Former Federal Reserve Chairman Ben Bernanke acknowledged that policy makers made two critical errors fighting the financial crisis a decade ago: They failed to see it coming with such force then underestimated how much economic damage it would cause later.
“Nobody saw how widespread and devastating the crisis itself would be,” he said in a short video discussing the results of a 90-page paper on the subject released on Thursday.
Bernanke, the Fed chief from 2006 until 2014, is now a distinguished fellow at the Brookings Institution in Washington. He singled out the panic that engulfed the financial system with the 2008 collapse of Lehman Brothers Holdings Inc. as the key reason for the depth of the recession back then.
The failure to foresee the severity of that downturn “demands a more thorough inclusion of credit-market factors in models and forecasts of the economy” in the future, he wrote in a separate blog post.
Bernanke is the second Fed policy maker to issue a public mea culpa this week. Former Vice Chairman Donald Kohn agreed that the central bank made forecasting errors during the crisis and its aftermath. The Fed also over-estimated the potential costs of its controversial quantitative-easing program and so was more timid than needed in carrying it out, he said.
“We were behind the curve,” Kohn told a conference on the crisis at Brookings on Tuesday.
Bernanke took issue with economists who contend that the housing-price bust — and its impact on household wealth and consumer spending — was the main driver of the deep downturn a decade ago. While that undoubtedly played a major role, particularly in sparking the crisis, Bernanke said the recession wouldn’t have been nearly as bad as it was if investors hadn’t yanked money out of banks and other financial institutions.
“There was a run, a panic analogous to the 1930s, but in an electronic form rather than people lining up in the street,” he said in the video. “The availability of credit plummeted.”
Echoing comments made last week by former Treasury Secretary Timothy Geithner, Bernanke voiced concern that post-crisis reforms had left the Fed and other policy makers with fewer tools to combat the next crisis.
In an effort to prevent future government bailouts, Congress curbed the ability of the Fed, the Federal Deposit Insurance and the Treasury Department to provide emergency support to the financial system.
While the reforms overall had significantly improved the system’s resilience to shocks by boosting bank capital and other measures, “policy makers need to have the appropriate tools to fight the next crisis,” Bernanke wrote in his paper.
“On this count, I am somewhat less sanguine,” he said.