|by Paul Davidson, USA TODAY|
Outgoing Federal Reserve Chairman
"Some of the costs people talk about are not really costs," Bernanke said in an interview with author and former banking industry official
Bernanke, who helped lead the nation from the financial crisis and recession, is scheduled to step down
On inflation, Bernanke said, "I think we have plenty of tools to manage interest rates and tighten monetary policy even if (the Fed's) balance sheet stays where it is or gets bigger."
Since the 2008 financial crisis, the Fed has launched several rounds of Treasury and mortgage bond purchases to push down long-term interest rates, swelling the Fed's balance sheet to more than
To head off inflation, Bernanke has said the Fed can temporarily buy back many of the bonds it has purchased — a strategy know as "reverse repurchases" — to sop up money from the banking system. Bernanke also noted inflation remains well under the Fed's 2% annual target.
Another risk is that the Fed will take huge losses when it begins to sell off the bonds as bond prices fall and interest rates rise, sharply reducing or eliminating the payments it makes to the U.S. Treasury. Bernanke, however, noted the Fed already has supplied hundreds of millions of dollars to the Treasury. Thus, there would still be a huge net gain to federal coffers. "We have already not only helped the economy but helped the fiscal situation quite significantly."
Bernanke said the only genuine risk of the Fed's bond-buying is the danger of asset bubbles as low interest rates drive investments to riskier holdings, such as stocks, real estate or junk bonds. "That's the only risk I find personally credible," he said.
But he added that he thinks stocks and other markets "seem to be within historical ranges, the financial system is strong and the financial institutions are well capitalized. We're watching this very vigilantly."
He said that if bubbles — such as the mid-2000s spike in real estate prices that led to a crash and the financial crisis — begin to form, the Fed would be inclined to use its regulatory authority to pop them, rather than resort to raising interest rates.
Bernanke said he has been frustrated by fact that
"I have felt some frustration," he said. "Certainly those things have caused problems for the economy, they've hit confidence."
Bernanke was also asked about his unruffled "Buddha"-like demeanor during the 2008 financial crisis as the Fed took unprecedented steps to provide liquidity to a financial system that virtually froze as mortgage-related losses mounted at top banks.
"It's my nature, I think, to the focus on the problem and I was so absorbed in what was happening, I really wasn't in that kind of reflective mode," Bernanke told Ahamed. "If you're in a car crash, you're mostly involved in trying to not go off the bridge and later on you say, 'Oh my God!'"
During the crisis, Bernanke said he had "a strong partnership" with former Treasury Secretary
"There was a little bit of discussion over whether the Treasury or the Fed should take the lead on this or that particular area," Bernanke said. Paulson "was most exposed to the political winds as a representative of the administration. In the end, he always did what had to be done."
Generally, the Fed provided emergency loans to troubled companies such as insurance giant AIG while Treasury injected cash into the firms and in some cases took over management.
Bernanke disputed the suggestion that the effects of the crisis could have been minimized if top officials had asked
Even then, he said, the House initially rejected the bailout before passing it. "I remember a senator telling me… 'I have to tell you my calls from constituents are running 50-50 — 50% no, and 50% hell no!'"
Bernanke said he wasn't surprised by enduring populist reaction to the Fed's efforts to prop up financial institutions and inject money into the financial system — though he says they were resoundingly successful. He said there was similar reaction to the Fed's response to financial panics in the 1930s.
"If we had not done it" a depression would have ensued and "the populist reaction would have exploded as well, so we were stuck."
"We hope as the economy improves and we tell our story and more information comes out about why we did what we did, people will appreciate and understand what we did was necessary."
Outgoing Federal Reserve Chairman
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