Like everyone, I have good days, and I have bad days. Last Tuesday was a very good day. Ironically, it was so good because I had the opportunity to hear about some very bad days in the life of Ben Bernanke, Chair of the Federal Reserve from 2006 to 2014.
A group of us from the SPDRs team made our way to San Diego this week to meet with our clients and partners at the Schwab IMPACT conference. On Tuesday, we hosted an intimate dinner with clients and Dr. Bernanke joined us to provide his views on a myriad of topics drawn out by our own Michael Arone.
It shouldn’t come as a surprise that we’re interested in the views of Dr. Bernanke. As you’ve probably seen or heard, we’ve been very focused on ensuring the market understands the benefits of liquidity in market products, and few people have had such an impact on market liquidity as Dr. Bernanke.
Over the course of our hour-long discussion, Bernanke owned the room with his candor and humor — not something that I expected given his carefully couched public statements on the actions of the Fed throughout the financial crisis.
I took away five lessons from Bernanke’s recollections of the crisis, three of which apply to our daily work lives, but seldom with so much riding on the outcome.
1. Strong data and transparency around decision-making are critical in building consensus
In our tweetstorm world of hyper-spin, it’s easy to get caught up in the emotion of the day and allow decisions to be biased by sentiment. The best antidote for this particular ill is compiling a strong set of data around what makes your business tick. In the case of the financial crisis, this came down to being able to rapidly evaluate the contagion risks at hand.
While the Fed had a lot of information at its disposal, it wasn’t always the information they needed in the early days of the crisis. Importantly, this didn’t stop them from acting on what they thought needed to be done. They used what they had, and looked to improve what they would be able to access in the future. Some of these early requests for data ultimately led to the formation of whole new divisions in the US government to get a better handle on the business of managing the US economy.
As they did this, there was a lot of behind-the-scenes meetings to ensure that even if the actions of the Fed weren’t fully agreed upon by all, nobody in key government roles was kept in the dark about the actions and the anticipated outcomes. While this added time to some of the execution plans in the short run, it made future decisions easier to understand by other members of government.
2. Those who are ignorant of history are doomed to repeat it
Bernanke mentioned a few times the well-known fact that he is a student of history, as were many of his colleagues at the time. He also pointed out that knowing the history doesn’t provide the full picture. As times change, people’s reactions can also change. Think runs on a bank in the 1920s, versus virtual runs on financial instruments in 2008/2009. Knowing how events played out in the past won’t necessarily give you the exact playbook for your decisions today, but it can provide you with some strong markers on why variations of a theme worked (or didn’t work) under similar circumstances.
3. Have the courage of your convictions
One of my favorite quotes of the night was when Bernanke relayed all the work the Fed did to keep Congress informed around some of the strategies they deployed to attempt to avoid another depression. He said he felt so far out on the limb that he couldn’t see the tree! But as a purveyor of the data in front of him, the student of history (and his colleagues) were intent on acting. While they thought actions like TARP would create a safety net for the US Economy, they couldn’t be sure until they tried.
4. Don’t just mask the symptoms
While the Fed was focused on ensuring that too-big-to-fail firms stayed afloat and market liquidity didn’t dry up, they couldn’t lose sight of the fact that they were treating symptoms —and needed to root out the disease. Many of the regulations put in place post-crisis were created with the intent to create market resiliency, to attempt to protect investors before a problem could arise. While some of these regulations have been, or are in the process of, being unwound, many are still in place. And the proof-point of successfully treating the disease might lay in the fact that the US has entered the longest period of expansion in history.
5. Politics were as present in the past as they are today
The actions of the Fed were (and still are) deeply debated, and not everyone agreed with the direction taken. Then, as now, the political landscape was deeply charged, and Bernanke and his team needed to find ways to rise above the politics. During his time in the office, there was the need to stretch the rights of the Fed to their limits to achieve the stability they were hoping for, even if the decisions were politically unpopular.
As fascinating as it was to relive the events of 10 years ago (how a decade has passed already is beyond me), we couldn’t help but ask for Bernanke’s views on the markets today. Historical economic expansion coupled with a low rate, low inflationary environment has created a very interesting road for central bankers around the world to walk. In the words of Dr. Bernanke, expansionary periods don’t die of old age...they’re murdered — and geopolitical events are often the catalyst for the demise. While he didn’t see anything in the near term that could be a trigger, Bernanke highlighted various watch list events, including trade war saber rattling, unrest in Hong Kong, Brexit, or any other driver of economic uncertainty. He also warned that inflation is dormant, not dead, and that he still feels there is an important role for central bankers to manage toward inflationary targets.
It was not lost on anyone in the room that whether or not you agreed with the tactics deployed post-Lehman, it’s very hard to argue with the results. Were the outcomes perfect? Of course not — nothing ever is. However, if we didn’t have the right person in the right place at the right time to help direct the actions of the Fed in 2008, I’m hard pressed to imagine that the roughly 5,000 advisors attending the IMPACT conference, the firms they partner with, and the millions of investors they help to build a financial future for, would be in as good a place as they are today.