Governor Erkki Liikanen
Submitted to Helsingin Sanomat (in Finnish)
The author has been Governor of the Bank of Finland and a member of the Governing Council of the European Central Bank since 2004.
Bernanke steered the USA through the crisis
In his memoirs, the unflappable central banker describes his experiences in his own inimitable style.
In early 2002, Ben Bernanke’s secretary at Princeton asked the professor: ‘Glenn Hubbard is on the line. Will you take the call?’
Hubbard, President George W. Bush’s leading economic adviser and at that time on leave of absence from Columbia University, had a question: ‘Would you be interested in coming to Washington to discuss with the President a post at the Federal Reserve?’
The rest is history. Bernanke first became a member of the Board of Governors of the Federal Reserve System, moved on to serve in the White House as chairman of President George W. Bush's Council of Economic Advisers and finally became Chairman of the Federal Reserve from 2006 to 2014. Thus, the leading researcher of financial crises was head of the USA’s central bank when the world stumbled into the great financial crisis of 2007–2009.
Bernanke visited Finland just a week ago. He told us he had written his memoirs personally. Amongst the numerous works dealing with the financial crisis, Bernanke’s position, expertise and clear, individual style of writing makes this book undoubtedly the pick of the crop.
The path of this young Jewish man from a small town in the American South to the elite universities of the North describes one of the paths available in the America of those days.
Bernanke grew up in South Carolina, which in the 1960s was still a segregationist state. The assassination of Martin Luther King in 1968 appalled the young Bernanke – as did the fact that even generally nice people could react to the assassination with satisfaction.
In the early 1970s, Bernanke left to study first at Harvard and then at MIT. At the latter, his professor was Stanley Fischer (today Vice Chairman of the Federal Reserve), who had served earlier as thesis supervisor for the Finnish economist and investor Pentti Kouri.
Fischer encouraged Bernanke to read the Monetary History of the United States by Milton Friedman and Anna Schwartz.. He was swept away and from then on concentrated on monetary and macroeconomic questions.
One of Bernanke’s recognised contributions to economic theory is the concept of the ‘financial accelerator’, which he used to explain the depth of the Great Depression of the 1930s. According to Bernanke, in a depression the flow of credit dries up, leading to a further exacerbation of the situation.
Banks become more careful as their losses grow. At the same time the solvency of borrowers is weakened. As the sources of credit run dry, this inhibits household purchases and corporate investment. A healthy financial system is, therefore, extremely important to the national economy.
This observation provides the key to Bernanke’s actions during the financial crisis.
Bernanke’s memoirs describe the phases of the financial crisis above all in the United States, but he also deals with the close cooperation between central banks globally and the crises in other regions.
Bernanke was the primus motor when dollar funding was secured not only for banks within the USA, but also for those abroad, through the aegis of other countries’ central banks, and for the exceptional interest rate reduction coordinated between all the leading central banks in October 2008.
He also deals with Europe and the ECB. Bernanke valued the input at a critical stage by the ECB’s Jean-Claude Trichet. The two men shared the same negative opinion of the debt restructuring in respect of Greece in 2010, although they occasionally differed in their monetary policy decisions.
Bernanke writes appreciatively of Trichet’s successor Mario Draghi – another product of MIT – and his work in conquering Europe’s economic problems.
In the economic crisis of 2008, President George W. Bush trusted Bernanke’s judgement from the outset. Bernanke, for his part, is grateful to Bush for shouldering the responsibility during the extremely critical weeks of 2008 irrespective of the political costs.
But the measures required to save the financial system in the United States, and perhaps globally also aroused opposition. The strongest attacks came in the 2012 presidential primaries for the Republican Party.
The Republicans’ hostility towards the Fed and Bernanke personally clearly bothered him.
‘I did not leave the Republican Party. I felt that the party left me,’ Bernanke states.
Finland makes a brief appearance in connection with the rescue operation for Bear Stearns. The Fed wanted for the first time in 60 years to use the exceptional possibility of granting credit directly to a single bank. This required the support of all five members of the Board. The problem was that one of the five, Rick Mishkin was at the time visiting the Bank of Finland and at that precise moment was skiing in Lapland. He could not be reached by an encrypted phone line. However, a solution was found. Nevertheless, the next member of the Federal Reserve Board to visit the Bank of Finland, Randall Kroszner did not dare come until the situation had calmed down.