Interview with Ben Bernanke Part 1/2

If you think your job is tough, consider Ben Bernanke's. As Chairman of the Federal Reserve, the task of reviving the U.S. economy falls largely on his shoulders. Scott Pelley has the interview.

Interview with Ben Bernanke Part 1/2 Scott Pelley: Aside from the President, he is the most powerful man working to save the economy but you’ve never seen an interview with Ben Bernanke. Bernanke is the Chairman of the Board of Governors of the Federal Reserve System better known as the Fed. The words of any Fed chairman cause fortunes to rise and fall and so by tradition, chairman of the Fed do not do interviews. That is until now. The Federal Reserve controls the economy by setting interest rates. But after the crash of 08 Bernanke invoked emergency powers and with unprecedented aggressiveness, he has thrown a trillion dollars off the crises. Then Bernanke may be the most important Fed chairman in history. The question is can he help lead America out of this deep recession and when? Mr. Chairman, I’m going to start with the question that everyone wants me to ask. When does this end? Ben: It depends a lot on the financial system. The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. Now, we’ve seen some progress on financial markets absolutely but until we got that stabilized and working normally, we’re not going to see recovery but we do have a plan. We’re working on it. I do think that we will get it stabilized and we’ll see the recession coming to an end probably this year. We’ll see recovery beginning next year and it will pick-up sting over time. Scott Pelley: Do you think the recession is going to end this year? Ben: In a sense that this decline will begin to moderate and will begin sea-leveling off, it won’t be back to full employment but we will see. I hope the end of these declines have been so strong in the last couple of quarters. Scott Pelley: But, you wouldn’t say at this point that we’re out of the woods? Ben: No, I think the key issue is the banking system and the financial system. Scott Pelley: Unemployment as we said here is about 8.1%, I wonder if you expect double-digit unemployment? Ben: Well, it’s hard to forecast exactly where we’re going. Unemployment is rising. Job losses are still very severe and no doubt that the unemployment rate is going to go higher than it is. But I think again that if we do succeed and stabilize in financial system, it will begin to see a slower pace of decline and eventually a stabilization that will set the basis for recovery. Scott Pelley: You seem to be saying that we’re not heading into a new American depression. Ben: I think we’ve heard of that risk. I think we have gotten past that and now the problem is to get the thing working properly again. Scott Pelley: Ben Bernanke, aged 55, has been Chairman of the Federal Reserve Board since 2006. For our interview, he opened up the Fed headquarters rarely seen by the public. It’s a monumental building along the National Mall. Construction started in 1935 in the depths of the Great Depression. You know Mr. Chairman, I think the Federal Reserve for most people is a mystery. Ben: Well, it’s an institution that people do not hear so much about but it’s a very important one. It manages monetary policy for the country. It’s one of the main tools that we have for stabilizing our economy and keeping prices stable. Scott Pelley: When was it founded? Ben: Fed was created by Congress in 1913 and its original purpose was to deal with financial planning which are what we’re doing right now. Scott Pelley: Bernanke’s crises started in 2007 with the mortgage meltdown. Lenders began to fail. Bernanke cut interest rates repeatedly. In 2008, the Fed stopped the collapse of Bear Stearns by arranging a sale to another firm but then came the end of Wall Street as we knew it. Mortgage giants Fannie Mae and Freddie Mac were seized by the government. On September 14th, Merrill Lynch was sold in distress and the next day 158-year-old Lehman Brothers failed. You didn’t rescue Lehman brothers. It set off a worldwide panic when it went bankrupt and I wonder looking back where do you think that was a mistake? Ben: There were many people who said, “Let them fail!” It’s not a problem. The markets will take care of it and I think I knew better than that and Lehman proved that you can’t let a large internationally active firm fail in the middle of financial crisis. Now, was it a mistake? It wasn’t a mistake for the following reason. We didn’t have the option. We didn’t have the tools. The Fed Reserve cannot put capital in to an institution. All we can do is make loans against collateral. Scott Pelley: The day after Lehman, Bernanke’s Fed did something astounding. It loaned $85 billion to a company that wasn’t a bank at all. American International Group, the global insurance giant that was also involved in backing risky mortgage investments. Bernanke says unlike Lehman, the Fed could make the loan base on good collateral in AIG’s portfolio. Scott Pelley: There had now been four rescues of AIG for about $160 billion. Why is that necessary? Ben: Let me just first say that of all the events and all the things that we’ve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst is the intervention of the AIG. Here was a company that made all kinds of unconsumable bets. Then, when those bets went wrong, we had a situation where the failure of that company would have brought down the financial system. Scott Pelley: You said it makes you angry. What do you mean by that? Ben: It makes me angry. I slammed the phone more than a few times on discussing the AIG. It’s just absolutely I understand why the American people are angry. It’s absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets that was operating out of the site regulators but which we have no choice but to stabilize or else risk enormous impact not just in the financial system but on the whole US economy. Scott Pelley: By September, Bernanke and former Treasury Secretary, Hank Paulson went to Capitol Hill to urge a massive bailout of the banking system. Ben: At that period, I thought we were pretty close to a global financial meltdown. Scott Pelley: How much danger was there? How close a call? Ben: It was very close. It was very close. The Congress passed the bill that gave Treasury the right to put capital into the bank in the first week of October. And it was on the second week of October that the crisis reached its peak. If we don’t have those powers, we could have a much worse outcome. So it was a very dangerous situation. Scott Pelley: Was anyone at Capitol Hill skeptical? Did they back and say, “Mr. Chairman, it’s probably not quite that bad.” Ben: Well, I do remember one conversation I had when I was addressing a caucus of Congressmen and a Congressman said to me, “Mr. Chairman, you know, I’ve talked to bankers in my town. I’m talking to shopkeepers in my town and they say things are normal. Nothing is going on. We don’t see any problem.” And I turned to him and I said, “You will.” Scott Pelley: That second week of October, the Dow fell 18%, its worst week in history. In the midst of the crisis Bernanke had freedom to act immediately. He doesn’t need prior permission from Congress or the President. While they debated on Capitol Hill, Bernanke cut in through its rates nearly to zero. Then he used Depression-era emergency powers to launch dozen rescue programs of his own. There was support for money market funds, mortgages, short-term lending to small businesses and support for auto loans, student loans and small business loans. Commitments of a trillion dollars doubling the size of the Fed’s balance sheets. Is that tax money that the Fed is spending? Ben: It’s not tax money. The banks have accounts with the Fed much the same way that you have an account in a commercial bank. So to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin although not exactly the same. But it’s much more akin to printing money than it is to borrowing. Scott Pelley: You’ve been printing money? Ben: Well, effectively and we need to do that because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply and make sure that we have a recovery that does not involve inflation. Scott Pelley: He’s not kidding about printing money, the Fed issues U.S. currency. That’s why it says Federal Reserve note on all the bills in your wallet. This is the Bureau of Engraving and Printing just a few blocks from Bernanke’s office. The Fed’s mandate from Congress to put enough money in the system for maximum employment but not so much that it sets off inflation. The Fed actually pays of itself and returns billions and profits to the treasury. In a sense Bernanke has been preparing for this emergency his whole professional life. He got a Ph.D. in Economics from MIT. He chaired the Economics Department of Princeton and his specialty is the Great Depression. He’s among many economists who now believe that it was the Federal Reserve itself that helped turned the recession in 1929 into a global calamity. Ben: They made two mistakes basically. One was they left the money supply contract very sharply. Prices fell, deflation, so monetary policy was in fact very concretionary, very tight during that period and the second mistake is they made was they left the banks fail. They didn’t make any strong effort to prevent the failure thousands of banks. Scott Pelley: Bernanke told us that we were close to a second depression and he is determined not to let the major banks fail on his watch. One of the things that I think many people watching this interview don’t understand. It has wider or multiple bail-outs, four bail-outs of AIG -three bail-outs of CD group. There is a sense that this is a Band Aid approach that we’re not getting to the root of the problem. Ben: Well, part of the issue is that the economy has gotten a good bit worse. The first part of the crisis was sub-prime and other assets that were toxic. Now we’re in the second phase which is that the economy is very weak. So, the economy’s weakness is meant that some of the initial attempts to stabilize the banks haven’t been enough and had to do more. Scott Pelley: You know Mr. Chairman there are so many people outside this building across this country who say, “To hell with them”. They made bad debts. The wages of failure on Wall Street should be failure. Ben: Let me give you an analogy, if I might. If you have a neighbor who smokes in bed and he’s a risk to everybody and supposed he sets fire to his house. You might say to yourself, “I’m not going to call the Fire Department. Let his house burn down. It’s fine with me.” But then of course, what if your house is made of wood and it is right next door to his house? What if the whole town is made of wood? I think we’d all agree that the right thing to do is to put out that fire first and then say, “What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn’t happen in the future? How can we fire- proof our houses?” That’s where we are now. We have a fire going on. It’s still burning. Scott Pelley: It’s still burning. Are all the big banks that you regulate solve it? Ben: I believe they are, yes. But we are doing a stress test right now. We’re looking at what the positions of the banks are under a tougher economic scenario than the one that we currently expect and what we plan to do is to say, “How much capital would each bank need to be well-capitalized not just solved but well- capitalized even in this more adverse scenarios. Scott Pelley: Are you committing in this interview that you are not going to let any of these banks fail? That no matter what their balance sheet actually looks like they are not going to fail. Ben: They are not going to fail. But, what we can do shouldn’t be necessary as to wind it down in the safe way. Scott Pelley: In other words, Bernanke thinks government should stabilize failed financial companies and take them apart slowly. Ben: So, for example in the case of the AIG, we’ve prevented the bankruptcy because of the chaos that we’d create. But, we’re also demanding that AIG divest itself, sell off its subsidiaries and use the proceeds to pay back the government. Scott Pelley: What are the dangers now? What keeps you up at night? Ben: The biggest risk is that we don’t have the political will. We don’t have the commitment to solve this problem and then we’ll let it just continue in which case we can’t count on recovery. Scott Pelley: The Fed estimates the wealth of American families fell 18% in 2008, the worst since the Great Depression. In the moment, Bernanke tells us what the first signs of recovery would look like.