Source: CITIC Press
When the world’s major central banks are vigorously tightening monetary policy, the global market fluctuates frequently, and this year’s Nobel Prize in Economics is particularly fitting.
On the evening of October 10, Beijing time, the winner of the Nobel Prize in Economics was announced. The 2022 Nobel Prize in Economics was awarded to former Federal Reserve Chairman Ben S. Bernanke, Douglas W. Diamond, professor at the University of Chicago Booth School of Business, and Philip W. Philip H. Dybvig for their outstanding contributions to the field of banking and financial crisis research.
The following is an excerpt from Ben Bernanke’s author’s foreword to his book Fire Fighting: The American Financial Crisis and Its Lessons. Let’s look back at the financial crisis and then think about how the Fed responds to the global economic recession, providing a reference for future crisis analysis and fire fighting tool reserves.
Financial catastrophe rarely happens. Often, financial markets are set on fire by their own chaos. The market adjusted spontaneously, and the company began to fail, but the situation remained the same. Sometimes the fires of financial crises are so intense that policymakers have to come forward to “fight the fire.” They will make loans to businesses to provide the liquidity they need, or a safe way to help companies in crisis land smoothly, but the situation is likely to continue. Financial crises rarely get to the brink of out of control, or even nearly destroy the financial system and other economic sectors, causing great damage and losses to the economy. This happened during the Great Depression in the United States, and it hasn’t happened again for 75 years.
But in 2008, the same scenario reappeared. The U.S. government—two consecutive presidents, Congress, the Federal Reserve, and countless public officials working across government agencies—had to deal with a financial crisis that has been severe for generations. At the time, the three of us had a heavy load on our shoulders—me, then Fed Chairman Ben Bernanke; Henry Paulson, president of the Bush presidency; Timothy Geithner, president of the New York Federal Reserve under Bush Bank president, served as president during the Obama presidency. We pushed the U.S. and other countries to develop strategies to deal with the crisis that slammed global credit markets, wrecked the international financial system, and plunged the U.S. economy into a 1930s-era 1930s-era ghetto of people waiting for relief Stacks since the Great Depression, for severe recessions.
With the full cooperation of our colleagues at the Federal Reserve and elsewhere, we have undertaken a series of extraordinary emergency interventions, escalating conventional and unconventional government bailouts for key businesses, and government support for key credit markets. When the crisis spread, we persuaded Congress to give us stronger policy-making powers to respond to the crisis, including authorizing direct injections of tens of billions of dollars into private financial institutions. We fought side by side with an outstanding and dedicated team of public officials in the United States and around the world to effectively stabilize the financial system before a freeze in access to credit and a collapse in asset values could drag the wider economy into a second Great Depression . Even so, the economy has suffered a major blow, so monetary policy tools and fiscal stimulus are needed to help the economy recover.
It was a financial panic to go down in history, reminiscent of the runs and crises that have plagued the financial industry for centuries. Long-term experience has taught us that the harm caused by financial panics never ends with the financial sector itself, although stopping such panics often requires supporting the financial sector. Americans who are not bankers or investors still rely on an efficient credit system to buy cars and houses, pay for college, and grow their careers. Financial crises that disrupt the credit system can create a severe recession that hurts both ordinary households and financial elites. Today, most of the American public remembers the government bailout of Wall Street as an intervention, but our goal has always been to protect the subject from the consequences of a financial collapse. The way to control the economic damage caused by the financial crisis is to put out the fire, although to do this we have to help some of the people who created the crisis.
Ten years later, we think it would be instructive to look back at how the crisis unfolded and reflect on lessons that might help reduce the damage of future crises. All three of us have written memoirs about our experiences during the 2008 financial crisis, but we wanted to talk about what we did together and what we learned together, both at the theoretical and practical levels of dealing with the financial crisis. We have very different backgrounds and personalities, and we didn’t know each other before the crisis. In the process of responding to the crisis, we have found a way to achieve effective cooperation, and we also agree that some basic laws can be used to resolve the financial crisis. Part of the reason why the financial crisis broke out again is that we have forgotten it, and we are recording it again to pass on some important lessons from our past experiences, which hopefully will keep your memories fresh , and in the future help crisis solvers protect the economy from financial crises.
Why is this crisis happening? Why is the crisis so devastating?
The 2008 financial crisis was a typical financial panic, triggered by the mortgage confidence crisis and spreading to the financial system. The credit boom was the main driver, as crises often show, with many households, like financial institutions, becoming dangerously overleveraged, already debt-ridden. This risk is exacerbated for two reasons: one is that a lot of risk has been transferred to financial institutions that operate outside the constraints and protections of the traditional banking system; the other is that so much leverage is in the form of volatile short-term funding, and These funds may disappear when the crisis begins to emerge. These weaknesses have been left unchecked by America’s fragmented financial regulatory administration, and a mix of financial institutions, government departments, and regulatory measures has been unable to keep pace with the real changes in the market and the rapid pace of financial innovation for decades. One such innovation was asset securitization, the mechanism Wall Street uses to segment mortgages into complex financial products that are ubiquitous in modern finance. Securitization turned fears over the potential risks of mortgages into fears about the stability of the system as a whole. .
When the financial system behaves exceptionally stable, these issues don’t seem to be urgent in boom times, where the conventional wisdom is that house prices will continue to rise indefinitely, and many in Wall Street, Washington and academia believe that severe financial crises are just things that happened in the past . However, once the housing bubble burst, the fear of losses created financial chaos as investors and creditors frantically reduced exposure to anyone or anything related to mortgage-backed securities, triggering a sell-off (cash-starved investors were forced to sell their assets at arbitrary prices) and margin calls (investors buying credit assets are forced to provide more cash), which in turn sparks more selling and margin calls. Financial panics paralyzed the credit system and shattered confidence in the broader economy, and the resulting job losses and foreclosures in turn caused more panic in the financial system.
A decade later, that apocalyptic cycle of financial panic and economic pain has begun to fade from public memory, but the chaos and horror of the time cannot be overstated. Beginning in September 2008, within a month, mortgage giants Fannie Mae and Freddie Mac were abruptly nationalized, the largest and astonishing government intervention in financial markets since the Great Depression. Respected investment bank Lehman Brothers collapsed, the largest bankruptcy in U.S. history. The brokerage firm Merrill Lynch threw itself into the arms of Bank of America. The government provided an $85 billion bailout for insurer American International Group to avoid a bankruptcy larger than the collapse of Lehman Brothers. Washington Mutual and Wachovia were the two largest federally insured bank failures in U.S. history. The investment banking model that was once the symbol of modern Wall Street is dead. For the first time ever, the government guaranteed money market funds worth more than $3 trillion, while also backing $1 trillion worth of commercial paper. The U.S. Congress initially rejected it because of the market crash, and later approved the bill — a $700 billion government funding support for the entire financial system. It all happened in the stalemate phase of the presidential campaign. Lenin said that sometimes nothing happens in decades, sometimes decades in weeks—that’s what it feels like in times of crisis.
It turns out that the powers of government crisis managers were not initially sufficient to stop panics, in part because so many issues were outside the Fed’s primary jurisdiction over commercial banks, but we eventually persuaded Congress to give us the powers we needed to restore market confidence. , the out-of-control situation was finally brought under control. At this time of intense partisanship and government in general questioning, work with nonpartisan public officials and legislature leaders from both parties to defuse a serious crisis that has confronted capitalism for decades.
We all believe strongly in the power of the free market, and we are all very reluctant to rescue reckless bankers and investors from their own mistakes. Where possible, the U.S. government has imposed harsh side terms on companies receiving aid. Sometimes, efforts to persuade stronger institutions as well as weaker institutions to participate in strengthening the financial system and restoring confidence limit project terms. severity. But we know that stepping back and letting it run its course is not a reasonable option. The “invisible hand” of capitalism cannot prevent a full-blown financial collapse, only the “visible hand” of government can do it. A full-blown financial meltdown can create a vicious recession that stifles businesses, reduces opportunities, and frustrates dreams.
In fact, the financial shock of 2008 was in many ways greater than the one experienced during the Great Depression, as was the economic impact. By the end of 2008, even after a series of very aggressive financial interventions, the US was losing 750,000 jobs a month and the economy was shrinking at an annual rate of 8%. But the economic contraction known as the “Great Recession” ended in June 2009, and the ensuing recovery has been 10 years old, and compared to previous crises or other developed countries after this one, the US’s The recovery can be described as a breakthrough reversal. The U.S. stock market, labor market and housing market have all rebounded from their bottoms and rose to new heights. Experts predict that our strategy will eventually lead to hyperinflation, economic stagnation and fiscal depletion. Government efforts to rescue troubled banks and ultimately the entire financial system will cost taxpayers trillions of dollars, but this will not solve the fundamental problem. question. However, we have the ability to get the economy back to growth, financial institutions to resume operations relatively quickly, and financial programs that can ultimately generate substantial profits for American taxpayers. This crisis was devastating, bringing deep and lasting painful memories to every family, the entire economic system, and the American political system. But without the concerted, robust rescue that the U.S. eventually succeeded in mobilizing, the damage could have been far greater.
Are we safe now?
The United States, as well as the rest of the world, have implemented sweeping financial reforms that should reduce the likelihood of another crisis in the near future. Part of the reason is that these reforms have left financial institutions with more capital, less leverage, more liquidity, and less reliance on fragile short-term funding. In short, our financial risk prevention regime is more effective today. Unfortunately, prevention is never foolproof, just as no building is fire-resistant. In the U.S. especially, government intervention has sparked a public backlash, and politicians have weakened the ability of risk-mitigation departments to respond to the next crisis, by depriving crisis managers of critical powers to avoid future bailouts. In fact, these restrictions, no matter how well-intentioned, are likely to make the next crisis worse and the resulting economic damage even worse. The idea that legislation designed to ban bailouts will actually prevent bailouts in the future, if possible, is a serious and dangerous delusion.
Backlash is inevitable and understandable. The government’s efforts to stem the panic and repair the damaged financial system, while successful, did not protect millions of people from being harmed by the loss of their jobs or families. Indeed, what the government does will inevitably hurt many of those involved in this broken system, some of whom contributed to the financial crisis. When the next financial crisis breaks out, the United States would very much like to have a more prepared crisis prevention system and a more capable group of crisis resolvers. One reason the 2008 crisis was so devastating is that governments lacked strong response tools from the outset. We fear that unless Washington makes a major change, the front-runners of future crises will have fewer and weaker means, as we have done, and they will have to lobby politicians to elevate their risk-mitigation departments when the crisis is already spreading permission.
We want America to be ready for the next crisis, to borrow a phrase from James Baldwin: “The fire will come.” That’s why we think it’s so important to have a deep understanding of the last crisis. What we need to understand is: how the crisis started, how it spread, why its impact was so severe, how people struggled to deal with it, what works and what can backfire. We fear that a country that does not understand the lessons of this crisis is doomed to suffer worse.
Some of these lessons are about anticipation and prevention, because a good way to minimize the damage from a financial crisis is to not let it happen. Most crises do follow a similar pattern, so it is possible to try to identify warning signs, such as over-leverage in the financial system, especially when the financial system is too reliant on short-term funding It is an area where risk supervision measures are weak and risk mitigation approaches are limited. It is also important that people remain humble in their ability to anticipate panic, because doing so requires them to anticipate the interactions of others throughout the complex system. The financial system is inherently fragile, and financial risk tends to bypass regulatory barriers like a river bypasses a rock. Because there is no sure way to avoid overconfidence or confusion, there is no sure way to avoid panic. People are people, which is why we think it makes sense to look at crises the way Buddhists see death: time and circumstances are uncertain, but one thing is certain, crises will happen eventually.
The 2008 financial crisis also provides us with the art and science of dealing with crises. It is difficult to predict a crisis in advance, and it is equally difficult to know early whether the next crisis will be a bush fire or the start of a Category 5 blaze. Allowing companies on the brink to file for bankruptcy is generally healthy for the economy, and policymakers shouldn’t overreact to small events in the market or the woes of big banks as if it were a harbinger of disaster. Reacting too quickly encourages risk-takers to believe they will never have to face the consequences of their wrong bets, creating “moral hazard” that encourages more irresponsible speculation and sets the stage for future crises. But once it is clear that the next crisis is truly systemic, underreacting is far more dangerous than overreacting, acting too late is more problematic than intervening too early, and measures that do nothing by the way only add fuel to the fire. In a crisis that has gone down in history, the priority is always to end it, although this may create some moral hazard, with the flaw of encouraging unprincipled risk-taking in the future. This is true, but pales in comparison to the negative effects of allowing systemic collapse right now. When panic strikes, policymakers need to do what they can to quell it, regardless of political consequences, regardless of ideology, or what they have said or promised in the past. Playing politics in a financial bailout is scary, but letting the depression go is only worse.
We don’t have easy solutions to improve political responses to crises, but we do hope that there can be some help in the choices we’ve made, and better solutions for rescuers in future crises. We’ll try to address some of the questions left over from the decision, like why the government bailed out AIG but not Lehman Brothers, and why we didn’t try to break up the big Wall Street banks after the crisis ended. We will also discuss some other lessons from the crisis, including the importance of aligning efforts to stabilize the financial system with stimulus packages to stabilize the wider economy, and the need for governments to respond to those who, though not traditional commercial banks, may give the whole Financial firms that pose similar risks to the system are regulated. We’ll discuss the challenges of making decisions in the midst of a complex financial war, and the availability of experienced and dedicated professionals at the Federal Reserve, the Federal Deposit Insurance Corporation, and other institutions willing to effectively cooperate rather than compete How important is the team. We will also discuss the strength and limits of post-crisis reforms and how we believe things can be improved. While none of us are politicians, we also have some discussion of political approach, which is often disappointing and frustrating, but sometimes quite inspiring.
The tone of the political process is set at the top, and Presidents Bush and Obama have used extraordinary political courage to support controversial but crucial interventions in the financial system at extremely dangerous times in history. While we privately grumbled with Congress, the concerted effort of legislative leaders in the United States to back nationalize Fannie Mae and Freddie Mac, and then save the entire financial system, a policy that seemed to have a lot of political side effects, eventually It became the last two important pieces of legislation passed with strong bipartisan support in the United States. The 2008 crisis and the painful recession that followed severely undermined trust in public institutions. We think the U.S. government’s response to the crisis shows that when public officials at all levels work together under enormous pressure for the public good, many things are possible.
We understand why many Americans do not see the U.S. government’s response to the crisis as successful or even legitimate. Because these solutions often seem disjointed and inconsistent, we are still groping in the dark, exploring the uncharted territories of the world of finance. We started with a traditional strategy, but the modern financial system is much more complex than it used to be, so we had to experiment and improve a lot. We grapple with crises with tools we don’t think are effective, and then we try to persuade politicians to give us more powerful tools. We can’t make a strong call to persuade the public to accept a bank bailout or other controversial policies, but we’ve worked hard to tell the outside world what we’re doing and why.
We hope we can do better now. The story of crisis is a distressing one, but in a way it is also a hopeful one. We believe this is more of a rewarding story.
Fire Fighting: The American Financial Crisis and Its Lessons
[美]Ben Bernanke [美] Timothy Geithner [美] Henry Paulson
“To deal with the next financial crisis, we need to prepare enough fire fighting tools.”
After the financial crisis, the three giants, Bernanke, Geithner, and Paulson, joined forces to review the financial disaster since the Great Depression. The complexity of the crisis and all the details – debt crisis, high-risk credit, weak supervision …
To prevent the next round of systemic financial risks, what fire-fighting tools can be used for reference? It provides valuable lessons from the origin of the crisis, the outbreak process and the rescue strategy.
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