Ben Bernanke congratulated the world's central bankers on a job well done yesterday, as they gathered to examine their response to the credit crisis and the lessons from the traumatic 12 months since the collapse of Lehman Brothers.
The Federal Reserve chairman warned that the global economy would recover only slowly from the crisis and that unemployment will remain painfully high in many countries for some time, but he said that unprecedented international co-operation had saved the world from a catastrophe.
Stock markets around the world nonetheless drew strength from Mr Bernanke's qualified optimism, with the Dow Jones touching its highest level in nine months in afternoon trade. In London, the FTSE 100 passed the 4,800 mark for the first time since October.
Speaking at the annual symposium organised by the Kansas Fed at the mountain retreat of Jackson Hole, Wyoming, Mr Bernanke said that he had been guided by the economic writings of Walter Bagehot as he battled a classic panic that gripped numerous important financial markets.
"As severe as the economic impact has been, the outcome could have been decidedly worse," he said. "Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal, and financial policies around the world have been aggressive and complementary.
"Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk."
Mr Bernanke, one of the world's foremost scholars of the Great Depression, said that without such actions, "the resulting global downturn could have been extraordinarily deep and protracted".
For the Fed chairman, the Jackson Hole retreat is an opportunity to step back from the firefighting of the past year – and the political in-fighting in which he has become embroiled in Washington – and to debate the lessons of the credit crisis. Other participants include the Fed's regional governors, independent economists and visitors from other countries, this year including the European Central Bank chairman, Jean-Claude Trichet.
Ideas being batted around include the possibility of central banks issuing tradable "insurance" for financial assets, which banks would buy during boom times. The aim would be to make runs less likely, since trading partners would know they had central bank insurance. As global credit markets melted down last autumn, central banks were in any case called upon to guarantee a wide array of financial instruments and to pump money into the system to restore confidence.
Co-ordinated interest rate cuts around the world, synchronised fiscal stimulus packages agreed at the "watershed" G20 meeting in Washington last October, and the recapitalisation of the banking systems of major nations were among the most important factors in pulling the economy back from the brink, Mr Bernanke said. Prospects for a return to growth in the US and elsewhere in the near term look good.
But he added: "Challenges remain: Strains persist in many financial markets across the globe, financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit. Because of these and other factors, the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels."
Mr Bernanke said new thinking and additional regulatory reforms would be needed to reduce the likelihood of panics. He welcomed new regulations which force banks to pay more attention to their liquidity and pressed once again for reform – something that could be bogged down in Washington amid criticism of the Fed's growing power.Reuse content