Chairman: Christian Noyer, Paris
  • Ben S Bernanke, Washington
  • Mark Carney, London
  • Agustín Carstens, Mexico City
  • Luc Coene, Brussels
  • Jon Cunliffe, London
  • Andreas Dombret, Frankfurt am Main
  • Mario Draghi, Frankfurt am Main
  • William C Dudley, New York
  • Stefan Ingves, Stockholm
  • Thomas Jordan, Zurich
  • Klaas Knot, Amsterdam
  • Haruhiko Kuroda, Tokyo
  • Fabio Panetta, Rome
  • Stephen S Poloz, Ottawa
  • Guy Quaden, Brussels
  • Ignazio Visco, Rome
  • Jens Weidmann, Frankfurt am Main
  • Zhou Xiaochuan, Beijing

Fri, 11/08/2013 - 18:38 | 4137007 Cacete de Ouro
Cacete de Ouro's picture

Bummers, Togoff and Fishy are also all in the Group of Thirty...

It won't be long until the Bernanke joins them (in the G30)

Fri, 11/08/2013 - 18:14 | 4136940 djsmps
djsmps's picture

Did his voice tremble like that of a little girl in a rattlesnake's lair?

Fri, 11/08/2013 - 19:08 | 4137086 fukidontknow
fukidontknow's picture

Limit moral hazard by stealing deposits instead of stealing tax payer money, good one Bernanke as always your logic is flawless.


Fri, 11/08/2013 - 19:57 | 4137204 CHX
CHX's picture

Did anyone say it? I did not check...

F U BEN (and remain in pain forever) [aka FUBAR IP F]

Fri, 11/08/2013 - 22:06 | 4137518 knowshitsurelock
knowshitsurelock's picture

Its actually quite simple.  Steal the right to print money from the people, charge interest on ALL money entering commerce so that ALL liquidity is based on debt.

Increase the money supply (debt) till it can no longer be serviced by new debt, then decrease the money supply, call in all the loans and bankrupt the people.

Now, go in and take all the assets at pennies on the dollar.  Rinse-repeat.

Over and over and over, and we still fall for this shit without firing the elite bankster bastards, and then distributing the means of exchange WITHOUT INTEREST!

So simple, yet most do not get it.

Sat, 11/09/2013 - 04:01 | 4137991 Sizzurp
Sizzurp's picture

Seems like we recovered a bit quicker after some legitimate failures in 1907-08.  A short quick hit to clean out the crap.  Now contrast that to the current debacle which was created by the Fed itself.  In 2008, after years of negligent accommodative Fed interest rate policy, we have the failure of Lehman, followed by massive liquidity intervention by the the same bozos created the problem to begin with.  Fast forward 5 years later, the economy has had an anemic artificial recovery and requires permanent infusion Fed cash to avoid what should have happened 5 years ago.  We have bubbles in bonds and equities that threaten to burst should the printing stop.  Unemployment remains stubbornly high, and GDP growth is pathetic.  We have 40 plus million on food stamps, record government debt, and no hopes of reversal. Yeah Bennie, you are the man.  Give yourself a big pat on the back.

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