The sad thing, of course, about today is it's the last one,

and I know that everybody who's been here

for the last two weeks has really enjoyed this very much

and it has been a terrific experience, a learning experience academically

and intellectually, as well as just an experience to be in the midst

of this event, which it is, as well as being a class.

And so, we're looking forward today to the final,

concluding lecture of the aftermath of the crisis

with Chairman Bernanke, Mr. Chairman.

[ Applause ]

Chairman Bernanke: Well, hello again.

So, today in the final of our four lectures, as Professor Fort said,

we want to talk about the aftermath of the crisis.

Now just to recap briefly, we talked last time about the most intense phase

of the crisis, in late '08 and early '09; financial panic both in United States

and in other countries, industrial countries;

threat in the stability of the entire global financial system;

the Federal Reserve working, as I'll describe, with others served in its lender

of last resort role provided short-term liquidity

to help stabilize key institutions and markets.

I think one of the points that we can now draw having looked at the history is

that rather than being some ad hoc and unprecedented set of actions,

that the Fed's response was very much in keeping with the historic role

of central banks, which is to provide lender

of last resort facilities in order to calm a panic.

And what was different about this crisis was

that the institutional structure was different.

It wasn't banks and depositors.

It was broker-dealers and repo markets.

It was money market funds and commercial paper

but the basic idea providing short-term liquidity in order

to stem a panic was very much what Bagehot envisioned

when he wrote Lombard Street in 1873.

Now, I've been focusing very much on the Fed's actions.

That's been the topic of the course, of course,

but the Fed obviously didn't work alone.

We worked in close coordination

with both other U.S. authorities and foreign authorities.

For example, the Treasury was actually engaged after the Congress approved the

so called TARP legislation.

The Treasury was in charge of making sure that banks had sufficient capital

and the U.S. government took an ownership position in many banks

that was essentially temporary.

Most of those have now been reversed.

The FDIC, the Federal Deposit Insurance Corporation, played an important role.

In particular, the deposit insurance limits,

the $250,000-deposit insurance limits, were raised essentially to infinity

for the transactions accounts.

And the FDIC also provided guarantees to banks who wanted to issue

up to three years of debt, corporate debt, in the marketplace.

For a fee, the FDIC guaranteed those issuances

so that banks could get longer term funding.

So this was a collaborative effort between the Fed and other U.S. agencies.

We also worked closely with foreign agencies.

I mentioned last time the currency swaps,

which are still in existence whereby the Fed gave dollars

to foreign central banks in exchange for their own currencies.

And those foreign central banks took the dollars

and on their own responsibility, on their own risk made those--

made dollar loans to financial institutions that required dollar funding.

We also of course continue to be in close touch with finance ministers

and regulators around the world as we try to coordinate to deal with the crisis.

Now, putting out the most intense phase of the fire was not really enough.

There's been a continuing effort to strengthen the financial systems,

strengthen the banking system.

For example, in a quite successful action,

one that I think was very constructive,

the Fed working with the other banking agencies led stress tests

of the 19 largest U.S. banks in the spring of 2009.

So this was not far after the most intense phase of the crisis.

And what we did in an unprecedented way was to disclose

to the markets what the financial positions were of the major banks.

And those stress tests, which confirmed

that our banks could survive even a return to worse economic

and financial conditions, created a great deal of confidence in investors

and allowed banks to go out and raise private capital,

a great deal of private capital,

and many cases to replace the government capital they've received during,

during the crisis.

The process of stress testing has continued.

Just a couple of weeks ago the Fed led another round of stress tests,

a very demanding set of stress tests.

Our banks did quite well.

They've raised a great deal of capital even since 2009.

They're, in many ways, in a stronger position than they were even prior,

prior to the crisis in terms of capital.

So these are steps that are being taken to try

to get the banks back into full lending mode.

It's still a process in progress but restoring the integrity

and the effectiveness of the financial system is obviously part

of getting us back to a more normal economic situation.

Now just saying a few words about the lender of last resort programs.

As I've already argued in some lengths, the programs,

it did appear to be effective.

They arrested runs on various types of financial institutions,

and they restored financial market functioning.

The programs, which were instituted primarily in the fall of '08,

were mostly phased out by March of 2010.

And they were phased out really in two different ways.

First, some of the programs just came to an end.

But more often, what happened was that the Fed would, in making loans,

liquidity provision to financial institutions,

the Fed would charge an interest rate that was lower than the crisis rate,

the rate, the panic rate, but higher than normal interest rates.

And so as the financial system calmed down and rates came down back

to more normal levels, it was no longer economically attractive

or financially attractive for the institutions to keep borrowing from the Fed,

and so that the program just sort of wound down quite naturally.

So we didn't have to just shut them down,

they just basically disappeared on their own.

The financial risks that the Federal Reserve took in this lender

of last resort programs was quite-- were quite minimal.

As I've described, lending was mostly short term.

It was backed by collateral in most cases.

In December of 2010, we reported to Congress all the details involved

in 21,000 loans that the Fed made during the crisis.

Of those 21,000 loans, zero defaulted.

Every single one was paid back.

So even though the objective

of the program was stabilizing the system, it was not profit making.

The taxpayers did come out ahead in those loans.

So that was lender of last resort activity.

That was the tool, the fire hose, to put out the fire of the financial crisis.

But of course as I've described last time, the--

even though the crisis was contained, the impact on the U.S.

and global economies was severe.

And new, new actions were needed to help the economy recover.

Remembering that the two basic tools of central banks are lender

of last resort policy and monetary policy, we now turn to the second tool,

monetary policy, which was the primary tool used to try

to bring the economy back after the trauma of the-- of the financial crisis.

Now, you're all familiar with conventional monetary policies.

Conventional monetary policies involve management

of the short-term overnight interest rate called the federal funds rate.

By raising and lowering the short-term interest rate,

the Fed can influence a broader range of interest rates.

That in turn affects consumer spending, purchases of homes,

capital investment by firms and the like,

and that provides demand for the output of the economy

and can help stimulate a return to growth.

Just a few words on the institutional aspects.

Monetary policy is conducted

by a committee called the Federal Open Market Committee.

The FOMC, as it's called, meets in Washington eight times a year.

During the crisis, it sometimes also held video conferences.

When we have a meeting of the FOMC,

there are 19 people sitting around the table.

There are seven governors, the seven members of the Board of Governors,

who have been appointed by the President and confirmed by the Senate.

And then there are the 12 presidents of the 12 Reserve Banks,

each of whom has been found or appointed by the Board of Directors of each

of the Reserve Banks and then confirmed by the Board of Governors in Washington.

So they're 19 people around the table.

We all participated in the monetary policy discussion.

When it comes time to vote, the system is a little bit more complicated.

At any given meeting there are actually only 12 people who are able to vote.

The voters at any given meeting are the seven members of the Board of Governors,

currently five, we have two empty seats and we hope to get those filled soon.

But the seven members of the Board

of Governors have a permanent vote in every meeting.

The president of the New York Federal Reserve Bank also has a permanent vote,

which goes back, of course, to the beginning of the system

and the fact that New York remains the financial capital of the United States.

Of the other 11 reserve bank presidents,

there's a rotation system in each year four

of the 11 other Reserve Bank presidents' vote and then at the end of the year,

they move on to another set.

So again, there's a total of 12 votes in any given meeting or any given decision

on monetary policy but the entire group participates in the discussions.

Now, here's the federal funds rate, again,

the short-term interest rate that is a normal tool

that the Fed uses for monetary policy.

You can see that at the end of Chairman Greenspan's term and the beginning

of my term in 2006, we were in the process of raising the federal funds rate

in an attempt to normalize monetary policy after having easier policy earlier

in the decade in order to help the economy recover from the 2001 recession.

But in 2007, as the problems began to appear,

typically in the subprime mortgage market, the Fed began to cut interest rates,

so you can see the right side of the picture

as interest rates were sharply reduced.

And by December of 2008, the federal funds rate was reduced to a range

of between 0 and 25 basis points.

The basis point is one-hundredth of one percent,

so 25 basis points means 1/4 of 1 percent.

So, essentially by December 2008,

the federal funds rate was reduced basically to zero.

It can't be cut anymore obviously.

So given that, as of December of 2008,

conventional monetary policy was exhausted.

We couldn't cut the federal funds rate any further.

And yet, the economy clearly needed additional support.

Into 2009, the economy was still contracting at a rapid rate.

We needed something else to support recovery,

and so we turn to less conventional monetary policy.

And the main tool that we've used is what we call in the--

within the balance of the Fed, the large-scale asset purchases or LSAPs,

more properly known in the press and elsewhere as quantitative easing, or QE.

I won't get into why I think LSAPs is a better descriptive name,

but in any case, I've had to bow to the common usage.

But these large scale asset purchases, as I'll explain in more detail,

were an alternative way of easing monetary policy, again,

to provide support to the economy.

So how does this work?

Well, to influence longer-term rates, the Fed began to take--

undertake large scale purchases of Treasury and GSE mortgage-related securities.

So, just to be clear here, the securities

that the Fed has been purchasing are government-guaranteed securities,

either Treasury securities, that's government debt of the United States,

or the Fannie and Freddie securities,

which recall were guaranteed by the U.S. government after Fannie

and Freddie were taken into conservatorship.

There have been two major rounds of large scale asset purchases,

one announced at March 2009 often known as QE1,

and another announced in November 2010, known as QE2.

There have been some additional variations since then,

including a program to lengthen the maturity of our existing assets,

but these were the two bigger--

biggest programs in terms of the size and the impact on the balance sheet.