Fed Chair Bernanke: History Might Not Repeat, but It Comes Close
Viewing the recent financial crisis in an historical context helped to shape the responses of the Federal Reserve and other central banks, Fed Chairman Ben Bernanke said in a recent speech.
"I think the recent global crisis is best understood as a classic financial panic transposed into the novel institutional context of the 21st century financial system," the chairman said during a November 8 talk at a research conference in Washington, D.C.
In particular, Bernanke discussed parallels between the financial crisis of 2007–08 and the Panic of 1907. Like the more recent crisis, the 1907 panic helped trigger a recession. The panic also led to the founding several years later of the Federal Reserve, which was signed into law by President Woodrow Wilson in December 1913.
How 1907 was like 2007
While elements of the two crises were similar, the responses were also in certain ways comparable. In both cases, for instance, injections of liquidity early on were crucial, Bernanke pointed out. But increased liquidity was only a first step. "Full stabilization requires the restoration of public confidence," he said.
Liquidity, restoring trust crucial to ending panics
In the recent financial crisis, three basic tools helped restore public confidence in the system: temporary public or private guarantees, measures to strengthen financial institutions' balance sheets, and public disclosure of the conditions of financial firms. The Fed and other public agencies, including the Federal Deposit Insurance Corporation and the Treasury Department, took various measures to bring about those three outcomes. The FDIC guaranteed bank debt, while the Treasury guaranteed money market funds. The Fed bank stress tests in the spring of 2009 and the publication of the stress-test findings helped repair confidence in the U.S. banking system, Bernanke said.
"Collectively," he said, "these measures helped end the acute phase of the financial crisis, although, five years later, the economic consequences are still with us."
November 20, 2013