Ben Bernanke: What Caused the Financial Crisis?

Scott Pelley: Aside from the President, he is the most powerful man working to save the economy, but Ben Bernanke had never done an interview until he sat down with us earlier this year. Bernanke is Chairman of the Board of Governors of the Federal Reserve System, better known as the Fed. The words of any Fed chairman cause fortunes to rise and fall and so, by tradition, chairmen of the Fed do not do interviews -- that is until now. The Federal Reserve controls the economy primarily by setting interest rates, but after the crash of '08, Bernanke invoked the emergency powers, and with unprecedented aggressiveness he has thrown a trillion dollars at the crisis and is prepared to double that. Ben Bernanke may be the most important Fed chairman in history. The question is, can he help lead America out of this deep recession and when? Mr. Chairman, I'm going to start with a question that everyone wants me to ask: when does this end? Ben Bernanke: It depends a lot on the financial system. The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. Now, we've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not going to see recovery. But, we do have a plan. We're working on it, and I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year. We'll see recovery beginning next year. And it will pick up steam over time. Scott Pelley: You think the recession is going to end this year? Ben Bernanke: In the sense that this decline will begin to moderate and we'll begin to see leveling off and we won't be back to full employment, but we will see -- I hope the end of these declines that have been so strong in the last couple of quarters. Scott Pelley: But you wouldn't say at this point that we're out of the woods? Ben Bernanke: No, I think the key issue is the banking system and the financial system. Scott Pelley: I wonder, do you expect double digit unemployment? Ben Bernanke: Well, it's hard to forecast exactly where we're going. Unemployment is rising. Job losses are still very severe and no doubt, the unemployment rate is going to go higher than it is. But I think, again, that if we do succeed in stabilizing the financial system, that we'll begin to see a slower pace of decline, and eventually, a stabilization that will set the basis for a recovery. Scott Pelley: You seem to be saying that we're not heading into a new American Depression? Ben Bernanke: I think we've averted that risk. I think we've gotten past that and now the problem is to get the thing working properly again. Scott Pelley: Ben Bernanke, age 55, has been chairman of the Federal Reserve Board since 2006. For our interview, he opened up the Fed headquarters, rarely seen by the public. It's a monumental building along the National Mall. Construction started in 1935 in the depths of the Great Depression. You know Mr. Chairman, I think the Federal Reserve, for most people, is a mystery. Ben Bernanke: Well, it's an institution that people don't hear so much about, but it's a very important one. It manages monetary policy for the country. It's one of the main tools we have for stabilizing our economy and keeping prices stable. Scott Pelley: When was it founded? Ben Bernanke: The Fed was created by Congress in 1913. And its original purpose was to deal with financial panics, which is what we're doing right now. Scott Pelley: Bernanke's crisis started in 2007 with the mortgage meltdown. Lenders began to fail. Bernanke cut interest rates repeatedly. In 2008, the Fed stopped the collapse of Bear Stearns by arranging a sale to another firm, but then came the end of Wall Street as we knew it. Mortgage giants Fannie Mae and Freddie Mac were seized by the government. On September 14, Merrill Lynch was sold in distress and the next day, 158-year-old Lehman Brothers failed. You didn't rescue Lehman Brothers. It set off a worldwide panic when it went bankrupt. And I wonder, looking back, whether you think that was a mistake. Ben Bernanke: There were many people who said, let them fail, you know, it's not a problem. The markets will take care of it and I think I knew better than that. And Lehman proved that you cannot let a large internationally active firm fail in the middle of a financial crisis. Now, was it a mistake? It wasn't a mistake for the following reason: we did not have the option, we didn't have the tools. The Federal Reserve cannot put capital into an institution. All we can do is make loans against collateral. Scott Pelley: The day after Lehman, Bernanke's Fed did something astounding. It loaned $85 billion to a company that wasn't a bank at all, American International Group. The global insurance giant that was also involved in backing risky mortgage investments. Bernanke says, unlike Lehman, the Fed could make the loan based on good collateral in AIG's portfolio. There have now been four rescues of AIG for about $160 billion. Why is that necessary? Ben Bernanke: Let me just first say that of all the events and all of the things we've done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG. Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, we had a situation where the failure of that company would have brought down the financial system. Scott Pelley: You say it makes you angry? What do you mean by that? Ben Bernanke: It makes me angry. You know, I slammed the phone to more than a few times on discussing AIG. It's just absolutely -- I understand why the American people are angry. It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but to stabilize or else risk enormous impact, not just in the financial system, but on the whole U.S. economy. Scott Pelley: By September, Bernanke and former Treasury Secretary Hank Paulson went to Capitol Hill to urge a massive bailout of the banking system. Ben Bernanke: At that period I thought we were pretty close to a global financial meltdown. Scott Pelley: How much danger was there? How close a call? Ben Bernanke: It was very close. It was very close. The Congress passed the bill that gave Treasury the right to put capital into the banks in the first week of October. And it was in the second week of October that the crisis reached its peak. And if we not had those powers, we could have had a much, much worse outcome. So, it was a very dangerous situation. Scott Pelley: Was anyone on Capitol Hill skeptical? Did they push back at all, say, you know, "Mr. Chairman, it's probably not quite that bad." Ben Bernanke: Well, I do remember one conversation I had where I was addressing a caucus of congressmen. And a congressman said to me, said that "Mr. Chairman, you know, I'm talking to bankers in my town. I'm talking to shopkeepers in my town. And they say things are normal. Nothing's going on. We don't see any problem." And I turned to him and I said, "You will." Scott Pelley: That second week of October the Dow fell 18 percent -- its worst week in history. In the midst of the crisis, Bernanke had freedom to act immediately. He doesn't need prior permission from Congress or the President. While they debated on Capitol Hill, Bernanke cut interest rates nearly to zero, then he used Depression-era emergency powers to launch a dozen rescue programs of his own. There was support for money market funds, mortgages, short term lending to small businesses, and support for auto loans, student loans and small business loans. Commitments of a trillion dollars, doubling the size of the Fed's balance sheet. Is that tax money that the Fed is spending? Ben Bernanke: It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. So, it's much more akin, although not exactly the same, but it's much more akin to printing money than it is to borrowing. Scott Pelley: You have been printing money. Ben Bernanke: Well, effectively, and we need to do that because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation. Scott Pelley: He is not kidding about printing money. The Fed issues U.S. currency, that's why it says "Federal Reserve Note" on all the bills in your wallet. This is the Bureau of Engraving and Printing just a few blocks from Bernanke's office. The Fed's mandate from Congress is to put enough money in the system for maximum employment, but not so much that it sets off inflation. The Fed actually pays for itself and returns billions in profits to the Treasury. In a sense, Bernanke has been preparing for this emergency his whole professional life. He got a PhD in economics from MIT. He chaired the Economics Department at Princeton, and his specialty is the Great Depression. He is among many economists who now believed it was the Federal Reserve itself that helped turn a recession in 1929 into a global calamity. Ben Bernanke: They made two mistakes, basically. One was they let the money supply contract very sharply. Prices fell, deflation, so monetary policy was in fact, very contractionary, very tight during that period. And then the second mistake they made was they let the banks fail. They didn't make any strong effort to prevent the failure of thousands of banks... Scott Pelley: Bernanke told us that we were close to a second Depression and he is determined not to let the major banks fail on his watch. One of the things that I think many people watching this interview don't understand is why there are multiple bailouts, four bailouts of AIG, three bailouts of Citigroup. There is a sense that this is a band-aid approach, that we're not getting to the root of the problem? Ben Bernanke: Well, part of the issue is that, you know, the economy has gotten a good bit worse. You know, the first part of the crisis was subprime and other assets that were toxic. Now, we're in the second phase, which is that the economy is very weak, so the economy's weakness has meant that some of the initial attempts to stabilize the banks haven't been enough, and we've had to do more. Scott Pelley: You know, Mr. Chairman, there are so many people outside this building, across this country, who say, "To hell with them. They made bad bets. The wages of failure on Wall Street should be failure." Ben Bernanke: Let me give you an analogy, if I may, if you have a neighbor who smokes in bed, and he is a risk to everybody. And suppose he sets fire to his house, and you might say to yourself, you know, "I'm not going to call the fire department. Let his house burn down. It's fine with me." But then of course, what if your house is made of wood, and it's right next door to his house? What if the whole town is made of wood? Well, I think we'd all agree that the right thing to do is put out that fire first, and then say, "What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn't happen in the future? How can we fire proof our houses?" That's where we are now. We have a fire going on. Scott Pelley: It's still burning. Ben Bernanke: It's still burning. Scott Pelley: Are all the big banks that you regulate solvent? Ben Bernanke: I believe they are, yes. But we are doing a stress test right now, where we're looking at what the positions of the banks are under a tougher economic scenario than the one that we currently expect. And what we plan to do is to say how much capital would each bank need to be well capitalized. Not just solvent, but well capitalized, even in these more adverse scenarios. Scott Pelley: Are you committing in this interview that you are not going to let any of these banks fail? That no matter what their balance sheet actually looks like, they are not going to fail? Ben Bernanke: They are not going to fail, but what we can do, should it be necessary, is try to wind it down in a safe way. Scott Pelley: What are the dangers now? What keeps you up at night? Ben Bernanke: The biggest risk is that, you know, we don't have the political will. We don't have the commitment to solve this problem, and that we let it just continue. In which case, you know, we can't count on recovery. Scott Pelley: After our interview, those stress tests were done and some of the largest banks were told to raise $75 billion to shore up their balance sheets. The Fed has pledged another $1 trillion to prop up the financial system. In a moment, Bernanke tells us what the first signs of recovery would look like.

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