Thought and the whole system starts unraveling in reverse. The political response to 2008, ben bernanke, henry pulson, president bush, and obama, did they get right . Guest i think once the crisis unfolded. Ben bernanke and the Federal Reserve acted correctly. And that is no small measure due to the part tha bernankes doctoral thesis had to do with the Great Depression and he worked out a new interpretation why the Great Depression was so severe. He talked about the credit influences and that you really have to rescue the Financial System to make sure lending continues. So i give him a lot of credit for saving things. The Bush Administration pushed through a small stimulus package in 2008 and that probably helped a bit. But in terms of fiscal policy, tarp, which was the bank bailout was incredibly important. It reassured people that the Banking System was going to continue. Tarp was a recapitalization of the Banking System. The banks had been holding lots of assets that suddenly were less valuable than they were originally thought. If that happened sufficient the banks are insolvent and shutdown or continue like zombie banks as they did in japan for a while. So you need somebody to come in to provide funds to make those banks solvent. That is what the u. S. Government did. If it hadnt, then i would think that, you know, the Financial System would grounded to a halt eventually. It would not have immediately but it would have stopped lending and you cannot run an economy without a Financial System that is working. Host professor chinn, are recessions and economic downfalls natural occurrences . Guest i think so because they will hit economies that push them down or up and cycles will occur. You dont want a system that is mechanical. You hear about people saying at the moment this recovery is unnaturally long and longer than average so it must, by definition, come to an end. My view would be at some time either the Federal Reserve acts in a way that tips the economy into a recession or some shock strikes that forces the feds hands or a combination from over seas causes the jump. What will the Federal Reserve reserve do is one question . Will it slow the economy down . The other question is if the Federal Reserve is not the thing that participates this recession is it the combination of world events . That would be a new event. Most of the time, i think we think about the United States as moving along its own path and not being driven by external influences. If this is a new case where china and china slow down precipitates a greater slowdown in the east asian industry and that translates to the United States that would be effective. Host has the legislation of 2008 important for stabilization of the economy . Guest so i think there are many aspects of the legislative response. The first one, the first big wan was the araa, the american recovery and reinvestment act implemented in 2009. That was a big counter cycle move. I would say that is one thing that pushed the economy in the right direction. That was early on and most affects of that have petered out. But i think that mitigated a lot of the pain and suffering that could have occurred. The other legislation that was passed, i think, have more longlasting implications and that includes the doddfrank legislation regarding the bank of legislation. So that is important over the longer term in so far as it really it reduces the incentives for banks to over overleverage. That is borrow up lots amounts and only putting in shareholders money and borrowing up with the Short Term Financial market instruments which are the two things that got the system in trouble before. With implementation of doddfrank and International Banking that you actually made the Banking System a lot more stable. There still remains some holes in the regulation of the international Financial System. I would say one of the things is we fix problems in the sectors where we see the problems. It is likely the next problem we see is somewhere we didnt xe expect it or apply regulations. We were thinking about 2008 that it wasnt the main line banks that were the big problem. They were regulated in the 1930s in response to the Great Depression. But we wound up with problems in the shadow Financial System because individuals, firms, banks and other Financial Institutions worked their way around those regulations or to use the term of financial innovation they innovated a way around the regulations. So we put in a set of regulations now that i think made the system safer for a period of time. More robust and more stable. But people are going to look around for a way of evading the regulations so they can get a higher rate of return and impose the risks upon the greater Financial System. That is the hazard that regulators keep on having to try to keep up with those who are trying to evade the regulations. Is that the message you want people who read lost decades to take away . Guest that is exactly one of them. You cannot just say we had this one big crisis and we fixed things and we move on. History repeats with examples where individuals, households, firms, banks all want to leverage up because that is a way of making higher return. They want to leverage up and borrow a lot. There is a tendency because it induces, in the short term at least, a period of growth and returns so there is also incentive to say there is no trouble or problem at this point. If i am a politician it will land in somebody elses lap in the future. If i am a household you might say i will get out before everything crashes. Or there is a tendency to say times are different now. We are just smarter. We are more nimble than we used to and the old rules dont apply. Our main point is the old rules to a large extend do apply. If you try to borrow a lot and leverage a lot some correction will come around and a lot of pain is going to be inflicted upon many times innocent bystanders. Host what are you teaching the university of wisconsin and what do you want students to leave with . Guest i teach economic and an international mack macro course to people getting their doctoral. I want them to keep alert. Analyze why things are the way they are. Why is it that concern people in positions of management in Financial Firms say what they say versus what people in policy positions would say versus what journalist would say. Using their mind what is being stated or argued rather than taking for granted that somebody says something and because they look aathorative. Host why can a small country like greece affect our giant economy here in the United States . Guest that is an interesting question. The Construction Market leading up to 2008. People would say construction of housing accounts for a small portion of the gdp so how can it affect the rest of the economy . Interconnections matter we have learned. In particular, in the case of housing it wasnt just the actual act of building houses but people sold assets involved in building houses and assets were derivatives and derived on the bases of housing prices. On the case of greece, lots of private individuals had assets issued by there greek government or by greece and private individuals. So those holdings lose value as you think they are less able to play. There is a big ramification for peoples portfolio and perception of net wealth. The euro was built upon the concept that no government could default and every government was going to embark upon a path of sustainable finances. So the fact a country would get into trouble and would have to be bailed out, which is against you know that is written out of the charter for the euro zone. That forced the reassessment of what is possible. It is not just greece. But greece signals what could happen to the other countries. Por portugul, italy, ireland and other countries. The signal greece gives about whether those countries could face a significant problem and what it means for the stability of the single european currency. Host you are watching booktv on cspan2. We have been talking to menzie chinn he is the cohauthor of lost decades. Thank you. Wednesday, booktv features books on drone warfare. Scott shanes talks to us at 8 00. Then mark moyer talks on strategic warfare. And William Arkin on his book after that. Drone warfare starting at 8 p. M. Eastern on booktv in primetime on cspan2. Here is a look at the best selling books according to the conservative book club. Looking at the attempted assassination of Ronald Reagan is at the top. And then fox host in the book of Thomas Jefferson and the tripoli pirates. And then a book on the Consulate Team in benghazi. Donald trump has two books on the list. A look at the conservative book club bestseller list continues with a pocket size addition of the u. S. Constitution and rush lim bahs rush revers and had star stangled banner. And finally, violating the Campaign Finance laws and the look at that. And a look at the former life of george h. Bush. Many of these authors have or will be appearing on booktv. You can watch them on our website. On the next washington journal we talk to Supreme CourtCourt Reporter david savage about the death of justice scal over the weekend. And then aaron cline on the Federal Reserve and the possible changes to Interest Rates in the coming weeks. You can join the conversation by phone, on facebook or on twitter. Washington journal live every morning at 7 a. M. On cspan. Former commissioner talks about the refuge crisis in europe at the Migration Policy Institute in washington. That is live at 9 30 a. M. Eastern on cspan2. Next, after words features formal Federal Reserve reserve church ben bernanke on his book the courage to act. He is interviewed by sharon burn of iowa. This is an hour. Host mr. Chairman, nice to be with you. Impressive work. You began, my understanding, from reading the book show showed up for work and kissed your wife good bye and went into the first day at brookings and began to write this 600 page tome. Impressive in detail and impressive in recall. This book was on the stands and being sold by october of 2015. So not much more than an 18 month process. How did you do that . So, you know, i started right away as you point out. I left the fed on saturday and monday i was at brookings working on the book. I had lots of material. The Federal Reserve let me see my emails and because i managed my emails i had dozens every day and it was useful because you could go back and see in realtime what you were thinking and what was happening. I had daily news clippings and other materials. I had a wealth of material. I could sit down and bang thout dra out the draft. I had help from Dana Skidmore a Public Affairs person at the fed who took a year off to edit this and help me with the process and research. I got a really quick start. I was done in about 14 months. Host a decade at the fed more or less in some of the most traum traumatic Economic Times certainly in our lifetime if not the nations history. As you wrote over that 18month period what did you learn about yourself . Guest writing the book, a big purpose was to think through the process at my leisure. I think one of the things i learned, first of all, is that there is a lot of hindsight bias. We all create a story about what happened. Everything seems inevitable. As you go back and realize you are in the fog of war and as thinks are happening you are trying to balance one probability against another and one risk against another. I saw myself as a risk manager. Someone trying to assess evolving chaotic situation. Host i remember seeing an in the Readers Digest saying would the boy i was be proud of the man i became. You dont strike me as a narcissistic man. Or ego centric. As you went back and reconstructed were you pleased with the way this unfolds and the way you accomplished what you did . Guest i think we made mistakes particularly running up to the crisis. We were balancing the risk of crisis against other risks into 2007 and took until august of 2007 to recognize the thing was getting quite severe. After that we were very aggressive. I think broadly speaking we did the right thing in efforts to stop the crisis and help the economy recover. So, yeah, like in any war plane when the First Contact with the enemy your plans are destroyed. Once we determined to hit it aggressively i feel we got the main things right. Host lets talk about your background and how that informs the communities. Small time jewish kid in South Carolina as you said in your book and said to me dodger fan because of sandy cofax before you moved to boston and now washington. A lot of readers might be surprised you worked at a place called south of the border and i know skyline chilly and the diner i go to in cleveland and i dont know south of the border but all of i95 points it. You were a middle class kid. Not poor. Not rich. But what did working at south of the border do for you . Guest well it is and a place where the Economic Situation is tough and people have to work hard. I worked as a construction worker, in my dads construction dads store and worked two years at south of the border. I was both part of the area and not part of the area. We were jewish and most of the town was Southern Baptist but i was part of the town going to the Public Schools and worked with people. In the drugstore we knew everybody in town. My father offered credit to anybody he felt he could trust. So the whole experience was one of getting to know, really, you know, ordinary americans facing economic challenges which dillion faced for a long time. Host you told stories about talking to your grandmother in North Carolina about the depression. You and i were born the same year. You are a little younger. But we had parents or grandparents that talked about the depression. Your grandmother, then living in connecticut, talked about the paradox of the shoes. I am sorry to preface your own story but you talked about the depression, if i am not putting dots together, that led you later to graduate school and so on. Tell me about the shoes. Guest sure. My grandfather used to tell me stories about her youth. And her stories were she was proud because her children were able to go to school and wear new shoes every year. But lots of the kids in town didnt get new shoes or even have shoes. And i see why not . And she said the shoe factories in this connecticut town shutdown and their fathers lost their job and there wasnt enough money to provide shoes for the town. All they had to do was open the factory, produce shoes and the kids would have the shoes and my grandmother said it didnt work that way. The system isnt working. It was a puzzle it me. I dont want to say from the age of six i was inspired to studying the Great Depression. But when i came back it to in graduate school i found it was the most important puzzle piece economist have. Host lets go to 2007. You had been at the chair for a while. I came to the senate in january of 2007 and put on a Commission Reid said was the sleeping banking committee. My wife and i now live in zip code 44105. Wont mean much to you. But in the first half of 2007 there were more foreclosures in the zip code i live in than in any other zip code in the state of america. It seemed in 20072008 until bear sterns in 2008 there wasnt that much attention to the housing issues because the housing crisis cause caused by a lot of lot of reasons. In cleveland, preditory lending and what was happening with manufacturing and that declining base. Why was the government overall not aware of the places ohio had more foreclosures all over the state. Why didnt we see that as a country how serious that was . Guest i dont accept your characterization. I spoke about foreclosures a number of time before the crisis. Some were probably unavoidable. But in some cases it seemed like there wasnt an enough effort to modify the loans and let people stay in their home. I talked both about foreclosures for the subprime mortgages and the like. We thought about it from a macroeconomic perspective with the risks to the economy overall. But we did worry about the effect on communities, the empty houses creating blight and the fed paid attention. Host i heard those statements and i would say the consumer p consum Consumer Protections and i think the fed, you were more intuned and your predecessor or i began to hear from people in cleveland and other cities on the pred pred tory lending the fed or any other regulator was not particularly there for us. Guest your use of the word predat predat predatory is critical. I had to go back to this extending back into the 90s. Some of the issues and debates. One of the big distinctions was in washington and that was between predatory lending that got people in trouble almost immediately and legitimate subprime lending. One of the reasons there wasnt a more aggressive effort to police subprime lending was the fear of cutting that off. And a strong difference between predatory lending which was already illegal. There was a question about enforcement so you can debate enforcement. Versus subprime lending which was a different kind of think. Host page 94 in the book you write i dont think key fed staff, you spoke about how good the staff was and my dealings on it i would agree, i dont think the key fed staff were captured by the firms they regulated in the sense they perceived it to be in their own career or financial interest to go easy. They were, however, open to arguments that regulatory burdens shouldnt be excessive and competitive Market Forces would deter poor lending practices. I work in an institution where lobbyist are putting on the present as different environment from regulators but regulators are from the same people. You may remember after doddfrank passed, the chief lobbyist for the Financial Service industry said it is half time and they would go lobby the regulators. I am in a place in the senate where lobbyist come at you regularly over time in part because you, and i, and your staff and regulators back when you were noncivilian, tend to hear from the most elite in society and hear the same song. Linco lincolns staff wanted him to stay in the war and free the slaves and lincoln said i have to go get my Public Opinion back and the fed doesnt seem like the pace place to get your Public Opinion back. It seems to me the fed is less likely to be aware of the pain of how many fed regulators really know people who have had their homes foreclosed on and are likely to see that and understand that. Guest well, i mean, one feature of the Federal Reserve system is it has these 12 Federal Reserve banks around the country. There is one in cleveland, and the president of the cleveland bank, would report what was happening in cleveland with housing and the like. Your concern is not wrong at all. But i think what was happening well before the crisis was there was a philosophical perspective that was shared, not just by the feds but others as well, that the Financial System should be less regulated so it can be more dynamic. We know there are problems with that. But greenspans view is if banks have sufficient capital you dont have to box them. The regulations shouldnt be too burdensome. Host the efficient capital issue wasnt done right. Host why did tarp with Bank Bailouts work better than what we tried to do with other home programs . Your perception and you are pushing through to a bunch of reluctant members of congress who didnt want to do this, i among them, why did that work better what we should have been doing, or tried to do, for homeowners . Guest we needed to stabilize wall street because we were afraid the affects on the housing economy would be catastrophic. So we worked to stabilize wall street. The treasury led this wasnt a Federal Reserve responsibility. The treasury led the effort to do modifications and working with refinancing and working with freddie and fannie mack. I got regular reports and understood what was going on. There was a lot of effort i frequently heard from president obama what are you doing and can you do more . I dont have a satisfactory answer except saying it was hard to do. People didnt respond to your calls for refinancing. They redefaulted often many faces after the modifications were done and records were incomplete. A lot of refinancing and modification got done but i feel your frustrations. It was, after all, the Obama Administration working on this and it proved difficult to get it done to the extent desired. Host you were hauled in front, and i know you didnt show it in your face, but i understand from your book you were not necessarily having the time of your life. Many of us would have acocuseda you, and the feds more so your predecesso predecessors, that criticism could come back on a lot of institutions. Here is what you wrote although i would testify many times over the next years i always disliked it it. Why is that . Guest i didnt think it was about informing the Oversight Committee but about hearing the committee make leading questions or make speeches. There was a lot of conflict involved and i dont like conflict so it was unpleasant. I certainly did it. I testified almost 80 times while chairman and acknowledged the importance and necessity of doing it. The fed needs to be overseen and as transparent as possible but it doesnt mean i had to enjoy it on a personal bases. Host the fed chair testifies twice a year by law. Once to the Senate Banking committee and then the house financi Financial Services and the other time gives a report, required by humphrey hawkins, that has us different from the european banks that is important and a Federal Reserve has a dual obligation. One is to combat inflation and the other is to fight unemployment. In europe it is only to try to restrain inflation and not restore unemployment. You seem to take the employment side of the dual mandate as serious as you took the inflation something other past chairs have not done. I would credit the cochair taking it as serious, too. Let me talk about the first time you and i and the cast of ten others had a sobering conversation. September 19th, 2008 you refer to the calls you need today make that day i guess to people like me. I got a call. I was in zanesville, ohio and got a call from the majority leader saying we need you on the phone at 2 00 with chairman ben bernanke and secretary pulson. This was before the 2008 election. Bear sterns had been saved and lee man and fannie and freddie and things were about the hap n happen. I remember howsoever how sobering the call was. You spoke first and then the secretary got on the phone. My recall was we need this done. And i remember writing best vote i will cast, worst political vote i will cast. Guest i remember all of that well. Host from the time what udid with tarp, and in my state with the auto rescue, was very important. I want to talk about the chapter here, chapter 18, the heading is from financing crisis to economic crisis. After you had stabilized the Financial System to the satisfaction of you and treasury and others it is hard to forget how bad a situation the country is in. From that day in 2008 to in the last four months of the year through the first half of 2009 our economy hemorrhaged i believe 8 plus million jobs. Many were manufacturing jobs and many industrial, good union paying jobs in my part of the country but everywhere. And you write over and over how the economy needed fiscal help. You got that fiscal help in the late bush years with the stimulus, taxcut stimulus you supported. I think in retrospect you thought it was inadequate but important. Another recovery act or stimulus you said was inadequate as many of us thought voting for it. Here is my question, sorry for the long intro, you know what happened after we did that. Overwhelming Republican Opposition to spending money, to fight austerity and help you with the Monetary Policy and fiscal on the other hand. You were appointed three times by president bush, a republican. I dont know about your politics. The secretary was a republican appointed by the Bush Administration. Why was it hard for the two of you to convince republicans to step up on the fiscal policy to grow the economy . To a significant extent was offset that local law will. , and end all those budgets were deeply cut. Was offsetting at the federal level to some extent so was probably less than the headline level teeseven in the reagan years read the economy began to come back and then with a significant job growth that was fuelled by government at the state and local level. But since then in the more recent recession which we have had job growth since the auto rescue and recovery act took off, but we had as a drag with local state and federal hiring so there are fewer government jobs which you use the word headwind a number of times in this book the were doing everything you could at the Monetary Policy level. As first suggested in the 30s public spending could replace private spending and if still in dire freefall with Interest Rates at zero it certainly needed fiscal help with tax cuts to promote private spending can to the plate the editorial effectively endorsed i was wrong dorsey a candidate but a program just as it did with the fiscal stimulus. So one of the things that you said at the time is my biggest frustration to beyond the big Key Committee was not accessibility horror transparency but the biggest frustration was to get you to talk more precisely than prescriptive flee about what we needed to do. Militia returned to sender republican critics to say we have to pass that transportation bill with public spending it is the best time when it declined. To be a little more prescriptive and stronger even though your predecessors made not have acted that way but this was an extraordinary time. The think it would have moved to the public a little more. I did say quite often that we needed to be less austere now because it is a time to get more jobs. That was more explicit . To i was concerned about overstepping with the implicit contract with monetary pasquales policy. But i try and buy general rule to explain to talk about the direction that we needed more fiscal support to stay away from issues the other transportation or a tax cut. That is what congress can work out a bond themselves. But i was a bit in the reluctant to say but passed to the infrastructure over a tax cut. I felt i went to war harm than good. But you say how surprised you were at the antipathy conservatives of both houses as the institution and. Tel last ted different way. To understand he might want to think of tax cuts the sum game that had to bother you precisely what that whole idea as a threat and to shut them down there is no question could use the claim the above that . Austerity with the small benefit to offset the fact of the overall economy that debt limit is about constrain the for those of have already occurred. If it is dangerous for the economy. I spoke of that quite often let the treasury take the lead but the fed was engaged with a pretty consistent the. End only one of the things that happened in the house and had said it with increasing consolidation but i believe 50 years ago they all made up 80 of gdp. Because of what happens with bear stearns and Washington Mutual that 18 percent of the six largest that it hasnt changed much since. And not as a result of dodd frank. Bloomberg has calculated with the 80 basis points. Because of the financial part of its. That they are too big to fail to give the big banks another reason and the gao report as of 30year 15 basis points. The others say too big to regulate were too big to jail. In with that political power . Debate but that study were some versions and show the tune big to fail it did take to shrug. So dodd frank and the agreement we had is a vigorous and a good direction that under the new capital rules because theyre big but they had dash floor capitol and the biggest firms with a higher percentage of capital. And their subject to the special said oversight. And with the liquidation of authority both reported dead constructive way the head of the fdic the ability to unwind in a way that could be done without breaking down. Cell to make them more costly is the advantages to be bigger than what you see as companies talk about drinking. So she capital talks about investing today there was the discussion that agee should prevent to avoid that extra capital and discussion and to simplify. Of behalf of those living wills but the practical effect to show how they can be simplified and why is it a necessity . He did in the hands of regulators and are it intently focused on this problem this will move as soon the right direction. The pronouncements of ben bernanke in 2015 dont move the markets as they did. But give us a little prediction that the fed is looking at they say to them if you cannot be and want with allied governments to infusion end you will have to divest. And it did you think that lifting will will precipitate . Does that happen . It does. But that alternative is the determination with the fed imposed a gag rule that says that only enough capital but that could be converted to a capital. And did you have things pushing against that cost but but to downsize the large Freddie Angeles to shuns. Added does provide certitude resources so it doesnt really feasible to break them up in those community banks. And make it tougher to be big to take away the funding and chanted church. The u. S. Argued most of that that wasnt yesterday the you are arguing . I would note it is anecdotal but some of those agencies argelander a City Government support of large banks. Im not saying problem is solved but it is there is attention paid to this over time dodd frank does provide flexible tools to get this to the right place. Are you concerned there is an effort of the 500 billion to strip away of the coordinated panel . Are you concerned about that . Some of the languages replacing dodd frank and although whole has been very constructive. I dont necessarily speak you have to defend every single clause. Consumer less effective than others but i hope it is a situation to make a rational review of with changes to be brave. And then to roll back the dodd frank reform. Unfortunately with the Affordable Care racked we dont debate to making adjustments said period there is not a lot ago we want teeseven one proposal is to eliminate the resolution of authority he did to to strengthen the baker see rules. The lesson in part not to do that . What bankruptcy does is protect the creditors to be sure the bondholders get as much return as the cube. Unfortunately that wasnt the lead public purpose of the time of the collapse. We were concerned about the overall system we ended up losing a lot of money which was fine but it goes against the idea that they were easily saved. But the trouble with vagrancy laws they are not focused for that public purpose for a freddie jill crisis. The advantage to give discretion and to do what is necessary to stabilize the system without necessarily being constrained of what will give shaw highest return to the company. It is a god preserve been Financial Stability and that should be protecting the system. That is specifically dedicated to that proposition and understanding