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Up Front

Bernanke Reflects on the Recent Crisis and Fed Response

David Wessel and Parinitha Sastry

Ben Bernanke, the former Federal Reserve Chairman who is a Distinguished Fellow in Residence at Brookings, told a conference on “Liquidity and the Role of the Lender of Last Resort” that the financial crisis of 2007-2009 followed the five stages of the classic 19th century banking panic in a more complex financial sector.


The five stages are losses followed by bank runs followed by sales of assets at fire-sale prices followed by contagion followed by economic impact. Bernanke conceded that the Fed and many others were “slow to see” how losses on real estate could trigger such calamitous losses through the financial system. But he said the central bank largely followed the classic lender-of-last-resort prescription outlined by the 19th century British economist and journalist Walter Bagehot – to lend freely on good collateral at a penalty rate.

Bernanke noted, however, that the ad-hoc interventions with Bear Stearns and AIG were not Bagehot-style lender-of-last-resort actions. Rather, they reflected the absence of any mechanism to unwind systemically important non-bank financial firms. He said he was pleased that provisions of the post-crisis Dodd-Frank legislation, which gave the Federal Deposit Insurance Corp. new authority to liquidate financial institutions, should take “the Fed out of the business of weekend emergencies.”

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