5/3/2016 -
Addressing a filled auditorium at the Donald P. Jacobs Center, former Federal Reserve Bank Chairman Ben Bernanke spoke with Kellogg professor
Jan Eberly on the U.S. economy, the 2008 financial crisis and recovering from one of the greatest recessions in American history.
Eberly, the James R. and Helen D. Russell Professor of Finance at Kellogg and former assistant secretary to the U.S. Treasury, moderated the conversation, which was part of the Susan Bies Lecture on Economics and Public Policy, an annual lecture series sponsored by the Weinberg College and Art and Science’s Department of Economics.
“Ben Bernanke led monetary policy through a financial crisis that nearly brought the global economy to a standstill,” Eberly said. “His visit and remarks gave rising leaders within Kellogg and Northwestern a glimpse into the intensity of the crisis, as well as the pressures of decision-making when it really matters.”
During the discussion, Bernanke outlined a number of issues that led to the collapse of several major financial institutions, while touting the progress made during the economic recovery and new regulations that should prevent a reoccurrence.
The lesson learned, according to Bernanke, is that the U.S. banking system was far more fragile and vulnerable to runs on financial institutions than anyone anticipated. The defaulting of subprime mortgage loans and crash of the housing market caused a ripple effect that brought the entire financial system to a screeching halt.
In order to stabilize the system and the entire U.S. economy, Bernanke employed “blue sky thinking” wherein he and his team had to look beyond conventional financial policy and economic theory for solutions.
Their work resulted in an $85 billion dollar bailout for AIG, the world’s largest insurance company at the time, to prevent a complete collapse of the economy. Other “big bank” companies were bought while others, like Lehmann Bros., failed.
Referring to Bernanke’s remarks as a fascinating opportunity to hear the behind-the-scenes story, Ben Burnham ’16, a director with Kellogg’s Private Equity and Venture Capital Club, praised events like this and President Barack Obama’s 2014 visit to campus as tremendously beneficial for Northwestern students.
“Opportunities to hear our nation’s leaders speak firsthand help us, as future leaders, engage directly with the big issues of our time,” he said. “It’s important that we think about how we can further the conversation and positively influence decisions that impact the lives of people beyond our own organizations.”
Bernanke shared more lessons learned and career advice that are both insightful and cautionary for emerging business leaders:
A holistic view is critical. While regulatory groups had been tasked with supervising specific parts of the financial industry, no single group was tasked with looking at the system as a whole to identify potential risks to its overall stability. Now, both the Fed and the Financial Stability Oversight Council, launched in 2010, are responsible for identifying those risks.
Anticipate global effects. While the crisis and subsequent bailouts certainly validated the connection between the U.S. banking industry and the overall economy, they also revealed its connection to markets outside of the country. International institutions had been investing in U.S. mortgage-backed securities prior to the collapse.
When the U.S. housing market crashed, global trade dropped sharply from the third quarter of 2008 through the second quarter of 2009, demonstrating the truly global reach of the U.S. financial system.
It’s not over until it’s over. While the country has recovered from the recession, economic growth has slowed and productivity is lower than it’s been in recent years. In other words, our rate of return on capital investments is slower, which is why interest rates remain low. The slowdown concerns Bernanke given that the rest of the world is still struggling to recover, which can hinder the U.S.
Public service is tough, but rewarding. In one of his final points, Bernanke told students interested in public service that working in government is both immensely challenging and rewarding. He emphasized that working in the polarizing world of politics can at times be frustratingly slow, but some great work can be done.
