Financial Update (Third Quarter 2009)

Fed Chair Bernanke Reflects on a Year of Crisis

photo of Chairman Ben BernankeAs difficult as the past year and a half have been financially and economically, it could have been much worse were it not for the response of policymakers around the world, Fed Chairman Ben Bernanke said in a speech at the Federal Reserve Bank of Kansas City's Annual Economic Symposium in Jackson Hole, Wyo., in late August.

A scholar of the Great Depression, Bernanke noted that in the 1930s, policy was "largely passive" and international cooperation difficult.

Speedy, forceful actions halted slide
"History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs," the Fed chairman said in a speech titled "Reflections on a Year of Crisis." "In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation."

The past year has revealed a couple of fundamental lessons, Bernanke explained. For one, a financial crisis exacts a huge toll in both human and economic terms. Secondly, financial disruptions cross borders, and no major country has been immune in the current crisis.

Text of speech
Kansas City Fed's 2009 Jackson Hole symposium

Passivity held great risk
Absent the prompt and forceful actions of policymakers, the financial panic of October 2008 would probably have worsened even more, additional major financial firms likely would have failed, and the entire global financial system would have been at serious risk. "We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted," the chairman said.

He also warned that challenges lie ahead.

"We must work together to build on the gains already made to secure a sustained economic recovery, as well as to build a new financial regulatory framework that will reflect the lessons of this crisis and prevent a recurrence of the events of the past two years. I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress toward both those objectives."

August 31, 2009