伯南克第四課英文講義

聯儲主席伯南克在喬治-華盛頓大學商學院進行了針對該院學生系列講座的第四講，題目為：金融危機的影響。

伯南克本次講座英文講義全文。
The Federal Reserve and the Financial Crisis

The aftermath of the crisis, Lecture 4

George Washington University School of Business

March 29, 2012, 12:45 p.m。

>> BEN S. BERNANKE: Hello again. So, today in the final of our four lectures, as professor Fort said we want to talk about the aftermath of the crisis。

Now, just to recap briefly, we talked last time about the most intense phase of the crisis, 08 and early \'09, a financial panic, both in the United States and in other countries, industrial countries, threaten the stability of the entire global financial system, the Federal Reserve working as I\'ll describe with others, served in its lender of last resort role provided short term liquidity, to help stabilize key institutions and markets。

I think one of the points that we can now draw having looked at the history is that rather than being some ad hoc and unprecedented set of actions, that the fed\'s response was very much in keeping with the historic role of central banks, which is to provide lender of last resort facilities in order to calm a panic. What was different about this crisis was that the institutional structure was different. It wasn\'t banks anddepositors. It was broker/dealers and repo markets, it was money market funds and commercial paper. But the basic idea providing short term liquidity in order to stem a panic, was very much what badgeette envisioned when he wrote Lombard street in 1873.

I\'ve been focusing very much on the fed\'s actions, that\'s been the topic of the course, of course. But the fed obviously didn\'t work alone. We worked in close coordination with both other U.S. authorities and foreign authorities, for example, the treasury was actively engaged after the Congress approved the so-called tarp legislation, the treasury was in charge of making sure that banks had sufficient capital, and the U.S. government took an ownership position in many banks that was essentially temporary, most of those have now been reversed。

The FDIC, federal deposit insurance corporation, played n important role in particular. The deposit insurance limits, the $250,000 deposit insurance limits were raised essentially to infinity for a transactions accounts. The FDIC also provided guarantees to banks who wanted to issue up to three years of debt, corporate debt in the marketplace, for a fee, the FDIC guaranteed those issuances so that banks could get longer term funding。

This was a collaborative effort between the fed and other U.S. agencies. We also worked closely with foreign agencies. I mentioned last time the currency swaps, which are still in existence, whereby the fed gave dollars to foreign central banks in exchange for their own currencies and those foreign central banks took the dollars and on their own responsibility, on their own risk, made those dollar loans to financial institutions that required dollar funding。

We also of course continued to be in close touch with finance ministers and regulators around the world as we tried to coordinate to deal with the crisis。

Putting out the most intense phase of the fire was not enough. There has been a continuing effort to strengthen the financial systems, strengthen the banking system, for example, in a quite successful action, one I think that was very constructive, the fed working with the other banking agencies led stress tests of the 19 largest U.S. banks in the spring of 2009. This was not far after the most intense phase of the crisis. What we did in an unprecedented way was to disclose to the markets what the financial positions were of the major banks, and those stress tests which confirmed that our banks could survive even a return to worse economic and financial conditions, created a great deal of confidence in investors and allowed banks to go out and raise private capital, a great deal of private capital, and in manycases to replace the government capital they received during the crisis。

The process of stress testing has continued. Just a couple weeks ago, the fed led another round of stress tests, verydemanding set of stress tests, our banks did quite well. They have raised a great deal of capital even since 2009. They are in many ways in stronger position than they were even prior to the crisis, in terms of capital。

These are steps that are being taken to try to get the banks back into full lending mode. It is still a process in progress. But restoring the integrity, and the effectiveness of the financial system is obviously part of getting us back to a more normal economic situation。

Now, just saying a few words about the lender of last resort programs, as I\'ve already argued at some length, the programs did appear to be effective. They arrested runs on various types of financial institutions and they restored financial market functioning。

The programs which were instituted primarily in the fall of \'08 were mostly phased out by March of 2010. They were phased out in two different ways. First, some of the programs just came to n end. But more often, what happened was that the fed would in making loans, liquidity provision to financial institutions, the fed would charge an interest rate that was lower than the crisis rate, the rate the panic rate. But higher than normal interest rates。

So as the financial system calmed down and rates came down, back to more normal levels, it was no longer economically attractive or financially attractive for the institutions to keep borrowing from the fed. So the programs just wound down quite naturally。

We didn\'t have to just shut them down. They basically disappeared on their own。

The financial risks that the Federal Reserve took in these lender of last resort programs was quite, were quite minimal. As I\'ve described, the lending was mostly short term. It was backed by collateral in most cases。

In December of 2010, we reported to Congress all the details involved in 21,000 loans that the fed made during the crisis, of those 21,000 loans, 0 defaulted. Every single one was paid back。

So even though the objective of the program was stabilizing the system, it was not profit making, the taxpayers did come out ahead in those loans。

So that was lender of last resort activity. That was the tool, the fire hose to put out the fire of the financial crisis. But of course as I described last time, even though the crisis was contained, the impact on the U.S. and global economies was severe, and new actions were needed to help the economy recover。

Remembering that the two basic tools of central banks are lender of last resort policy and monetary policy, we now turn to the second tool, monetary policy, which was the primary tool used to try to bring the economy back after the trauma of the financia crisis。

Now, you are all familiar with conventional monetary policies. Conventional monetary policies involve management of the shor term overnight interest rate called the federal funds rate, by raising and lowering the short term interest rate, the fed can influence a broader range of interest rates, that in turn affects consumer spending, purchases of homes, capital investment by firms and the like, and that provides demand for the output of the economy, and can help stimulate a return to growth。

Just a few words on the institutional aspects. Monetary policy is conducted by a committee, called the Federal Open Market Committee. FOMC as it is called meets in Washington eight times a year, during the crisis it sometimes also held videoconferences. When we have a meeting of the FOMC, there are 19 people sitting around a table. There are 7 governors, 7 members of the board o governors.....Who have been appointed by the president, and confirmed by the senate。

There are the 12 presidents of the 12 reserve banks, each of whom has been found or appointed by the board, Board of Directors of each of the reserve banks, and then confirmed by the Board of Governors in Washington。

There are 19 people around the table. We all participate in the monetary policy discussion. When it comes time to vote, the system is a little more complicated. In any given meeting there are actually only 12 people who are able to vote. The voters in any given meeting are the 7 members of the Board of Governors, currently five, we have two empty seats, we hope to get those filled soon。

But the 7 members of the Board of Governors have a permanent vote, in every meeting. The president of the New York Federal Reserve Bank also has a permanent vote, which goes back of course to the beginning of the system and the fact that New York remains the financial capital of the United States. Of the other eleven reserve rank presidents there is a rotation system. Each year, four of the eleven other reserve bank presidents vote and then at the end of the year, they move on to another set。

Again, there is a total of 12 votes in any given meeting or any given decision, on monetary policy. But the entire group participates in the discussions。

Now, here is the federal funds rate. Again, the short term interest rate that is the normal tool that the fed uses for monetary policy. You can see that at the end of chairman Greenspan\'s term, the beginning of my term in 2006, we were in the process of raising the federal funds rate, in an attempt to normalize monetary policy after having easier policy earlier in the decade in order to help the economy recover from the 2001 recession。

But in 2007, as the problems began to appear, particularly in the subprime mortgage market, the fed began to cut interest rates, you can see the right side of the picture, as interest rates were sharply reduced. And by December of 2008, the federal funds rate was reduced to a range of between 0 and 25 basis points. Basis point is 100th of one percent so 25 basis points means one fourt of one percent. Essentially, by December, 2008, the federal funds rate was reduced basically to zero. Can\'t be cut any more obviously。

Given that as of December, 2008, conventional monetary policy was exhausted, we couldn\'t cut the federal funds rate anyfurther. Yet the economy clearly needed additional support, into 2009. The economy was still contracting at a rapid rate. We needed to do something else to support recovery. So we turned to less conventional monetary policy。

The main tool that we have used is what we call within the bounds of the fed, the large scale asset purchases or L saps, more properly known in the press and elsewhere as quantitative easing or Q E。

I won\'t get into why I think Lsap is a better descriptive name but in any case I\'ve had to bow to the common usage. But these large scale asset purchases as I\'ll explain in more detail, werean alternative way of easing monetary policy, again to provide support to the economy。

How does this work?

To influence longer term rates, the fed began to take, undertake large scale purchases of treasury and GSE mortgage related securities。

So just to be clear here, the securities that the fed has been purchasing are government guaranteed securities either treasury securities, government debt of the United States, or the Fannie and Freddie securities which were guaranteed by the U.S. government after Fannie and Freddie were taken into conservatorship。

There have been two major rounds of large scale asset purchases, one announced in March, 2009, often known as Q E1, and another announced in November, 2010, known as QE2. There have been additional variations since then, including a program to lengthen the maturity of our existing assets, but these were the two biggest programs in terms of the size and the impact on the balance sheet. And taken together, these actions boosted the fed\'s balance sheet by more than two trillion dollars。

Here is a picture of the asset side of the fed\'s balance sheet to help us see the effects of the large scale asset purchases。

The green at the bottom is the traditional securities holdings. So just to be absolutely clear, even under all, most normal circumstances, the fed always owns a substantial amount of U.S. treasuries。

We owned about 800 billion plus of U.S. treasuries before the crisis even began. So in that respect, it is not like we began buying them from scratch, we have always owned a significant amount of these securities。

The green shows the baseline, where we started from. What else appeared on the fed\'s balance sheet on the asset side during this period? The dark blue represents assets acquired or loans made during the crisis period, and you can see that in late 2008, our loans outstanding to financial institutions and to some of these other programs, rose very sharply. But you can also see that as time passed and certainly by early 2010, those initiatives to address financial strain had been greatly reduced。

If you look at the far right, by the way, you see a little bump there right recently. That is the swaps. We reinstituted and extended the swap agreements with European central bank and other major central banks. There has been some usage of that in an attempt to try and reduce strains in Europe, and that shows up as a little bump there at the far right of the picture。

Now, again, we owned about 800 billion dollars in treasury securities at the beginning of the crisis, but as you can see, from the red, labeled Lsaps, we added about 2 trillion dollars in new securities to the balance sheet during the period starting in early 2009.

At the top there you have other assets, variety of things, could be security reserves, physical assets, and other miscellaneous items。

Now, why were we doing this? Why were we buying these securities? This is by the way an approach which monitors lik Milton Friedman and others have talked about. The basic idea is that when you buy treasuries in GSE securities and bring them onto the balance sheet, that reduces the available supply of those securities in the market, investors want to hold those securities in order to be willing to hold a smaller amount, they have to receive a lower yield, or put another way, if there is a smaller available supply, of those securities in the market, they are willing to pay a higher price for those securities which is the inverse of the yield。

Again, by purchasing treasury securities, bringing them on our balance sheet, reducing the available supply of those treasuries, we effectively lowered the interest rate on longer term treasuries, and on GSE securities, as well。

Moreover, to the extent that investors no longer having available treasuries and GSE securities to hold in their portfolios, to the extent that they are induced to move to other kinds of securities, like corporate bonds, that also raises the prices and lowers the yields on those securities, and so the net effect of these actions was to lower yields across a range of securities。

And of course, as usual, lower interest rates have supportive stimulative effects on the economy。

This was really monetary policy by another name. Instead of focusing on the short term rate, we were focusing on longer term rates. But the basic logic of lowering rates to stimulate the economy is really the same。

You might ask the question, the fed is going out and buying $2 trillion of securities, how do we pay for that? The answer is that we paid for those securities by crediting the bank accounts of the people who sold them to us, and those accounts at the banks showed up as reserves that the banks would hold with the fed。

The fed is a bank for the banks. The banks can hold deposit accounts with the fed essentially and those are called reserve accounts。

So as the purchases of securities occurred, the way we paid for them was basically by increasing the amount of reserves that banks had in their accounts with the fed。

So, you can see this here. This is the liability side of the fed\'s balance sheet. Of course, assets and liabilities including capital have to be equal. The liability side had also to rise near $3 trillion, as you can see。

Now, take a look first, as you look at that, take a look first at the light blue line at the bottom, the light blue line at the bottom is currency, Federal Reserve notes in circulation。

Sometimes you hear the fed is printing money in order to pay fo the securities we acquire. I\'ve talked about that, in some, giving some conceptual examples. But as a literal fact, the fed is not printing money to acquire these securities. You can see it from the balance sheet here, the light blue line is basically flat. The amount of currency in circulation has not been affeced by these activities。

What has been affected is the purple area, those are reserve balances. Those are the accounts that banks, commercial banks hold with the fed, and their assets are the banking systems and they are liabilities of the fed, and that is basically how we pay for those securities。

The banking system has a large quantity of these reserves, but they are electronic entries at the fed. They basically sit there. They are not in circulation. They are not part of any broad measure of the money supply. They are part of what is called the monetary base. But again they are not, certainly aren\'t cash。

Then there are other liabilities, including treasury accounts and a variety of other things that the fed does. We act as the agent, fiscal agent for the treasury. But the two main items you can see are the notes in circulation, and the reserves held by the banks。

So what do the Lsaps or quantitative easing, what does it do?

Well, we anticipated that when we took these actions that we would be able to lower interest rates, and that was generally successful。

For example, as you probably know, 30-year mortgage rates have fallen below 4 percent which is a historically low level. But other interest rates are falling as well. Corporate credit has fallen, the rates of interest that corporations have to pay on bonds for example have fallen. Both because the underlying safe rates have fallen, but also because the spreads between corporate bond rates and treasury rates have fallen as well. Reflecting greater confidence in the financial markets about the economy。

Lower long term rates have in my view, and I think in terms of the analysis we do at the fed, have promoted growth, and recovery. Although, as I\'ll talk about, the effect on housing was probably weaker than we had hoped. We have got mortgage rates down very low, you would think that would stimulate housing. But as you probably know, the housing market has not yet recovered。

Now, of course, always we have a dual mandate. We always have two objectives. One of them is maximum employment, which we interpret to mean as trying to keep the economy growing, and using its full capacity. And low interest rates are a way ofstimulating growth and trying to get people back to work。

But, the other part of our mandate is price stability, low inflation. We have been quite successful in keeping inflation low. It has been helped I would say, that Volker in particular and also Greenspan made it much easier for me, because they had already persuaded markets that the fed was committed to low inflation, and there was a lot of credibility to the fed has built up over the last 30 years or so。

As a result, markets have been confident that the fed will keep inflation low and inflation expectations have stayed low, and except for some swings up and down, related to oil prices, overall, inflation has been quite low and stable。

At the same time, while we have kept inflation low, we have also made sure that inflation hasn\'t gone negative. Particularly around the time of Q E2, November 2010, there was concern that inflation had been falling and was well below normal levels, and the concern was that we might actually get into a negative inflation or a deflation。

Those of you familiar with the Japanese situation understand that that\'s been a big problem for their economy now for quite a few years. We certainly wanted to avoid deflation. I talked about deflation in the context of the great depression. Monetary ease guarded against the risk of deflation, by making sure that the economy didn\'t get too weak。

One more comment on large scale asset purchases. A lot of people don\'t make a very good distinction between monetary and fiscal policy. Of course, I\'m sure you understand they are very different tools. Fiscal policy is the spending and taxation tools of the Federal Government, monetary policy has to do with the fed\'s management of interest rates. These are very different tools。

In particular, when the fed buys assets, as part of an Lsap or QE program, this is not a form of government spending. It doesn\'t show up as government spending because we are not actually spending money. What we are doing is buying assets which at some point will be sold back to the market, and so the value of that, of those purchases will be earned back。

In fact, because the fed gets interest of course on the securities that we hold, we actually make a very nice profit on these Lsaps。

What we have done over the last three years is transfer about $200 billion in profits to the treasury, that money goes directly to reducing the deficit. These actions are not deficit increasing. They are in fact significantly deficit reducing。

So, a major tool we used when we ran out of room for short term interest rates was Lsaps, asset purchases. The other tool that we have used to some extent as well is communication about monetary policy。

To the extent that we can clearly communicate what we are trying to achieve, investors can better understand our objectives and our plans and that can make monetary policy more effective。

The fed has made a lot of steps to become more transparent about monetary policy to try to make sure people understand what we are trying to accomplish. Here is one example. This is a picture of me giving a press conference. So four times a year now, after two day FOMC meetings, I give a press conference, and answer questions about the policy decision。

This is a new thing for the fed, in terms of trying to explain what our policies are。

Another recent step that we took in terms of communicating our policies more clearly, was to put out a statement that described our basic approach to monetary policy, and in particular, gave fo the first time a numerical definition of price stability. Many central banks around the world already have a numerical efinition of price stability。

We in our statement said that for our purposes, we were goin to define price stability as 2 percent inflation. So the markets will know that over the medium term, the fed will try to hit 2 percent inflation even as it also tries to hit its objectives for growth and employment。

Finally, the fed has also begun to provide guidance to investors and the public about what we expect to do with the federal funds rate in the future. Given how we currently see the economy。

So given how we currently see the economy, we tell the markets something about where we think the rates are going to go. To the extent that the market is better, better understands our plans, that is going to help reduce uncertainty in the financial markets, and to the extent that our plans are in some sense more aggressive than the market anticipated, it will also tend to ease policy conditions。

Again, monetary policy has been used to try to help get the economy back on its feet. The recession which the period of contraction, which is very severe, as of course I mentioned officially came to an end。

There is a committee called the national bureau of economic research, which officially designates the beginning and end dates of recessions, I was a member of that committee before it became policy maker. They determined that this recession began in December, 2007, and ended in June of 2009.

It was a long recession. When they say the recession ended, what that means basically is not that things are back to normal. It just means that the contraction has stopped and the economy is now growing again。

We have been growing now for almost three years, averaging about 2-1/2 percent a year. But as I described we are still some distance from being back to normal. When you say the economy is no longer in recession, we don\'t mean that things are great. We just mean that we are no longer actually contracting. We are now growing。

Here is a picture of the sluggish economic recovery that we have had. The blue line in the graph shows the path of real GDP. The gray bar shows the period of the official national bureau of economic research recession. You can see it begins in December, 2007 and real GDP begins to decline during that period。

In mid 2009, the recession is officially over, and you can see since then, the blue line has been moving up, as the real economy has been expanding。

What you can also see though is a comparison here. What we did was we said, suppose that the economy had been recovering since mid 2009 at the same average pace as previous recoveries in the postwar period. That average recovery is shown by the red line. You can see by comparing that this recovery has been slower than the average recovery in the post World War II period。

It\'s actually even worse than that, in a way, because this was the most severe recession in the post World War II period and so you would expect perhaps that recovery might be a little quicker, as the economy comes back to its normal levels。

But in fact, it has been actually slower on average in term of growth, than previous postwar recoveries。

Now, a question -- sorry, and so an implication of course of the sluggish recovery is only very slow improvement in the unemployment rate. You can see the unemployment rate rising sharply during the recession period, peaking around 10 percent, and now coming slowly down to its current value of about 8.3 percent。

That is still quite high, obviously. Here is housing, singl family housing starts. As we discussed, in the last lecture, in the previous one, housing starts collapsed even before the recession began. Of course, it was a trigger of the recession. You see how very sharply, construction declined. But then if you look at the most recent year or two, you see that there have bee a few wiggles but the housing market has not come back。

This is one reason, if you think, if you ask the question, why has this recovery been more sluggish than normal? One reason certainly is the housing market. In a usual recovery, housing comes back. It is an important part of the recovery process. The construction workers get put back to work. Related industries like furniture and appliances begin to expand。

And that\'s again part of the recovery process. But in this case, we haven\'t seen it. Now, why not? Well, there is still a lot of structural factors in the housing market which arepreventing a more robust recovery. On the supply side, we still have a very high excess supply of housing, high vacancy rate, the graph shows you the percentage of housing units in the United States which are vacant。

You can see that that peaked at over 2-1/2 percent during the recession. It has come down some but it is still well above normal levels。

Foreclosed homes, homes where the seller is unable to find a buyer, there are a lot of homes on the market, and that producesan excess supply, and falling house prices。

On the demand side, you might think that a lot of people would be buying houses these days, because one thing is true about the housing market is that houses are really affordable. Prices are down a lot. Mortgage rates are low。

If you are able to buy a house, you can get an awful lot of house for your monthly payment now compared to where you were a few years ago。

But, being able to take advantage of that affordability requires among other things that you get a mortgage. This graph shows what is happening in the mortgage market。

The lines show the, the bottom line shows the 10th percentile, the top line, the 90th percentile of credit scores of people receiving mortgages。

You can see that before the crisis, people with relatively low credit scores were able to get mortgages. But since the crisis, you can see the whole bottom part of that yellow area has been cut away, implying that people with lower credit scores and 700 is not a terrible credit score, are unable to get mortgages。

Just in general, there has been a much, there have been much tighter conditions in terms of trying to find a mortgage。

So, even though housing is very affordable, and monthly payments are affordable, a lot of people are unable to get mortgages。

So, the implications for the economy, with a lot of excess supply in the market, with a lot of people unable to get mortgage credit or afraid to get back into the housing market, house prices have been declining, as shown by the picture on the right. Recently, we have seen some leveling out, some flattening out. But so far, not much evidence of a pickup。

Declining house prices means it\'s not profitable to build new houses. So construction has been quite weak. More broadly,existing homeowners, when they see their house prices down, may mean they can\'t get a home equity line of credit, may mean they just feel poor. So that affects not just their housing behavior, but also their willingness and ability to buy other business services。

That is one of the reasons the declines in housing prices and to some extent also stock prices are part of the reason why consumers have been cautious, and less willing to spend. The other major factor, and of course housing was a big reason for this crisis and recession, the other major factor was the financial crisis and it impacts on credit markets and that is another reason the recovery has been somewhat slower than we would have hoped。

As I\'ve discussed, the U.S. banking system is stronger than i was three years ago. The amount of capital in the banking system over the last three years increased by something like $300 billion, a significant increase. Generally speaking, we are seeing credit terms getting a bit easier. We are seeing expansions in bank lending in a lot of categories, so there is certainly some improvement in banking and credit。

Nevertheless, there are still some areas where credit remains tight. I\'ve already talked about mortgages, where if you have anything less than a perfect credit score, it is awfully hard to get a mortgage these days。

Other categories like small businesses have also found it difficult to get credit. As well-known, small businesses are n important creator of jobs, and so their inability to, the inability to start a small business or to get credit to expand a small business is one of the reasons why job creation has been relatively slow. Another aspects of financial and credit markets has to do with the European situation, which I haven\'t gotten into。

But following on the financial crisis in Europe, which was very severe alongside of ours, there is now a sort of second stage whereby the solvency issues of a number of countries, concerns about whether or not countries like Greece and Portugal and Ireland can pay their creditors, have led to some stressed financial conditions in Europe, and those have affected the U.S. by creating risk aversion, and by volatility in the financial markets. So that has also been a negative factor。

I think a lesson worth drawing from this, and one I\'ve cited in testimony and elsewhere, is that monetary policy is a powerful tool but it can\'t solve all the problems that there are。

In particular, what we are seeing in this recovery is a number of structural issues relating, for example, to the housing market, to the mortgage market, to banks, to credit extension, and of course to the European situation, where other kinds of policies, whether they are fiscal policies or housing policies or whatever they may be, are really needed to get the economy going again。

The fed can provide stimulus, it can provide low interest rates, but monetary policy by itself can\'t solve important structural fiscal and other problems that affect the economy。

This is all a bit discouraging. Again, taken a while to get back to where we are, and we are still a long way from where we would like to be. So let me just say a couple words about the long run。

We did have of course a major trauma, the crisis is very deep. We have had a lot of people who have been unemployed for a long time, about 40 percent or more of all the unemployed have been unemployed for six months or more. If you are unemployed for six months or a year or two years, your skills will start to atrophy, and your ability to get reemployed will decline。

That is a problem, clearly. There are many other issues that the United States was facing, even before the crisis, like Federal budget deficits, and those have not gone away. In fact, they have gotten somewhat worse through the process of the recession。

Clearly, there has been some real head winds for our economy. That said, I think it\'s really important to understand that our economy has faced many short term shocks in the past, some not so short term, but has been able to recover。

We have a lot of strengths in this economy. It is of course the largest economy in the world, between 20 and 25 percent of all output in the world is produced in the United States. Even though we have something more like 6 percent of the world population or less。

And the reason that we are so productive has to do with the diverse set of industries that we have, our entrepreneurial culture, which still is clearly the best in the world, the flexibility of our labor markets and our capital markets, and our technology, which remains one of our very strongest points。

Increasingly, technology has been driving economic growth, and with some of the finest universities in the world, and research centers and as a magnet for talented people from around the world, the United States has been very successful in the research and development area。

So that has also been a source of ongoing growth and innovation in our economy。

Again, we have weaknesses, and the financial crisis highlighted a few. But we have also tried of course to address that. I\'ll come back to it by strengthening our financial regulatory system。

Here is a picture I find kind of interesting, to put a little perspective on what we have been talking about for the last few lectures. The dashed line shows a constant growth rate of a little over 3 percent, in real terms。

This is a log scale so a straight line means a constant growth rate. You can see that the United States economy going back to 1900 has grown pretty consistently around 3 percent for more than a century。

You can see in the 1930s, you can see the big swing as the great depression pulled actual output below the trend line. Then you can see the movement above the trend line during World War II, but look what happened after World War II. We went right back to the trend line。

There were recessions and booms and busts in the postwar period, but remained close to the trend line. If you look to the very far right, you see where we are today. We are below the trend line. There are debates about whether or not that decline is in some way permanent. But I think there is a reasonable chance, looking at the long run of history, that the U.S. economy will return t healthy growth, somewhere in the 3 percent range。

There are factors to take into account like changes in our population growth rate and our aging of our population and so on. But broadly speaking, what this picture shows is that over long periods of time our economy has been successful in maintaining long term economic growth。

Let me say a few words about regulatory changes. You recall that I discussed in the last couple, the vulnerabilities in both the private and public sector, in the financial system. On the public side, the crisis revealed many weaknesses in our regulatory system。

We saw what happened with Lehman Brothers and AIG, and the two big to fail problem, the effects that they had on our system, more generally, the problem of lack of any attention to the broad stability of the system as opposed to individual parts of the system。

There has been a very substantial amount of financial regulatory reform in the United States. The biggest piece of legislation is the so called Dodd frank act, in the United States, I\'m sure you know legislation is named after the chairman of the relevant committees, Barney Frank was the head of the house financial services committee, when the Democrats controlled the House in 2010.

Senator Chris Dodd was the head of the senate banking committee. So this Wall Street consumer protection act passed in December of 2010 was a comprehensive set of financial reforms addressing many of the vulnerabilities that I talked about earlier。

What were these vulnerabilities? Let me remind you, one of them was the fact that there was nobody watching the whole system. Nobody looking at the entire financial systems, to look for risks and threats to overall financial stability。

The Dodd-Frank act, one of the main themes of the act is to try to create a systemic approach, one where regulators look at the whole system and not just individual components of it。

Among doing that, among the tools to do that was the creation o a council called the financial stability oversight council of which the fed is a member, which helps regulators coordinate. We meet regularly in this council and discuss economic and financial developments and talk about ways that we can look at the whole system and try to avoid various kinds of problems。

Moreover, the Dodd Frank act gave all regulators a responsibility to take into account broad systemic implications of their own individual regulatory and supervisory actions, and in particular the Federal Reserve has greatly restructured our supervisory divisions, so that we are looking now very comprehensively at a whole range of financial markets and financial institutions, so that we have a big picture that we didn\'t have before the crisis。

I mentioned in discussion of vulnerabilities the many gaps in the financial system. They were important firms, like AIG, for example, but others as well, that really had no significant comprehensive oversight by any regulatory agency。

The Dodd Frank act provides a kind of fail-safe, in that the financial stability of the oversight council can designate by vote, can designate any institution which it views as not being adequately regulated, to come under the supervision of the Federal Reserve。

That is a process that is going on now. So there will not be any more large complex systemically critical firms that have no oversight。

Likewise, the FSO C can also designate so called financial market utilities like a stock exchange or some other major exchange to be supervised by the fed and other agencies。

So those gaps are getting closed. We won\'t have the situation that we had before the crisis。

Another set of problems had to do with too big to fail and dealing with firms that are systemically critical. The approach to dealing with too big to fail or systemically critical institutions is two pronged. On the one hand, under Dodd Frank, large complex systemically important financial institutions are going to face tougher supervision and regulation than other firms。

The Federal Reserve working with international regulators has established higher capital requirements, that these firms will be subject to, including surcharges for the very largest and most systemic firms. Rules like the vocal rule which prohibit bankaffiliates from trading, taking risky bets on their own account, will try to reduce the riskiness of large firms。

Stress tests, I talked about, will be conducted, Dodd Frank requires that large firms be stress tested by the fed once a year, and conduct their own stress tests once a year, so we will be comfortable or at least more comfortable that these firms can withstand a major shock to the financial system。

Now, one part of tackling a too big to fail is by bringing these large complex firms under tougher scrutiny, more supervision, more capital, more stress tests, more restrictions on their activities. But the other side of too big to fail is, well, failing。

In the crisis, the fed and the other financial agencies faced the very bad choice of either trying to prevent some large firms like AIG from failing which was a bad choice, because it ratified too big to fail, and meant that the firm was not really punished, adequately punished for the risks that it took, but the alternative would be to let it fail and to have huge consequences for the whole financial system and the economy. That is a too big to fail problem。

The only way to solve that problem in the end is to make it safe for a big firm to fail. One of the main elements of the Dodd Frank act is what is called the orderly liquidation authority, which has been given to the FDIC. The FDIC already has the authority to shut a failing bank, and it can do that quickly and efficiently over the weekend typically, and depositors are made whole, and the FDIC\'s ability to do that has avoided panics and bank runs since the 1930s。

The idea here is that the FDIC will do something similar, but instead it will do it for large complex firms, which obviously is much tougher. But in cooperation with the fed and with regulators from other countries, where in case of multinational firms, work is under way to prepare so that should it happen, that a large firm comes to the brink of insolvency and cannot be, cannot finan answer, cannot find new capital, for example, that the ability of the fed to intervene the way we did in 2008 has been taken away. We can\'t do it legally anymore. The only option we will have is to work with the FDIC to safely wind down the firm。

And that will ultimately reduce or we hope eliminate the too big to fail problem。

There are many other aspects of the Dodd Frank act. I talked about another vulnerability, was the exotic financial instruments, derivatives and so on, that concentrated risk. There is a whole set of new rules that require more transparency about the derivatives position, standardizations of derivatives, trading of derivatives through third parties, called central counter parties。

The idea here is to take derivatives and those transactions ou of the shadows, make them available and visible to both the regulators and to the markets, to avoid a situation like we saw during the crisis。

One of the shortcomings and again here the Federal Reserve did not do as good a job as it should have, in protecting consumers on the mortgage front, so the Dodd Frank act creates a new agency, called the Consumer Financial Protection Bureau, which is meant to protect consumers in their financial dealings, and that would include things like protections on the terms of mortgages, for example。

There is quite a variety of these, of aspects of Dodd Frank. It is a large and complex bill, a lot of complaining about the fact that it is large and complex. The regulators are doing their best to implement these rules in a way that will be both effective and at the same time minimize the cost to the industry and to the economy。

That is difficult, but it is an ongoing process. We do that through an extensive process of putting out proposed rules, gathering comments from the public, looking at those comments, making changes to the rules, and so on. So it\'s an iterative process by which we develop these regulatory, put into place these regulatory standards。

And again, it\'s still very much under way, so finally, le me just conclude by saying just a couple things about the future。

Central banks obviously, not just the United States but around the world, have been through a very difficult and dramatic period, and it has required a lot of rethinking about how we manage policy, how we manage our responsibilities with respect to the financial system。

In particular, during much of the World War II period, because things were relatively stable, because financial crises were something that happened in emerging markets and not in developed countries, many central banks began to view financial stability policy as kind of a junior partner to monetary policy. It was not as important. It was something that attention was paid to, but i was not something that the same amount of resources and attention was paid to。

Obviously, based on the crisis and what happened, and theeffects that we are still feeling, it is now clear that maintaining financial stability is just as an important responsibility as monetary and economic stability. And indeed, this is very much a return to the, where the fed came from in the beginning. Remember the reason the fed was created was to try to reduce the incidence of financial panics. So financial stability was the original goal of creation of the fed。

So now we sort of have come full circle. Financial crises will always be with us. That is probably unavoidable. We have had financial crises for 600 years in the western world. Perioically there are going to be bubbles or other instabilities in the financial system。

But given the potential for damage now, as we have seen, it is really important for central banks and other regulators to do all we can first to try to anticipate or prevent a crisis, but if a crisis happens, to mitigate it, and to make sure the system is strong enough that it will be able to make it through the crisis intact。

Again, we began by noting the two principal tools of central banks, serving as lender of last resort to prevent or mitigate financial crises and using monetary policy to enhance economic stability. In the great depression, as I described, those tools were not used appropriately. But in this episode, the fed and other central banks, and I should say that there has been a great convergence, that other major central banks have followed or, on their own have followed very similar policies to that of the fed, that these tools have been used actively and in my belief, in any case, we avoided by doing that, we avoided much worse outcomes in terms of both the financial crisis, and the depth and severity of the resulting recession。

New regulatory framework will be helpful. But again, it\'s not going to solve the problem. The only solution in the end is for us regulators and our successors to continue to monitor the entire financial system, and to try to identify problems, and to respond to them using the tools that we have。

Those are my comments. We have some time. And I\'ll be happy to take your questions. Kelly。

>> Thank you, Dr. Bernanke, my name is Kelly Quinn. In the first class, you touched on the main street versus Wall Street divide. This has been in the back of my mind throughout the lecture series。

You have talked about the importance of educating the public on monetary policy, and although this lecture series has definitely demystified the fed for me, I think it\'s really been Wall Street, not main street, that has been tuning in. So given how unpopular bank bailouts were among many Americans struggling to pay their mortgages, who don\'t really understand the importance of financial stability, do you ever see Americans reconciling these differences?

>> BEN S. BERNANKE: Well, you are right, that some of the same conflicts that we saw in the 19th century that you see echoes of them today as well, I don\'t have a simple answer to that question. As you know, the fed has done more outreach, the press conferences and other kinds of tools, to try to explain what we did, and what we are doing。

Clearly, the fed is very accountable. We testify frequently, not just myself, but other members of the board or reserve bank presidents。

We give speeches. We appear in various events and so on。

It is inherently difficult, because the fed is a complicated institution, and you have seen the last four lectures, these are not simple issues. But all we can do, I think, is do our best and hope that our educators and our media and so on, will begin to carry the story, and help people understand better。

It is a difficult challenge. It is a difficult challenge. It does reflect an attention that has been in U.S. American feelings about central banks ever since the beginning。

>> Thank you, Mr. Chairman. Earlier you mentioned that the fed had several ways to unwind the large purchases of assets, including selling them back into the market. What guarantees that investors will be willing to buy them back in the future?

>> BEN S. BERNANKE: Again, first of all, we have essentially three separate types of tools that we can use. Any of which by themselves would actually allow us to unwind our policies, but taken together, I think gives us a lot of comfort。

First of all, we have the ability to pay interest on the reserves that banks hold with us. So when the time comes, whenever that time may come, whenever the time comes for the fed to raise interest rates we can do so by raising the rate of interest we pay to those banks and those reserves, banks are not going to lend out the reserves at a rate lower than what they can get from the fed. That will lock up reserves, and serve totighten monetary policy. That one tool by itself even if our balance sheet stayed large could tighten monetary policy。

The second tool we have is what is called draining tools. I won\'t get much into this, but basically we have various ways that we can drain the reserves from the banking system and replace them with other kinds of liabilities, even as again the total amoun of assets on our balance sheet is unchanged。

The third and final option is either to let the assets either run off as they mature, or to sell them. These are treasury securities, these are government guaranteed securities, it is certainly possible that the interest rate that will prevail when we sell those securities will be higher than it is today。

In other words, we will have to pay a higher interest rate in order to make investors willing to acquire them. But actually that will be part of the process. That will be a time when we are trying to raise interest rates, it will be reverse of what we did when we bought them. At that point we will be trying to raise interest rates in order to exit from the E Z policy and to a policy that will allow the economy to grow in a low inflationary way. I don\'t think there is any danger that investors won\'t buy the assets。

They will certainly buy them at a higher interest rate, and that in a way would be part of the objective of reducing the balance sheet would be to tighten financial conditions, so as to avoid inflation concerns in the future。

>> Thank you. I read an article, I\'m sorry I don\'t remember the exact source, it outlaid a plan to allow homeowners who have been on time with their mortgage payments to refinance at the current lower rates, sort of as a way to protect them from their housing prices dropping。

I was wondering whether you have heard of plans like that, and what sort of involvement the fed would have or whether that would fall to the consumer protection agency。

>> BEN S. BERNANKE: There are some programs like that. One in particular is called the HARP program. That\'s run by the GSE, Fannie and Freddie and by their regulator which is called the FHFA. On this program, if you are under water in your mortgage, in other words, if you owe more on your mortgage than your house is worth, you still may be able under this program, if your mortgage is held by Fannie or Freddie you may be able to refinance at a lower interest rate which will reduce your payments。

That program is under way and being expanded. It doesn\'t necessarily work if your mortgage is being held by a bank, because they are not part of this program. But they may choose voluntarily to do it. But you might be out of luck if your mortgage is not held by Fannie and Freddie。

Yes, there are programs like that. Fed is not involved in them. Our job has been to keep the mortgage rate low and hope that we can help homeowners. But programs like that which allow people to get lower payments, obviously, are going to be helpful to those people because they will face less financial stress, and may be smaller chance they will end up being delinquent on their mortgage。

>> Hi, I\'m Michael Feinberg. Thank you very much, chairman. You mentioned in your lecture the dangers of deflation from the great depression and more recently in Japan。

One of the arguments for maintaining a target inflation rate above 0 is to provide a cushion against possibility of deflation. In the last two recessions in the United States, there has been a significant fear of deflation causing the fed to keep monetary policy accommodative in the beginning of the last decade and even more so at this point。

Do you think that 2 percent is enough of a cushion to prevent deflation? Have you considered higher inflation target rates? Thank you。

>> BEN S. BERNANKE: That\'s a great question. There has been a lot of research on it. It seems like the international consensus is pretty much around 2 percent. Almost all central banks that have a target either have a 2 percent target or a 1 to 3 percen target, something like that. There is a trade-off here. On the one hand, you want to have it above 0, as you say in order to avoid or reduce deflation risk。

But on the other hand, if inflation is too high, it is going to create problems for markets, that\'s going to make the economy less efficient. There is a trade-off. What level of inflation gives you at least some reasonable buffer against deflation. But it is not so high that it makes markets work less well。

So again, the international consensus has been around 2 percent. And that\'s sort of where the fed has been informally for quite a while. That\'s what we announce and that is, for foreseeable future that is where we plan to stay. But it is an issue that researchers will continue to look at, trying to address exactly that trade-off that you are referring to。

>> Thank you, chairman Bernanke. You mentioned one of the biggest lessons you learned from the recent financial crisis as monetary policy is powerful but it cannot solve all the problems especially like the structure problems. What do you think are the effective tools that can be used to solve this structure problems in like housing and financial and credit markets? Thank you。

>> BEN S. BERNANKE: Depends on the particular set of problems. In the case of housing, the Federal Reserve staff wrote a whit paper which analyzed a number of the issues, talked about not just foreclosures, but also issues like what do you do with emptyhouses。

Talked about issues of how you get more appropriate mortgage origination conditions, things of that sort. We didn\'t come down with a list of actual recommendations, because that is really up to Congress and to other agencies to determine. But we did go through a whole list of possible approaches, which I guess I won\'t try to do here。

But housing is a very complex problem. There are many different things that could be done to try to make it work better. Indeed, looking forward, given the problems with Fannie and Freddie, we have some very big decisions as a country to make about what our housing finance system is going to look like in the longer ter。

A lot of issues there. On Europe, for example, it has been a very complex problem. We have been in close discussions with our European colleagues. They have taken a number of steps. They are right now talking about the so-called firewall, how much money they are going to contribute to provide as protection against the possibility of contagion, if some country defaults or fails to pay its bills。

So each one of these issues has its own approach. In the labor market we have the problem of people who have been out of work for a long time, obviously one of the best ways to deal with that would be through various forms of training, increasing skills。

So you can go down the list. Basically anything that makes our economy more productive and more efficient and deals with some of these long term issues related to our fiscal problems, those are all things that would help and the fact that the fed is doing what we can to try to support the recovery shouldn\'t mean that no other policies are undertaken. I think it\'s important that we look across the entire government and ask, what kinds of constructive steps can we take to make our country recover and help our economy be more sustainable。

>> Thank you, chairman. You mentioned that the fed is doing what it can to sustain the recovery, but with unemployment at 8.3 percent, and the housing issues that you mentioned, very sluggish, and the problems in Europe, what other tools do you think the fed has to potentially fight off other issues that we are going to have in the future?

>> BEN S. BERNANKE: Give me an example。

>> I mean, that\'s, I guess, if -- other issues that, let\'s say unemployment decides to rise, or the housing recovery gets worse, or Portugal, Spain and Italy, you know, all three of those issues。

>> BEN S. BERNANKE: Cost me a night\'s sleep now. (Chuckles。

I\'ve described, what I described today was basically, in these lectures, is basically what the tool kit is for the Federal Reserve and other central banks. We have lender of last resort authority. We still have that, it has been modified in some ways by Dodd-Frank but strengthened in some ways and reduced in some ways。

Between that and our financial regulatory authorities, we want to make sure our financial system is strong, and we have worked particularly hard to make sure that we do everything we can to protect our financial system and our economy from anything that might happen in Europe。

That whole set of tools is still very much available and in play, should there be any new problems in financial markets。

On the monetary side, I\'ve described to you, I don\'t have any completely new monetary tools, but we have the tools we have used, and our interest rate policies, and we can continue to use monetary policy as appropriate, as the outlook changes, to try to achieve the appropriate recovery, while still maintaining price stability, which is of course the other half of the Federal Reserve\'s mandate。

We have these two base successful tools and we need to continue to use them and continue to evaluate where the economy is going and use them appropriately. We don\'t have lots of other tools. That is why I was saying earlier, that we really need an effort across different parts of the government, and indeed the private sector, to do what can be done to get our economy back on its feet。

>> I think this has to be the last question。

>> Thank you, chairman. You spoke a lot about the economic recovery, and that while it is painfully slow, there is clear recovery happening。

My question is, what are the key indicators that you and the Federal Reserve are looking at that would suggest that the private sector has begun self-sustaining this economic recovery, and that the fed may begin to tighten monetary policy?

>> BEN S. BERNANKE: That\'s a great question. First, one set of indicators that has been looking better lately, and we have been paying a lot of attention to, is developments in the labor market. Jobs, unemployment rate, unemployment insurance claims, hours of work, all those indicators suggest the labor market is strengthening and indeed, employment is one of our two mandates, one of our two objectives。

So clearly that is something we would like to see sustained, w would like to see continued improvement in the labor market. A I talked about in the speech I gave on Monday, it is much more likely that that will be sustained if we also see increases in overall demand and overall growth. So we will continue to look at indicators of consumer spending, consumer sentiment, capital plans, capital expenditures, indicators of optimism on the part of firms, those kinds of things to see where production and emand are going to go。

Then of course as always, we have to look at the inflation side, and be comfortable that price stability will be maintained and that inflation will be low and stable。