Ben Bernanke defended the Fed's stimulus moves in response to the financial crisis, including quantitative easing, in his last scheduled public remarks as Federal Reserve chairman.
On Thursday, Bernanke joined Liaquat Ahamed, Pulitzer Prize-winning author of Lords of Finance: The Bankers Who Broke the World, for a discussion sponsored by the new Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.
During the discussion, Bernanke brushed aside critics' concerns about inflation and capital losses under the easy-money policy.
Concerns about financial stability
However, he conceded concerns about financial instability, saying, "Of the various costs that have been ascribed to QE, it's the only one I've found personally credible." He said the Fed is trying to address financial instability concerns with supervision and regulation.
When asked about whether he was concerned about too much "froth" in the financial markets, Bernanke responded that the markets "seem to be broadly within historical ranges."
At one point, Bernanke joked that "the problem with QE is it works in practice, but doesn't work in theory."
Bernanke is scheduled to step down from his post at the end of this month. He acknowledged that he made a number of controversial moves during his tenure, including implementing QE and providing "forward guidance" that assured investors that the Fed would keep interest rates low for a while into the future.
Bernanke said he had some sleepless nights during the worst of the financial crisis, but said his experience was much like being in a car accident: "I was so absorbed in what was happening and trying to find a response to it that I wasn't really in that kind of reflective mode. Later on, I was kind of like ... If you're in a car wreck, you're mostly involved in trying to avoid going off the bridge. And then later on you say, 'Oh, my God.' "
Bernanke said it's too soon to know whether the financial crisis has done long-lasting damage to the economy, but said, "Eventually, the economy will return to the growth path that it was on prior to the crisis, or something close to that."
For now, he said long-term unemployment could affect the available labor supply going forward and also noted that the financial crisis may have led to a slower pace of innovation. But he said that innovation could still be happening but not showing up in productivity reports.
Bernanke and the government
In response to a question from the audience, Bernanke gave credit to former President George W. Bush, saying Bush gave "a lot of leeway to me and to (former Treasury Secretary Hank Paulson) to do what's right."
He noted "without making a judgment" that governments with parliamentary systems were able to respond more quickly to the financial crisis, saying that the Founding Fathers of our country imagined the president having to respond quickly to a military or foreign relations crisis, but not a financial one.
"During the crisis ... the British, for example, very quickly put together a plan to address their banking problems because, in this particular case, they had a government which controlled the legislature and was able to respond quickly," Bernanke said. He said that since the crisis, there have been steps taken to try to better ensure that regulators could take quicker actions.
Bernanke also said he had some "frustration" with the fight over the debt limit, saying it affected consumer confidence and prevented more positive action from the government to address the crisis.
What do you think of Bernanke's legacy as Fed chair?
Follow me on twitter: @allisonsross.