A lot has happened in the seven years since the United States economy went into a tailspin, and according to former US Federal Reserve chairman Ben Bernanke, the global economy is in a safer place than it ever was as a result of the response to the crisis.
Between 15 and 22 September 2008, Lehman Brothers investment bank filed for Chapter 11 bankruptcy protection, Bank of America bought the flailing Merrill Lynch, and Ben Bernanke, then chairman of the US Federal reserve went to the White House to ask for $US85 billion to save failing insurance company American International Group.
“It was never going to be very popular, but we needed to do something to prevent the crisis getting deeper,” Bernanke told the audience at the World Business Forum, held recently in Sydney. “The role of the Federal Reserve is to be lender of last resort, and so we moved to protect AIG, and also to protect against a run on the banks, which was a serious concern.”
Although he openly admits the move to protect AIG was not popular, Bernanke is keen to point out that the initial protection of the banking sector was backed up in 2009 with a series of “stress tests”, in which financial institutions were asked to demonstrate that they had taken measures to become more resilient.
It’s important to remember that sub-prime mortgages represented only a very small proportion of the overall financial sector. When they went bad, they triggered a massive failure across the financial sector because the rest of the system was not strong enough.
“..There was not enough capital in the banks to withstand a shock, even a small one.”
These moves to support AIG, and the subsequent $US700 billion Troubled Asset Relief Program, which effectively bailed the financial sector out of the crisis, attracted criticism from all sides of politics. Describing the program as “the most successful and least popular financial program in US history”, Bernanke told the audience the measures taken have been validated by the slow but steady recovery, as well as the current state of the US economy and the global economy.
“Growth has been slow since the crisis, but there’s plenty of scope for the economy to keep going, and the financial system is now more stable than it was in 2008, because it has been tested,” Bernanke said.
He went on to highlight the fact that the GFC resulted in an economic decoupling, effectively pushing nations into different economic cycles, and creating more opportunities for business to hedge against failure.
“In 2008 everybody was going down and coming up together, and now you see different countries going up and coming down together,” Bernanke said. “What everyone should take away is that we’re in a better position than we’ve been before, and we can all look forward to a boring financial future – boring is good in financial markets, boring is what you want from your financial system.”