- November 17, 2014
Key Points
·
I shared the stage at
Schwab’s IMPACT conference recently with former Fed Chair Ben Bernanke (a
goose-bumpy experience).
·
He was remarkably
funny; but also firm in his views about the merits of the Fed’s extraordinary
efforts to stem the tide of the financial crisis.
·
Notably, he strongly
pushed back on the notion that QE is an inflation accident waiting to happen.
If you were to sample
any number of folks about the most funny of men, you would likely hear answers
like Robin Williams, Jerry Seinfeld, Eddie Murphy or Jim Carrey. I doubt you’d
get a single “Ben Bernanke.” But he
surprised a packed house of over 4,000 at Schwab’s IMPACT conference in Denver
this month with his humility and humor.
I had the great honor
of sharing the stage at IMPACT with Former Fed Chair Ben Bernanke in Denver
about 10 days ago. This was the fourth time at IMPACT that I’ve had the
pleasure of having an on-stage “conversation“ with remarkable men and
women from the annals of politics and policy, including former Fed Chair Alan
Greenspan, Former Treasury Secretary Hank Paulson and former Senator Olympia
Snowe. Dr. Bernanke is putting the
finishing touches on a book chronicling the financial crisis and set to be
released in March of next year.
Your dad is…?
But in his opening 10
minutes of remarks before I joined him on stage, he took the opportunity to
surprise the crowd with the first of what were many hysterical quips. His
introduction included the obvious mention of the fact that he’s become highly
recognizable. But he recounted the early couple of days of his daughter’s
freshman year in college. When her roommate asked her what her father did for a
living, she replied that he was the Chairman of the Federal Reserve; to which
her roommate replied, “Your dad is Alan Greenspan?!“ He went on to note
that it’s still the case that 12% of the public believes Greenspan is still running
the Fed!
Ben, please explain
But of course, it
wasn’t all laughter. Dr. Bernanke spend much of our time together recounting
the heady days of the financial crisis; with an emphasis on AIG, Lehman and the
Troubled Asset Relief Program (TARP). He recalled a meeting he and Secretary
Paulson had with members of Congress during which the bailout of AIG was
discussed: “Paulson and I met with 20 leaders of the House and Senate.
Paulson said, ‘Ladies and gentlemen, we’re about to make an $85 billion loan to
AIG … Ben, please explain.” This, too,
generated much laughter (of course I’m talking about the laughter at IMPACT six
years later; not during that fateful meeting).
As for Lehman
Brothers, Bernanke views the weekend of its demise the critical turning point
in the financial crisis. “My view was that it was essentially a panic;” an
institutional panic, wholesale panic, causing “the cost of bank funding
[to shoot] through the roof in December 2008.” The turning point came when
Congress ultimately passed TARP, which ultimately helped stabilize the
financial system; however unpopular it was at its outset. He had another
now-funny quip when he recounted one Senator’s assessment of voter sentiment
about TARP, which “was running about 50-50: 50% said ‘no’ and the other 50%
said ‘hell no!”
But TARP did give the
Fed the tools it needed to tackle the crisis; including quantitative easing
(QE) as an addendum to having taken short-term interest rates to zero following
Lehman’s collapse. I asked Dr. Bernanke
about his “worst-case scenario fears” during the peak of the crisis and whether
what ultimately happened was better or worse. With the benefit of hindsight, he
said the failure of Lehman and its ripple effects, did not match his worst-case
scenario; which would have brought the failure of many more institutions. Today, he analyzes crises from the private
sector sidelines. He got another roar of laughter when he quipped, “Now I read the
newspaper and say, ‘gee, that’s a serious problem; I hope somebody does
something about it.’“
QE: practice vs.
theory
I also probed about QE
and specifically asked him about a funny comment he made earlier this year at
another speaking engagement. He noted that, “the problem with QE is it works in
practice, but it doesn’t work in theory.”
He continues to make a strong defense of QE and uses the less
economically secure conditions in the eurozone—which hasn’t implemented
US-style QE—as testament to his case.
I asked him a bit more
about the European Central Bank (ECB) and their efforts to-date. He believes
the ECB will have a rough time implementing US-style QE. The ECB faces “barriers
to doing it [that] are not really economic. The legal and political barriers
being thrown up are going to make it very difficult to do that.“ He also fought
back against those who have railed at the supposed-inflation implications of a
now-$4.5 trillion Fed balance sheet courtesy of three rounds of QE. He recalled
thinking, “we were never concerned about [inflation]; that was just bad
economics; inflation was never a risk and is not a risk now…inflation is
non-existent and we’re adding 200,000 jobs a month to the economy. Four
years later there’s not a sign of inflation. The dollar is strengthening.
They’re saying, ‘Wait another five years, it’s going to happen.’ It’s not going
to happen.”
But he was sympathetic
to the concern, about which I asked him, that QE ultimately suffered from the
law of diminishing returns: “The first round in 2009 was probably the
most powerful but you come to a point where it’s harder to bring yields down;
it’s harder on the signaling side to show you’re going to keep rates low.“
Clooney vs. Giamatti
When we got to
audience Q&A, he was asked what he thought about the movie “Too Big
to Fail;“ the film adaptation of the book written by my friend and CNBC Squawk
Box anchor, Andrew Ross Sorkin. His response: “I didn’t see the movie. I
saw the original.” He also expressed some frustration that his choice to play
him—George Clooney—was not available, so the part went to Paul Giamatti (who
received a Golden Globe for the portrayal).
I wrapped things up
with a few more questions of my own; including what advice he and other former
Fed chairs have given to their successors. Bernanke remembered the sage advice
from Greenspan: “When you sit at this table, always sit where you can see
the clock so you know when the meeting’s over. “
End
"prohibition"
Dr. Bernanke recounted
a different ritual when he became the head of the Council of Economic Advisors
under President George W. Bush (who also a speaker at IMPACT this year), which
was the job he held before he took over the Fed. The new chair gets presented a
sign that says, “In case of emergency, open the bottom drawer. When you opened
the bottom drawer, there was a bottle of scotch.”
I took that as an
opportunity to ask whether he agreed with the view expressed by many (including
yours truly) that politicians need to return to the days when liquor flowed
more freely and there were more collegial relationships in Washington. His reply? “It couldn’t hurt.”
Legacy … and drinking
I asked Dr. Bernanke
about his legacy. He exudes a sense of pride around the steps the Fed took
during the financial crisis, as well as its increased transparency; which has
included press conferences following Federal Open Market Committee (FOMC)
meetings, public appearances by the Fed Chair and other FOMC members, and
providing to the public the minutes of FOMC meetings. In particular, he lauded
the fact that the Fed is now “structured to address financial stability issues;
financial stability is now an equal partner with monetary policy.”
He also responded to
my question about how he has been received over the years: “On the whole,
people have been very nice. It was a very hard time; I’m sure that we didn’t do
everything right. There was a lot of anger; a lot of people upset about the
economy with good reason. But people have been very supportive. I’m very
appreciative of that.”
The audience was
certainly supportive and appreciative. (www.schwab.com)
Thanks for reading and please forward this blog on to anyone else that might want to hear about the "lighter" side of our "Helicopter Ben"!
Best,
Mike
Michael M. Knittel
Director/Portfolio Manager
Lagunitas Asset Management
1024 Iron Point Road, Suite 100
Folsom, CA 95630
916.357.6656
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