Bernanke Says Fed Sought to Avert a ‘Second Great Depression’

By Scott Lanman and Timothy R. Homan

July 27 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke defended bailouts by the central bank and other unprecedented efforts to end the credit crisis, saying he sought to avoid a “second Great Depression.”

“In a financial crisis, if you let the big firms collapse in a disorderly way, it will bring down the whole system,” Bernanke said yesterday at a town-hall-style meeting in Kansas City, Missouri, taped for broadcast this week on PBS television. “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.”

Bernanke’s appearance indicates he’s stepping up public- relations efforts while confronting criticism from lawmakers over government aid to big financial firms. His first term at the Fed’s helm ends Jan. 31, and President Barack Obama needs to decide whether to reappoint him for another four years.

Vincent Hogan of Kansas City, a human resources manager at General Motors Co. and a member of the forum’s audience, said he believed Bernanke showed “honesty and candor.”

Before the meeting, Hogan, 45, said he thought Bernanke acted under political pressure during the height of the financial crisis last year. “I understand now there were some dire economic situations back then,” he said in an interview.

The Fed rescued Bear Stearns Cos. and American International Group Inc. last year while backing creation of the $700 billion Troubled Asset Relief Program.

Bernanke, 55, said he had to “hold his nose” over the bailouts of large financial firms. Responding to a small- business owner “frustrated” over the billions of dollars in aid, Bernanke said, “I understand your frustration.”

‘Working Really Hard’

“We’re working really hard to try to make it better,” Bernanke said, referring to Fed efforts to improve credit for small businesses.

The questioner, David Huston, said in an interview after the forum that he hasn’t yet seen positive results. “They can say they’re putting money into the banks to help distribute loans, but I don’t see it,” said Huston, 56, president of Olson Manufacturing and Distribution Inc. in Shawnee, Kansas.

At the one-hour event moderated by Jim Lehrer, a PBS news anchor, Bernanke said he expects the U.S. economy to grow at an annual rate of 1 percent in the second half of 2009, while unemployment will exceed 10 percent before beginning to decline. At the same time, “we want to make sure that we don’t overstimulate the economy” and spur inflation, Bernanke said.

For the next couple of years, “inflation will be quite low,” Bernanke said. Asked about the dollar, he said that “the best way to have a strong dollar is to have a strong economy.”

‘Back on Track’

“I have a lot of confidence that within a few years that we will be not only back on track but that we will be growing strongly again,” Bernanke said.

Lehrer questioned the Fed chief about criticism from Anna Schwartz, the 93-year-old monetary scholar who wrote a New York Times opinion column yesterday arguing against his reappointment. In a companion piece, Nouriel Roubini, the New York University professor who predicted the credit crisis, said Bernanke deserves another term for averting a “near depression.”

“What Ms. Schwartz wanted us to do was to state in advance what our strategy was for saving firms,” Bernanke said. “We had no idea which firm was going to fail and we didn’t have a system, we didn’t have a structure.”

The Fed is “putting the pedal to the metal” with its policy actions, and it’s too early to judge the impact of the $787 billion fiscal stimulus law, he said.

Overstepped Authority

Voter concern that the Fed overstepped its authority prompted a majority of House lawmakers to co-sponsor a bill allowing for audits by the Government Accountability Office of the central bank’s monetary policy and other operations. Bernanke opposes the measure, which was introduced by Representative Ron Paul of Texas, a Republican.

Asked yesterday about the audit bill, Bernanke said it could result in lawmakers issuing subpoenas over potential decisions to raise interest rates. “I don’t think the American people want Congress running monetary policy,” he said.

The central bank chairman said independence from political interference in setting interest rates produces “much better results” for the economy. “We are very, very sensitive to this issue,” Bernanke said at the forum.

Participating in yesterday’s meeting was an “enormously smart decision” for Bernanke, said Gregory Hess, an economics professor at Claremont McKenna College in California and a member of the Shadow Open Market Committee, a group of economists that critiques the Fed.

‘Big Questions’

“People still have big questions, which are, how did we get in this mess, how do we get out of this mess, how are we going to make sure this mess never happens again?” Hess said. “It’s a time where he can really leverage his ability to communicate.”

Bernanke appeared on the CBS program “60 Minutes” in March, his first televised interview since becoming Fed chairman in 2006.

His comments are scheduled to air in three segments this week as part of “The NewsHour with Jim Lehrer” on U.S. stations affiliated with PBS, the Public Broadcasting Service.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Timothy R. Homan in Kansas City at thoman1@bloomberg.net.