By Michael Hansen
Ben Bernanke visited St. John’s College recently to participate in a panel of three people including Mr. Bernanke and two St. John’s Graduates. The audience were mostly local alumnae and faculty, but had a few students, including myself! Mr. Bernanke was the chairman of the Federal Reserve from 2006 to 2013, and most notably, this period includes the ’08 recession. During this short hour and a half, Mr. Bernanke spoke on the history of the Federal Reserve, its role in the ’08 financial crisis, and the future of the Federal Reserve’s involvement in the economy.
The history of the Federal Reserve began with the first national bank, under the influence of Alexander Hamilton. Hamilton was a strong proponent of a federal bank system which he writes about in his federalist papers, which we read during senior year at St. John’s. Essentially, what its function was then, and now as the Federal Reserve is to create stability in the United States economy. To create that stability, it has one major tool: influencing interest rates.
Interest rates were of huge importance during the ’08 recession and its recovery. Bernanke, whose PhD thesis was written on the great depression, said the most important part of getting out of an economic slump, is to get people spending again. The Federal Reserve (the Fed for short) can encourage people to spend more by making saving less desirable by lowering interest rates. With lower interest rates, the return on stored up money is not significant. The tools to introduce more money, and to change the interest rates on safe investments, such as bonds, are the strongest tools the Fed has.
So how can we know whether the actions of the Fed were beneficial in ’08? Well, according to Bernanke it begins with how the economic downturn in the US affected the whole world. There was a near universal reaction to the depressed economy in America because of this interconnected age. By looking to other countries affected, we can see if they recovered as well as we did. Not even close it seems, as the target GDP in the United States is back on track to where it would have been had the crash not even happened, and our unemployment has gone down to 5%. Looking to an equally developed country, Germany, their unemployment rate is 11% – one percent higher than before the crash, and their GDP suffers.
Bernanke wrote a book called ‘The courage to act.’ All of the signs of a great depression were there, and if he could do something that had even a small chance to prevent that, he would do it. The evidence says that those policies worked extremely well, but Bernanke lamented the negative stigma that surrounds an institution with limited power that has often worked for the good of the US.
This visit by Ben Bernanke was a pleasure for all those who were able to attend, especially for someone thinking they might go into business and finance after graduation. The visit allowed members of the polity to ask questions about the future and the past of the economy, mixing in knowledge of Great Books such as the Federalist Papers and the Constitution.